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 September 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 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 October ~~23, 2020,~~29, 2021, there were ~~180,231,989~~180,325,272 outstanding shares of the registrant’s common stock, par value $0.01 per share.

Xylem Inc.

Table of Contents


ITEM			PAGE
PART I – Financial Information
Item 1	-	F ~~inancial~~Financial Statements:
		Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, ~~2020~~2021 and ~~2019~~2020 (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2020~~2021 and ~~2019 (Unaudited) and 2019~~2020 (Unaudited)	4
		Condensed Consolidated Balance Sheets as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~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	3231
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	5249
Item 4	-	Controls and Procedures	5349
PART II – Other Information
Item 1	-	Legal Proceedings	5450
Item 1A	-	Risk Factors	5450
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	5450
Item 3	-	Defaults Upon Senior Securities	5450
Item 4	-	Mine Safety Disclosures	5450
Item 5	-	Other Information	5450
Item 6	-	Exhibits	5450
		Signatures	5652

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)


		Three Months				Nine Months					Three Months				Nine Months

For the periods ended September 30,	For the periods ended September 30,	2020		2019		2020		2019		For the periods ended September 30,	2021		2020		2021		2020
Revenue	Revenue	$	1,220	$	1,296	$	3,503	$	3,878	Revenue	$	1,265	$	1,220	$	3,872	$	3,503
Cost of revenue	Cost of revenue	759		787		2,199		2,369		Cost of revenue	793		759		2,390		2,199
Gross profit	Gross profit	461		509		1,304		1,509		Gross profit	472		461		1,482		1,304
Selling, general and administrative expenses	Selling, general and administrative expenses	266		273		851		870		Selling, general and administrative expenses	273		266		878		851
Research and development expenses	Research and development expenses	45		44		138		142		Research and development expenses	49		45		152		138
Restructuring and asset impairment charges		19		33		69		58
Restructuring and asset impairment (recoveries) charges										Restructuring and asset impairment (recoveries) charges	(2)		19		7		69
Goodwill impairment charge	Goodwill impairment charge	58		148		58		148		Goodwill impairment charge	—		58		—		58
Operating income	Operating income	73		11		188		291		Operating income	152		73		445		188
Interest expense	Interest expense	22		16		56		52		Interest expense	21		22		63		56
Other non-operating expense, net		(1)		(7)		(5)		(2)
Other non-operating income (expense), net										Other non-operating income (expense), net	2		(1)		1		(5)
Gain from sale of business	Gain from sale of business	0		0		0		1		Gain from sale of business	—		—		2		—
Income (loss) before taxes		50		(12)		127		238
Income tax expense (benefit)		13		(77)		21		(45)
Income before taxes										Income before taxes	133		50		385		127
Income tax expense										Income tax expense	19		13		71		21
Net income	Net income	$	37	$	65	$	106	$	283	Net income	$	114	$	37	$	314	$	106

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.20	$	0.36	$	0.59	$	1.57	Basic	$	0.63	$	0.20	$	1.74	$	0.59
Diluted	Diluted	$	0.20	$	0.36	$	0.58	$	1.56	Diluted	$	0.63	$	0.20	$	1.73	$	0.58
Weighted average number of shares:	Weighted average number of shares:									Weighted average number of shares:
Basic	Basic	180.0		180.1		180.1		179.9		Basic	180.2		180.0		180.2		180.1
Diluted	Diluted	181.0		181.2		181.0		181.2		Diluted	181.6		181.0		181.5		181.0

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

Three Months Nine Months
For the periods ended September 30, 2020 2019 2020 2019
Net income $ 37 $ 65 $ 106 $ 283
Other comprehensive loss, before tax:
Foreign currency translation adjustment (10) (20) (53) (9)
Net change in derivative hedge agreements:
Unrealized gain (loss) 4 (5) 8 (14)
Amount of (gain) loss reclassified into net income (2) 3 1 7
Net change in postretirement benefit plans:
Net loss 0 (11) 0 (11)
Amortization of prior service credit (1) (1) (3) (3)
Amortization of net actuarial loss into net income 5 2 15 8
Settlement/Curtailment 0 8 0 8
Other comprehensive loss, before tax (4) (24) (32) (14)
Income tax (benefit) expense related to items of other comprehensive loss (17) 13 (10) 14
Other comprehensive income (loss), net of tax 13 (37) (22) (28)
Comprehensive income $ 50 $ 28 $ 84 $ 255
Less: comprehensive loss attributable to noncontrolling interests 0 0 (1) 0
Comprehensive income attributable to Xylem $ 50 $ 28 $ 85 $ 255


	Three Months				Nine Months
For the periods ended September 30,	2021		2020		2021		2020
Net income	$	114	$	37	$	314	$	106
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment	(19)		(10)		10		(53)

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


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


Other comprehensive income (loss), before tax	(13)		(4)		17		(32)
Income tax expense (benefit) related to items of other comprehensive income (loss)	11		(17)		26		(10)
Other comprehensive income (loss), net of tax	(24)		13		(9)		(22)
Comprehensive income	$	90	$	50	$	305	$	84
Less: comprehensive loss attributable to noncontrolling interests	—		—		—		(1)
Comprehensive income attributable to Xylem	$	90	$	50	$	305	$	85

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

September 30,
2020 December 31,
2019

ASSETS
Current assets:
Cash and cash equivalents $ 1,402 $ 724
Short-term investments 200 0
Receivables, less allowances for discounts, returns and doubtful accounts of $40 and $35 in 2020 and 2019, respectively 968 1,036
Inventories 582 539
Prepaid and other current assets 159 151
Total current assets 3,311 2,450
Property, plant and equipment, net 633 658
Goodwill 2,795 2,839
Other intangible assets, net 1,090 1,174
Other non-current assets 619 589
Total assets $ 8,448 $ 7,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 495 $ 597
Accrued and other current liabilities 745 628
Short-term borrowings and current maturities of long-term debt 40 276
Total current liabilities 1,280 1,501
Long-term debt 3,053 2,040
Accrued postretirement benefits 455 445
Deferred income tax liabilities 283 310
Other non-current accrued liabilities 502 447
Total liabilities 5,573 4,743
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 194.6 shares and 193.9 shares in 2020 and 2019, respectively 2 2
Capital in excess of par value 2,021 1,991
Retained earnings 1,828 1,866
Treasury stock – at cost 14.5 shares and 13.7 shares in 2020 and 2019, respectively (588) (527)
Accumulated other comprehensive loss (396) (375)
Total stockholders’ equity 2,867 2,957
Non-controlling interests 8 10
Total equity 2,875 2,967
Total liabilities and stockholders’ equity $ 8,448 $ 7,710


	September 30, 2021		December 31, 2020

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

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

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

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

~~(in~~ (in millions)

For the nine months ended September 30, 2020 2019
Operating Activities
Net income $ 106 $ 283
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 88 88
Amortization 101 104
Share-based compensation 19 23
Restructuring and asset impairment charges 69 58
Goodwill impairment charge 58 148
Gain from sale of business 0 (1)
Other, net 33 7
Payments for restructuring (25) (21)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables 43 (73)
Changes in inventories (48) (2)
Changes in accounts payable (91) (30)
Changes in accrued taxes (5) (140)
Other, net 106 7
Net Cash – Operating activities 454 451
Investing Activities
Capital expenditures (136) (175)
Acquisitions of businesses, net of cash acquired 0 (18)
Proceeds from sale of business 0 (2)
Proceeds from the sale of property, plant and equipment 1 0
Cash received from investments 0 3
Cash paid for investments (200) 0
Other, net 9 7
Net Cash – Investing activities (326) (185)
Financing Activities
Short-term debt issued, net 359 317
Short-term debt repaid (600) (254)
Long-term debt issued, net 985 0
Repurchase of common stock (61) (39)
Proceeds from exercise of employee stock options 10 10
Dividends paid (142) (131)
Other, net (1) (2)
Net Cash – Financing activities 550 (99)
Effect of exchange rate changes on cash 0 (10)
Net change in cash and cash equivalents 678 157
Cash and cash equivalents at beginning of year 724 296
Cash and cash equivalents at end of period $ 1,402 $ 453
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 46 $ 46
Income taxes (net of refunds received) $ 27 $ 94


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

Changes in accrued taxes	—		(5)

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

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

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

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

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Background and Basis of Presentation

Background

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

Xylem operates in 3 segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note ~~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 in March 2020, declared a pandemic by the World Health Organization, has created significant global volatility, uncertainty and economic disruption. The COVID-19 pandemic also has caused increased uncertainty in estimates and assumptions affecting the condensed consolidated financial statements. Actual results could differ from these estimates.

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

~~Note 2. Recently Issued Accounting Pronouncements~~

~~Recently Adopted Pronouncements~~

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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 became 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 nine months ended September 30, 2020 we spent approximately $0 million, net of cash received on acquisition activity.~~

~~During the three and nine months ended September 30, 2019 we spent approximately $0 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				Nine Months Ended
	September 30,				September 30,
(in millions)	2021		2020		2021		2020
Revenue from contracts with customers	$	1,214	$	1,170	$	3,726	$	3,358
Lease Revenue	51		50		146		145
Total	$	1,265	$	1,220	$	3,872	$	3,503

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Revenue from contracts with customers $ 1,170 $ 1,231 $ 3,358 $ 3,690
Lease Revenue 50 65 145 188
Total $ 1,220 $ 1,296 $ 3,503 $ 3,878

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2021		2020		2021		2020
Water Infrastructure
Transport	$	390	$	374	$	1,173	$	1,042
Treatment	106		100		306		276

Applied Water*
Commercial Building Services	152		136		454		406
Residential Building Services	71		67		211		171
Industrial Water	177		161		542		462

Measurement & Control Solutions
Water	253		254		824		759
Energy	65		78		216		242



Total	$	1,214	$	1,170	$	3,726	$	3,358

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Water Infrastructure
     Transport $ 374 $ 369 $ 1,042 $ 1,111
     Treatment 100 96 276 274
Applied Water
     Building Services 205 207 579 636
     Industrial Water 159 169 460 513
Measurement & Control Solutions
     Water 166 193 510 587
     Energy 65 90 207 248
     Software as a Service 23 26 67 75
     Test 78 81 217 246
Total $ 1,170 $ 1,231 $ 3,358 $ 3,690
*Items in the prior year footnote disclosures for Applied Water were reclassified to conform to the current presentation.

The following table reflects revenue from contracts with customers by geographical ~~region:~~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				Nine Months Ended
	September 30,				September 30,
(in millions)	2021		2020		2021		2020
Water Infrastructure
United States	$	137	$	142	$	402	$	407
Western Europe	175		163		538		462
Emerging Markets (a)	137		124		391		319
Other	47		45		148		130

Applied Water
United States	197		185		593		559
Western Europe	90		83		281		227
Emerging Markets (a)	81		69		240		181
Other	32		27		93		72

Measurement & Control Solutions
United States	189		202		625		636
Western Europe	59		58		202		172
Emerging Markets (a)	46		45		141		125
Other	24		27		72		68

Total	$	1,214	$	1,170	$	3,726	$	3,358

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Water Infrastructure
     United States $ 142 $ 141 $ 407 $ 434
     Europe 181 170 515 509
Asia Pacific 96 92 236 260
Other 55 62 160 182
Applied Water
     United States 185 196 559 609
     Europe 92 89 255 275
Asia Pacific 46 41 105 121
Other 41 50 120 144
Measurement & Control Solutions
     United States 202 251 636 739
     Europe 65 63 197 199
Asia Pacific 29 27 76 85
Other 36 49 92 133
Total $ 1,170 $ 1,231 $ 3,358 $ 3,690

(a)Emerging Markets 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 71 97
  Revenue recognized from opening balance — (82)
  Billings (58) —
  Other 9 (3)
Balance at September 30, 2019 $ 118 $ 125
Balance at January 1, 2020 $ 106 $ 135
  Additions, net 95 98
  Revenue recognized from opening balance — (83)
  Billings (89) —
  Other 0 (1)
Balance at September 30, 2020 $ 112 $ 149


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




Other	—		(1)
Balance at September 30, 2020	$	112	$	149

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




Other	(1)		(2)
Balance at September 30, 2021	$	130	$	167

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

Performance obligations

Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of September 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 ~~$459~~$489 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

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

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

~~As a result of the plan, during~~ During the three and nine months ended September 30, 2020, we recognized restructuring charges of $8 million and $48 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 nine months ended September 30, 2019, we recognized restructuring charges of $26 million and $48 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				Nine Months Ended
	September 30,				September 30,
(in millions)	2021		2020		2021		2020
By component:
Severance and other charges	$	1	$	8	$	9	$	31

Asset impairment	—		—		1		17
Other restructuring charges	—		1		—		1
Reversal of restructuring accruals	(3)		(1)		(4)		(1)
Total restructuring charges	$	(2)	$	8	$	6	$	48
Asset impairment charges	—		11		1		21
Total restructuring and asset impairment charges	$	(2)	$	19	$	7	$	69

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

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
By component:
Severance and other charges $ 8 $ 26 $ 31 $ 46
Lease related charges 0 0 0 1
Asset impairment 0 0 17 1
Other restructuring charges 1 0 1 0
Reversal of restructuring accruals (1) 0 (1) 0
Total restructuring charges $ 8 $ 26�� $ 48 $ 48
Asset impairment 11 7 21 10
Total restructuring and asset impairment charges $ 19 $ 33 $ 69 $ 58
By segment:
Water Infrastructure $ 6 $ 6 $ 14 $ 17
Applied Water 1 2 3 4
Measurement & Control Solutions 12 25 52 37

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

(in millions) 2020 2019
Restructuring accruals - January 1 $ 27 $ 5
Restructuring charges 48 48
Cash payments (25) (21)
Asset impairment (17) 0
Foreign currency and other 0 (2)
Restructuring accruals - September 30 $ 33 $ 30
By segment:
Water Infrastructure $ 5 $ 1
Applied Water 1 1
Measurement & Control Solutions 22 21
Regional selling locations (a) 4 7
Corporate and other 1 0
2020:


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

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

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

The following table presents expected restructuring spend in ~~2020~~2021 and thereafter:


(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total
Actions Commenced in 2021:
Total expected costs	$	4	$	—	$	—	$	—	$	4
Costs incurred during Q1 2021	1		—		—		—		1
Costs incurred during Q2 2021	1		—		—		—		1
Costs incurred during Q3 2021	—		—		—		—		—
Total expected costs remaining	$	2	$	—	$	—	$	—	$	2

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

(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2020:
Total expected costs $ 27 $ 11 $ 35 $ 3 $ 76
Costs incurred during Q1 2020 1 0 0 0 1
Costs incurred during Q2 2020 5 2 30 0 37
Costs incurred during Q3 2020 7 1 1 0 9
Total expected costs remaining $ 14 $ 8 $ 4 $ 3 $ 29
Actions Commenced in 2019:
Total expected costs $ 19 $ 5 $ 27 $ 0 $ 51
Costs incurred during 2019 18 5 27 0 50
Costs incurred during Q1 2020 1 0 0 0 1
Costs incurred during Q2 2020 1 0 0 0 1
Costs incurred during Q3 2020 (1) 0 0 0 (1)
Total expected costs remaining $ 0 $ 0 $ 0 $ 0 $ 0
During the third quarter of 2021, we recorded an adjustment of $3 million to decrease the liability within the Measurement & Control Solutions segment, related to 2019 actions. As a result of this adjustment, the estimated total cost of the 2019 actions decreased to $24 million for the Measurement & Control Solutions segment. The 2019 actions are complete.

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

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

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

Asset Impairment

During the third quarter of 2020, we determined that certain assets including software and proprietary technology within our Measurement & Control Solutions segment were impaired. Accordingly we recognized an impairment charge of $11 million. Refer to Note 9,7, "Goodwill and Other Intangible Assets," for additional information.

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

During the third quarter of 2019, we determined that certain assets within our Measurement & Control Solutions segment, including customer relationships, internally developed software, proprietary technology, and plant property & equipment, were impaired. Accordingly we recognized an impairment charge of $7 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 September 30, ~~2020~~2021 was ~~$13~~$19 million resulting in an effective tax rate of ~~26.2%~~13.9%, compared to a ~~benefit of $77~~$13 million expense resulting in an effective tax rate of ~~623.6% (on a pre-tax loss for the period)~~26.2% for the same period in ~~2019.~~2020. The income tax provision for the nine months ended September 30, ~~2020~~2021 was ~~$21~~$71 million resulting in an effective tax rate of ~~16.6%~~18.3%, compared to a ~~benefit of $45~~$21 million expense resulting in an effective tax rate of ~~(18.9)%~~16.6% for the same period in ~~2019.~~2020. The effective tax rate for the three and nine month periods ended September 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 and goodwill impairment charge.~~inclusion. Additionally, the effective tax rate for the three and nine month periods ended September 30, 2020 ~~differs~~differ from the ~~same periods in 2019~~U.S. federal statutory rate primarily due ~~primarily~~ to the ~~impact~~mix of earnings in foreign jurisdictions, partially offset by the ~~changes in tax law in Switzerland in 2019 along with the impact of the larger~~GILTI inclusion and goodwill impairment ~~charge on income before taxes in 2019.~~charge.

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 September 30, 2020 was $125 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 (benefit)" in our Condensed Consolidated Income Statements. As of September 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 September 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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net income (in millions) $ 37 $ 65 $ 106 $ 283
Shares (in thousands):
Weighted average common shares outstanding 180,006 180,044 180,031 179,909
Add: Participating securities (a) 16 28 24 29
Weighted average common shares outstanding — Basic 180,022 180,072 180,055 179,938
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options 656 790 648 819
Dilutive effect of restricted stock units and performance share units 290 350 253 402
Weighted average common shares outstanding — Diluted 180,968 181,212 180,956 181,159
Basic earnings per share $ 0.20 $ 0.36 $ 0.59 $ 1.57
Diluted earnings per share $ 0.20 $ 0.36 $ 0.58 $ 1.56


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net income (in millions)	$	114	$	37	$	314	$	106
Shares (in thousands):
Weighted average common shares outstanding	180,221		180,006		180,182		180,031
Add: Participating securities (a)	15		16		21		24
Weighted average common shares outstanding — Basic	180,236		180,022		180,203		180,055
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options	949		656		880		648
Dilutive effect of restricted stock units and performance share units	457		290		405		253

Weighted average common shares outstanding — Diluted	181,642		180,968		181,488		180,956
Basic earnings per share	$	0.63	$	0.20	$	1.74	$	0.59
Diluted earnings per share	$	0.63	$	0.20	$	1.73	$	0.58

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

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

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2020 2019 2020 2019
Stock options 1,699 1,390 1,611 1,401
Restricted stock units 408 351 387 360
Performance share units 334 391 311 439


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

Note 8.6. Inventories

The components of total inventories are summarized as follows:

(in millions) September 30,
2020 December 31,
2019
Finished goods $ 237 $ 212
Work in process 53 47
Raw materials 292 280
Total inventories $ 582 $ 539


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

Note 9.7. Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying value of goodwill by reportable segment for the nine months ended September 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	(7)		(9)		(22)		(38)
Balance as of September 30, 2021	$	661	$	520	$	1,635	$	2,816

(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
Impairment 0 0 (58) (58)
Foreign currency and other 3 6 5 14
Balance as of September 30, 2020 $ 654 $ 519 $ 1,622 $ 2,795
As of September 30, 2021, goodwill included an accumulated impairment loss of $206 million within the Measurement & Control Solutions segment.

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

During the third quarter of 2019, the Company recorded a goodwill impairment charge of $148 million related to the AIA goodwill reporting unit within our Measurement & Control Solutions segment. The impairment resulted from a downward revision of forecasted future cash flows. Factors that contributed to the revised forecast in the third quarter include lower than expected results as compared to prior forecasts, largely as a result of slower-than-expected conversion of pipeline opportunities to revenue. Additionally, we have continued to invest in the AIA platform ahead of the adoption curve, which has also impacted the near term profitability of the business. These factors drove the decrease in forecasted cash flows, and as such, the calculated fair value of the AIA reporting unit below its carrying value as of the third quarter. To determine the fair value of the AIA reporting unit, the Company used the income approach.

Other Intangible Assets

Information regarding our other intangible assets is as follows:

September 30, 2020 December 31, 2019
(in millions)
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor relationships $ 929 $ (391) $ 538 $ 945 $ (352) $ 593
Proprietary technology and patents 202 (125) 77 204 (111) 93
Trademarks 141 (59) 82 148 (52) 96
Software 471 (249) 222 428 (206) 222
Other 21 (17) 4 20 (16) 4
Indefinite-lived intangibles 167 0 167 166 0 166
Other Intangibles $ 1,931 $ (841) $ 1,090 $ 1,911 $ (737) $ 1,174


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

Amortization expense related to finite-lived intangible assets was $31 million and $96 million for the three and nine month periods ended September 30, 2021, respectively, and $33 million and $101 million for the three and nine month periods ended September 30, 2020, ~~respectively, and $34 million and $104 million for the three and nine month periods ended September 30, 2019,~~ respectively.

During the third quarter of 2020, the Company assessed whether the carrying amounts of the AIA reporting unit’s long-lived assets may not be recoverable based on the updated forecast of future cash flows, and therefore impaired. Our assessment resulted in an impairment charge of $11 million, primarily related to software and proprietary technology. The charge was calculated using an income approach, which is considered a Level 3 input for fair value measurement, and is reflected in “Restructuring and asset impairment charges” in our Condensed Consolidated Income Statements.

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

During the third quarter of 2019, the Company also assessed whether the carrying amounts of the AIA reporting unit’s long-lived assets may not be recoverable based on the revised forecasted cash flows, and therefore impaired. Our assessment resulted in an impairment charge of $7 million, primarily related to customer relationships, proprietary technology, software and property, plant and equipment. The charge was calculated using an income approach.

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 ~~$137~~$130 million and $0 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. As of September 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 ~~$52 million,~~ $47 million, ~~$12~~$42 million, $8$17 million, $8$7 million, $7 million and $7$5 million, respectively.

Hedges of Net Investments in Foreign Operations

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

~~Cross Currency~~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 ~~$1,189~~$1,184 million and ~~$714~~$1,249 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Foreign Currency Denominated Debt

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023. We designated the entirety of the outstanding balance, or ~~$581~~$579 million and ~~$554~~$610 million as of September 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 Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Cash Flow Hedges
Foreign Exchange Contracts
Amount of gain (loss) recognized in OCI $ 4 $ (5) $ 7 $ (14)
Amount of (gain) loss reclassified from OCI into revenue (2) 2 0 4
Amount of loss reclassified from OCI into cost of revenue 0 1 2 3
Net Investment Hedges
Cross Currency Swaps
Amount of gain (loss) recognized in OCI $ (53) $ 31 $ (30) $ 30
Amount of income recognized in Interest Expense 5 4 $ 14 $ 11
Foreign Currency Denominated Debt
Amount of gain (loss) recognized in OCI $ (21) $ 22 $ (26) $ 23


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

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

As of September 30, ~~2020, $6~~2021, $5 million of net ~~gains~~losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.

As of September 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) September 30,
2020 December 31,
2019
Derivatives designated as hedging instruments
Assets
Cash Flow Hedges
Other current assets $ 4 $ 0
Net Investment Hedges
Other non-current assets $ 8 $ 4
Liabilities
Net Investment Hedges
Other non-current accrued liabilities $ (54) $ (24)


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


Net Investment Hedges
Other non-current assets	$	1	$	—
Liabilities
Cash Flow Hedges
Other current liabilities	$	(4)	$	—
Net Investment Hedges
Other non-current accrued liabilities	$	(55)	$	(117)

The fair value of our long-term debt, due in 2023, designated as a net investment hedge was ~~$611~~$598 million and ~~$591~~$640 million as of September 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) September 30,
2020 December 31,
2019
Compensation and other employee benefits $ 230 $ 199
Customer-related liabilities 173 153
Accrued taxes 96 79
Lease liabilities 61 61
Accrued warranty costs 59 36
Other accrued liabilities 126 100
Total accrued and other current liabilities $ 745 $ 628


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

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

Total debt outstanding is summarized as follows:

(in millions) September 30,
2020 December 31,
2019
4.875% Senior Notes due 2021 (a) $ 600 $ 600
2.250% Senior Notes due 2023 (a) 583 557
3.250% Senior Notes due 2026 (a) 500 500
1.950% Senior Notes due 2028 (b) 500 0
2.250% Senior Notes due 2031 (b) 500 0
4.375% Senior Notes due 2046 (a) 400 400
Commercial paper 40 276
Debt issuance costs and unamortized discount (c) (30) (17)
Total debt 3,093 2,316
Less: short-term borrowings and current maturities of long-term debt 40 276
Total long-term debt $ 3,053 $ 2,040


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

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





Debt issuance costs and unamortized discount (b)	(25)		(28)

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

(a)The fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due 2021 was ~~$627~~$0 million and ~~$629~~$620 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The fair value of our Senior Notes due 2023 was ~~$611~~$598 million and ~~$591~~$640 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The fair value of our Senior Notes due 2026 was ~~$555~~$545 million and ~~$518~~$563 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020 respectively. The fair value of our Senior Notes due 2028 was $505 million and $529 million as of September 30, 2021 and December 31, 2020,

respectively. The fair value of our Senior Notes due 2031 was $503 million and $527 million as of September 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2046 was ~~$474~~$481 million and ~~$431~~$496 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

(b)The fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due 2028 and 2031 was $522 million and $530 million, respectively, as of September 30, 2020.

~~(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 September 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, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may also redeem the Senior Notes in certain other circumstances, as set forth in the applicable Senior Notes indenture.

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

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

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

Credit Facilities

2019 Five-Year Revolving Credit Facility

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

Interest on all loans under the 2019 Credit Facility is payable either quarterly or at the expiration of any LIBOR or EURIBOR interest period applicable thereto. Borrowings accrue interest at a rate equal to, at Xylem's election, a base rate or an adjusted LIBOR or EURIBOR rate plus an applicable margin. The 2019 Credit Facility includes customary provisions for implementation of replacement rates for LIBOR-based and EURIBOR-based loans. The 2019 Credit Facility also includes a pricing grid that determines the applicable margin based on Xylem's credit rating, with a further adjustment depending on Xylem's annual Sustainalytics Environmental, Social and Governance ~~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; and in addition contains a number of customary covenants, including limitations on the incurrence of secured debt and debt of subsidiaries, liens, sale and lease-back transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. The 2019 Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the 2019 Credit Facility, subject to certain requirements and conditions set forth in the 2019 Credit Facility.

On June 22, 2020, Xylem entered into Amendment No. 1 to the 2019 Credit Facility (the "Amendment") which modified the financial covenant from a test based on the maximum leverage ratio (defined as consolidated total debt to consolidated EBITDA) to a test based on the net leverage ratio (defined as consolidated total debt less unrestricted cash and cash equivalents to consolidated EBITDA). This modification is effective through the quarter ending September 30, 2021, after which the covenant will revert back to the prior maximum leverage ratio test. The Amendment also ~~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 September 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 September 30, ~~2020~~2021 and December 31, ~~2019, $40 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 2.20%.~~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 ~~$583~~$580 million) which may be denominated in a variety of currencies. The maximum issuing balance may be increased in accordance with the Dealer Agreement. As of September 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 $117 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. As of September 30, 2020, the ING Bank Term Loan Facility was undrawn.

~~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%.~~As of September 30, 2020, the Australia & New Zealand Banking Group Limited Term Loan Facility was undrawn.~~

~~Time Deposits~~

Certain Green Bond proceeds were invested in time deposits. Time deposits with original maturity periods of three months or less are included within “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets, while time deposits with original maturity periods greater than three months but less than one year are separately presented as "Short-term investments". Time deposits are recorded at cost, which approximates fair value as of September 30, 2020 and is considered a Level 1 input. The fair value of time deposits classified as “Cash and cash equivalents” and “Short-term investments” was $550 million and $200 million, respectively, as of September 30, 2020. There were no time deposits as of December 31, 2019.

2019

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 Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Domestic defined benefit pension plans:
Service cost $ 0 $ 1 $ 2 $ 2
Interest cost 1 1 3 3
Expected return on plan assets (1) (2) (5) (6)
Amortization of net actuarial loss 0 — 2 1
Net periodic benefit cost $ 0 $ — $ 2 $ —
International defined benefit pension plans:
Service cost $ 3 $ 2 $ 9 $ 7
Interest cost 3 4 11 14
Expected return on plan assets (4) (4) (10) (22)
Amortization of net actuarial loss 4 2 10 6
Settlement/Curtailment 0 8 0 8
Net periodic benefit cost $ 6 $ 12 $ 20 $ 13
Total net periodic benefit cost $ 6 $ 12 $ 22 $ 13


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

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

Amortization of net actuarial loss	5		4		13		10

Net periodic benefit cost	$	8	$	6	$	22	$	20
Total net periodic benefit cost	$	8	$	6	$	24	$	22

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

The total net periodic benefit cost for other ~~postretirement~~post-retirement employee benefit plans was less than $1$1 million, ~~for the three and nine months ended September 30, 2020,~~ including net credits recognized into other comprehensive income of ~~less than $1 million and $1 million, respectively, for the three and nine months ended September 30, 2020. The total net periodic benefit cost for other postretirement employee benefit plans was~~ less than $1 million, for both the three and nine months ended September 30, ~~2019, including net credits recognized into other comprehensive income of $1 million~~2021 and ~~$2 million, respectively, for the three and nine months ended September 30, 2019.~~2020, respectively.

We contributed ~~$19~~$16 million and ~~$14~~$19 million to our defined benefit plans during the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Additional contributions ranging between approximately $5$4 million and ~~$10~~$8 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 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 nine months ended September 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~~Subsequent to the end of the ~~change in assets from~~quarter, we made a ~~mix~~payment of ~~equities and bonds~~approximately $6 million related 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 purchasepreviously disclosed buy-out of the ~~bulk annuity.~~UK pension plan. The remaining payments will be completed in Q4 2021.

Note 12. Equity

The following table shows the changes in stockholders' equity for the nine months ended September 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)		—		—		(13)
Dividends declared ($0.28 per share)	—		—		(50)		—		—		—		(50)
Stock incentive plan activity	—		12		—		—		(7)		—		5
Repurchase of common stock	—		—		—		—		(60)		—		(60)
Balance at March 31, 2021	$	2	$	2,049	$	1,967	$	(426)	$	(655)	$	9	$	2,946


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

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


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

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

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

~~Note 14. Equity~~

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


	Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Non-Controlling Interest		Total
Balance at January 1, 2020	$	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
Net income	—		—		37		—		—		—		37
Other comprehensive income, net	—		—		—		13		—		—		13
Distribution to minority stockholders	—		—		—		—		—		(1)		(1)
Dividends declared ($0.26 per share)	—		—		(47)		—		—		—		(47)
Stock incentive plan activity	—		9		—		—		(1)		—		8
Balance at September 30, 2020	$	2	$	2,021	$	1,828	$	(396)	$	(588)	$	8	$	2,875

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

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

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, 2019 $ 2 $ 1,950 $ 1,639 $ (336) $ (487) $ 14 $ 2,782
Sale of business — — — — — (2) (2)
Net income — — 79 — — — 79
Other comprehensive income, net — — — 20 — — 20
Dividends declared ($0.24 per share) — — (44) — — — (44)
Stock incentive plan activity — 12 — — (14) — (2)
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
Net income — — 65 — — — 65
Other comprehensive loss, net — — — (37) — — (37)
Distribution to minority shareholders — — — — — (3) (3)
Dividends declared ($0.24 per share) — — (44) — — — (44)
Stock incentive plan activity — 8 — — — — 8
Balance at September 30, 2019 $ 2 $ 1,983 $ 1,791 $ (364) $ (526) $ 9 $ 2,895

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

Share-based compensation expense was $8 million and $25 million during the three and nine months ended September 30, 2021, respectively, and $3 million and $19 million during the three and nine months ended September 30, 2020, ~~respectively, and $7 million and $23 million during the three and nine months ended September 30, 2019,~~ respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $7$8 million, ~~$25~~$27 million and ~~$10~~$15 million, respectively, at September 30, ~~2020~~2021 and is expected to be recognized over a weighted average period of 1.9, 1.9 and 22.6 years, respectively. The amount of cash received from the exercise of stock options was ~~$10~~$15 million and $10 million for the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively.

Stock Option Grants

The following is a summary of the changes in outstanding stock options for the nine months ended September 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 (260) 37.95
Forfeited and expired (65) 77.45
Outstanding at September 30, 2020 2,263 $ 55.11 6.6 $ 64
Options exercisable at September 30, 2020 1,487 $ 45.33 5.3 $ 56
Vested and expected to vest as of September 30, 2020 2,175 $ 54.37 6.4 $ 62


	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	262	102.61
Exercised	(264)	54.82
Forfeited and expired	(24)	84.39
Outstanding at September 30, 2021	1,935	$	62.63	6.2	$	113
Options exercisable at September 30, 2021	1,280	$	51.49	4.8	$	89
Vested and expected to vest as of September 30, 2021	1,872	$	61.89	6.1	$	111

The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the nine months ended September 30, ~~2020~~2021 was ~~$12.0~~$17.1 million.

Stock Option Fair Value

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


Volatility	~~24.07~~26.29		%
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~~23.26

Expected volatility is calculated based on an analysis of historic volatility measures for Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the ~~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 nine months ended September 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 334 75.35
Vested (251) 63.86
Forfeited (38) 75.41
Outstanding at September 30, 2020 557 $ 74.59


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

ROIC Performance Share Unit Grants

The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the nine months ended September 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	61	102.69


Forfeited (a)	(66)	76.13
Outstanding at September 30, 2021	177	$	84.85

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 (16) 76.83
Outstanding at September 30, 2020 198 $ 75.86

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

TSR Performance Share Unit Grants

The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the nine months ended September 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 (16) 76.83
Outstanding at September 30, 2020 198 $ 96.41
2021:


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

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

The fair value of TSR performance share units was calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The following are weighted-average assumptions for ~~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 on March 1, 2026 based on our performance as of December 31, 2025 against certain of the Company's 2025 sustainability goals.

Note ~~16.~~14. Capital Stock

For the three and nine months ended September 30, 2021, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and approximately 0.7 million shares of common stock for $68 million, respectively. For the three and nine months ended September 30, 2020, the Company repurchased less than 0.1 million shares of common stock for approximately $1 million and approximately 0.8 million shares of common stock for $61 million, respectively. For the three and nine months ended September 30, 2019, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and approximately 0.5 million shares of common stock 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~~stockholders and maintains our focus on growth. There were no shares repurchased under the program for the three months ended September 30, 2021. For the nine months ended September 30, 2021, we repurchased approximately 0.6 million shares for $60 million. There were no shares repurchased under the program for the three months ended September 30, 2020. For the nine months ended September 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 September 30, 2019. For the nine months ended September 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 September 30, ~~2020.~~2021.

Aside from the aforementioned repurchase program, we repurchased less than 0.1 million shares and approximately 0.1 million shares for ~~approximately~~less than $1 million and ~~$11~~$8 million for the three and nine months ended September 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~~approximately $1 million and ~~approximately $14~~$11 million for the three and nine months ended September 30, ~~2019,~~2020, respectively.

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

The following table provides the components of accumulated other comprehensive loss for the nine months ended September 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)
Foreign currency translation adjustment	(19)		—		—		(19)
Tax on foreign currency translation adjustment	(10)		—		—		(10)

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

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

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

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

The following table provides the components of accumulated other comprehensive loss for the nine months ended September 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)
Foreign currency translation adjustment (10) — — (10)
Tax on foreign currency translation adjustment 18 — — 18
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 — — 4 4
Reclassification of unrealized gain on foreign exchange agreements into revenue — — (2) (2)
Balance at September 30, 2020 $ (141) $ (260) $ 5 $ (396)

~~The following table provides the components of accumulated other comprehensive loss for the nine months ended September 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 foreign exchange agreements into revenue	Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		1		1		Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		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)
Foreign currency translation adjustment	Foreign currency translation adjustment	(20)		—		—		(20)		Foreign currency translation adjustment	(10)		—		—		(10)
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	(13)		—		—		(13)		Tax on foreign currency translation adjustment	18		—		—		18
Changes in postretirement benefit plans		—		(11)		—		(11)
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net		—		1		—		1
Settlement charge released into other non-operating income (expense), net		—		8		—		8
Unrealized loss on derivative hedge agreements		—		—		(5)		(5)
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 September 30, 2019		$	(144)	$	(213)	$	(7)	$	(364)

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

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

Note ~~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,

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~~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 $3$5 million and $5$6 million as of September 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 September 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 ~~$378~~$417 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 millionand $3$3 million as of September 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.

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 44 20
Settlement of warranty claims (24) (32)
Warranty accrual - September 30 $ 62 $ 46
accruals over each period:


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

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.

3029

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

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Revenue:
Water Infrastructure $ 524 $ 531 $ 1,463 $ 1,574
Applied Water 364 376 1,039 1,149
Measurement & Control Solutions 332 389 1,001 1,155
Total $ 1,220 $ 1,296 $ 3,503 $ 3,878
Operating Income:
Water Infrastructure $ 89 $ 97 $ 201 $ 246
Applied Water 56 61 144 179
Measurement & Control Solutions (62) (136) (120) (94)
Corporate and other (10) (11) (37) (40)
Total operating income $ 73 $ 11 $ 188 $ 291
Interest expense $ 22 $ 16 $ 56 $ 52
Other non-operating (expense) income, net (1) (7) (5) (2)
Gain from sale of business 0 0 0 1
Income (loss) before taxes $ 50 $ (12) $ 127 $ 238
Depreciation and Amortization:
Water Infrastructure $ 13 $ 15 $ 44 $ 46
Applied Water 7 5 18 17
Measurement & Control Solutions 36 36 106 107
Regional selling locations (a) 4 6 15 14
Corporate and other 3 3 6 8
Total $ 63 $ 65 $ 189 $ 192
Capital Expenditures:
Water Infrastructure $ 9 $ 14 $ 27 $ 65
Applied Water 4 5 16 15
Measurement & Control Solutions 22 21 73 74
Regional selling locations (b) 6 4 18 13
Corporate and other 0 2 2 8
Total $ 41 $ 46 $ 136 $ 175


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2021		2020		2021		2020
Revenue:
Water Infrastructure	$	547	$	524	$	1,625	$	1,463
Applied Water	400		364		1,207		1,039
Measurement & Control Solutions	318		332		1,040		1,001
Total	$	1,265	$	1,220	$	3,872	$	3,503
Operating Income (Loss):
Water Infrastructure	$	101	$	89	$	265	$	201
Applied Water	60		56		190		144
Measurement & Control Solutions	7		(62)		29		(120)
Corporate and other	(16)		(10)		(39)		(37)
Total operating income	$	152	$	73	$	445	$	188
Interest expense	$	21	$	22	$	63	$	56
Other non-operating income (expense), net	2		(1)		1		(5)
Gain from sale of business	—		—		2		—
Income before taxes	$	133	$	50	$	385	$	127
Depreciation and Amortization:
Water Infrastructure	$	12	$	13	$	38	$	44
Applied Water	5		7		17		18
Measurement & Control Solutions	38		36		111		106
Regional selling locations (a)	6		4		15		15
Corporate and other	1		3		5		6
Total	$	62	$	63	$	186	$	189
Capital Expenditures:
Water Infrastructure	$	18	$	9	$	42	$	27
Applied Water	4		4		11		16
Measurement & Control Solutions	19		22		60		73
Regional selling locations (b)	4		6		12		18
Corporate and other	2		—		2		2
Total	$	47	$	41	$	127	$	136

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

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

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

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes, included elsewhere in this report on Form 10-Q (this "Report").

This Report contains ~~information that may constitute~~ “forward-looking statements" within the meaning of Section 27A of the ~~Private~~ Securities ~~Litigation Reform~~ Act of ~~1995.~~1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” "contemplate," "predict," “forecast,” “likely,” “believe,” “target,” "goal," “will,” “could,” “would,” “should,” "potential," "may" and similar expressions or their negative, may, but are not necessary to, identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements ~~that:~~that are not historical, such as statements about ~~the Company’s capitalization, restructuring and realignment~~our strategy, financial plans, ~~and future strategic plans; describe the Company’s business strategy,~~ outlook, objectives, plans, intentions or 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,~~growth.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and ~~expressing general views about future operating results. Forward-looking~~results of operations, as well as any forward-looking statements, ~~involve known~~are subject to change and ~~unknown~~to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and ~~other important~~uncertainties are, and may continue to be, amplified by the ongoing coronavirus (“COVID-19”) pandemic. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from ~~those expressed~~estimates or projections contained in or implied ~~in, or reasonably inferred from, such statements. The novel coronavirus (“COVID-19”) pandemic is~~by our forward-looking statements include, among others, the following: overall industry and ~~may continue to amplify many~~economic conditions, including industrial, governmental and private sector spending and the strength of ~~these risks~~the residential and ~~uncertainties.~~

~~Factors that could cause results to differ materially from those anticipated include: overall~~commercial real estate markets; geopolitical, regulatory, economic and ~~business conditions;~~other risks associated with international operations; continued uncertainty around the COVID-19 pandemic’s ~~uncertain~~ magnitude, duration ~~geographic reach~~ and ~~impact on the global economy; the current and 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 from adverse economic conditions on our performance or customer markets caused by~~ the ~~COVID-19 pandemic;~~pace of recovery when the pandemic subsides; actual or potential other epidemics, pandemics or global health crises; ~~geopolitical~~availability, shortage or delays in receiving products, parts, electronic components and raw materials from our supply chain; manufacturing and operating cost increases due to inflation, prevailing price changes, tariffs and other risks associated with our international operations that could affect customer markets and our business, such as military actions, protectionism, economic sanctions or trade barriers, including tariffs and embargoes, and non-compliance with laws or regulations, including those pertaining to foreign corrupt practices, data privacy, export and import and competition; potential for unexpected cancellations or delays of customer orders in our reported backlog;factors; 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 refinance our existing indebtedness; availability of liquidity sufficient to meet our needs; uncertainty from the expected discontinuance of LIBOR and transition to another interest rate benchmark; changes in the value of goodwill or intangible assets; uncertainty related to restructuring and realignment actions and related charges and savings, including with respect to the amount and timing of estimated costs and savings, the timing of or delays in implementing actions, and our ability to realize all of the anticipated cost savings, all of which are subject to change as the Company makes decisions and refines plans and estimates over time; management and employee distraction resulting from restructuring actions; timing delays in implementing strategic initiatives; our ability to continue strategic investments for growth; risks relating to products, including defects, security, liability and recalls; governmental or regulatory claims or investigations; cybersecurity ~~attacks, breaches~~incidents or other disruptions of information technology systems on which we rely, or oninvolving our products; disruptions in operations at our facilities or that of third parties upon which we rely; availability, regulation and interference with radio spectrum used by some of our products; our ~~sustainability initiatives;~~ability to retain and attract senior management and other key talent; uncertainty related to restructuring and realignment actions and related charges and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; risks relating to products, including defects, security, warranty and liability claims, and recalls; difficulty predicting our financial results, including uncertainties due to the ~~use~~nature of ~~proceeds from~~ our ~~green bond offering,~~short- and long-cycle businesses; volatility in our results due to weather conditions, including the effects of climate change; our ability to borrow or refinance our existing indebtedness and the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to ~~appropriately 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~~environment and climate change; changes in our effective tax rates or ~~meet the investment requirements of certain environmentally-focused investors; litigation~~tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our ~~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.

3231

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 COVID-19 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 have continued through the third quarter. As the COVID-19 pandemic began to unfold in the first quarter of 2020, 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 and across the Company. 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 ~~are,~~may 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, such as travel restrictions, for periods of time 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 to varying degrees during the year, particularly during the first and second quarter. Currently, our overall operating capacity remains just over 90% globally, with all of our production facilities operational. In order to maintain a safe work environment, 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.

The COVID-19 pandemic, ~~is also~~as well as broader global market supply and demand 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,~~continue to experience, ~~unpredictable interruptions with~~shortages in the supply of components, including electronics, parts and raw materials. We have also experienced, and continue to experience, increased freight and logistics costs, including delivery delays related to port congestion and other related logistics challenges. To help mitigate the effects of these challenges and increase the resilience of our ~~external suppliers,~~supply chain, we ~~have enhanced~~continue to enhance and augment our risk management activities, including supplier pulsing and ~~redundancy to minimize those impacts.~~

~~To date, the most significant operational impacts~~redundancy. Additionally, we have ~~experienced are volume reductions ranging across all segments and major geographic regions.~~

~~Future demand for our products and services is uncertain as~~in 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 or delayed demand for our products and services, as well as changes~~ in the ~~payment patterns~~future, take measures with respect to buffer stock, the use of alternative suppliers or redesign of certain products to mitigate the impacts of freight and logistics delays and bolster our ~~customers. At the end of the third quarter, total backlog increased 21.7% as compared~~access to ~~December 31, 2019~~raw materials, parts and ~~there has not been~~components. If these shortages and interruptions continue, or if additional interruptions occur, they

could have 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 project delays, inability to access or travel to customer sites and shipping delays due to stay at home measures. However, because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain and rapidly changing, the pandemic’s ongoing and future impactsnegative impact on our ~~business, financial condition,~~ results of ~~operations, and stock price remain uncertain and difficult to predict, but we expect our results to continue to be adversely impacted beyond the quarter ending September 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 during the second quarter of 2020. 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 end 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 by strengthening access to Water, Sanitation and Hygiene (WASH) facilities in schools and health centers through its partnership with Americares and UNICEF, as well as the ~~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 we will continue to evaluate it for continuation, as necessary.

Many of our offices globally ~~have transitioned to~~remain in a 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 also~~ 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 actions in an effort to mitigate adverse consequences.

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

Executive Summary

Xylem reported revenue for the third quarter of ~~2020~~2021 of ~~$1,220~~$1,265 million, ~~a decrease~~an increase of ~~5.9%~~3.7% compared to ~~$1,296~~$1,220 million reported in the third quarter of ~~2019.~~2020. On a constant currency basis, revenue ~~decreased~~increased by ~~$85~~$25 million, or ~~6.6%~~2.0%, driven ~~entirely~~ by organic ~~declines across all~~revenue growth in the Water Infrastructure and Applied Water segments, ~~with the majority of the decline coming from~~partially offset by Measurement & Control Solutions. These results were driven by growth in the industrial and ~~utility~~commercial end ~~markets. Organic revenue decline during~~markets, offset by declines in the ~~quarter was anticipated as our business continues to be impacted by the COVID-19 pandemic.~~utilities end market.

We generated operating income of ~~$73~~$152 million (margin of ~~6.0%~~12.0%) during the third quarter of ~~2020,~~2021, as compared to ~~$11~~$73 million (margin of ~~0.8%~~6.0%) in ~~2019.~~2020. Operating income in the third quarter of ~~2020~~2021 benefited from ~~decreases in special charges of $85 million and decreases~~a decrease in restructuring and realignment costs of ~~$15~~$13 million as compared to the third quarter of ~~2019.~~2020 and a decrease in special charges of $69 million. Excluding the impact of these items, adjusted operating income was $155 million (adjusted margin of 12.3%) during the third quarter of 2021 as compared to $158 million (adjusted margin of 13.0%) ~~during the third quarter of 2020 as compared to $196 million (adjusted margin of 15.1%)~~ in ~~2019.~~2020. The decrease in adjusted operating margin was primarily due to cost ~~inflation; unfavorable volume, impacted significantly by COVID-19; unfavorable mix;~~inflation, increased spending on strategic investments, increased logistics costs and ~~increased inventory management costs.~~unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving ~~initiatives.~~initiatives, price realization, favorable volume, and other lesser impacts.

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

•Orders of ~~$1,246~~$1,518 million, ~~down 7.4%~~up 21.8% from ~~$1,346~~$1,246 million in the prior year, and ~~down 8.2%~~up 20.1% on an organic ~~basis, impacted by the COVID-19 pandemic.~~basis.

•Earnings per share of ~~$0.20, down 44.4%~~$0.63, up 215.0% when compared to the prior year ($~~0.62, down 24.4%~~0.63, up 1.6% on an adjusted basis).

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

•Net cash flow provided by operating activities of ~~$454~~$318 million for the nine months ended September 30, ~~2020, up $3~~2021, a decrease of $136 million from cash provided in the same period of the prior year. Free cash flow ~~of $318~~was $191 million, ~~up $42~~down $127 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								Nine Months Ended									Three Months Ended								Nine Months Ended
		September 30,								September 30,									September 30,								September 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	$	37	$	0.20	$	65	$	0.36	$	106	$	0.58	$	283	$	1.56	Net income & Earnings per share	$	114	$	0.63	$	37	$	0.20	$	314	$	1.73	$	106	$	0.58
Restructuring and realignment, net of tax of $3 and $15 for 2020 and $9 and $17 for 2019		12		0.06		21		0.11		52		0.28		54		0.30
Restructuring and realignment, net of tax of $1 and $4 for 2021 and $3 and $15 for 2020																		Restructuring and realignment, net of tax of $1 and $4 for 2021 and $3 and $15 for 2020	1		—		12		0.06		12		0.07		52		0.28

Special charges, net of tax of $6 and $9 for 2020 and $2 and $2 for 2019		65		0.36		164		0.91		76		0.42		168		0.93
Special charges, net of tax of $0 and $1 for 2021 and $6 and $9 for 2020																		Special charges, net of tax of $0 and $1 for 2021 and $6 and $9 for 2020	2		0.01		65		0.36		7		0.04		76		0.42
Tax-related special items	Tax-related special items	—		—		(101)		(0.56)		(5)		(0.03)		(118)		(0.65)		Tax-related special items	(1)		(0.01)		—		—		6		0.03		(5)		(0.03)
Gain from sale of business, net of tax of $0 for 2019		—		—		—		—		—		—		(1)		(0.01)
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)		—		—
Adjusted net income & Adjusted earnings per share	Adjusted net income & Adjusted earnings per share	$	114	$	0.62	$	149	$	0.82	$	229	$	1.25	$	386	$	2.13	Adjusted net income & Adjusted earnings per share	$	116	$	0.63	$	114	$	0.62	$	337	$	1.86	$	229	$	1.25

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

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

•“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						Nine Months Ended
	September 30,						September 30,
(in millions)	2021			2020			2021			2020
Net Income	$	114		$	37		$	314		$	106
Income tax expense	19			13			71			21
Interest expense, net	20			20			58			50
Depreciation	31			30			90			88
Amortization	31			33			96			101
EBITDA	$	215		$	133		$	629		$	366
EBITDA Margin	17.0		%	10.9		%	16.2		%	10.5		%
Share-based compensation	$	8		$	3		$	25		$	19
Restructuring and realignment	2			15			16			67
Special charges	2			71			8			85
Gain from sale of business	—			—			(2)			—
Adjusted EBITDA	$	227		$	222		$	676		$	537
Adjusted EBITDA Margin	17.9		%	18.2		%	17.5		%	15.3		%

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

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

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

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


		Nine Months Ended					Nine Months Ended
		September 30,					September 30,
(In millions)	(In millions)	2020		2019		(In millions)	2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	454	$	451	Net cash provided by operating activities	$	318	$	454
Capital expenditures	Capital expenditures	(136)		(175)		Capital expenditures	(127)		(136)
Free cash flow	Free cash flow	$	318	$	276	Free cash flow	$	191	$	318
Net cash used by investing activities	Net cash used by investing activities	$	(326)	$	(185)	Net cash used by investing activities	$	(113)	$	(326)
Net cash provided (used) by financing activities		$	550	$	(99)
Net cash (used) provided by financing activities						Net cash (used) provided by financing activities	$	(806)	$	550

3635

•“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 Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Net Income $ 37 $ 65 $ 106 $ 283
Income tax expense (benefit) 13 (77) 21 (45)
Interest expense (income), net 20 14 50 49
Depreciation 30 30 88 88
Amortization 33 35 101 104
EBITDA $ 133 $ 67 $ 366 $ 479
Share-based compensation $ 3 $ 7 19 23
Restructuring and realignment 15 30 67 71
Special charges 71 166 85 170
Gain from sale of business — — — (1)
Adjusted EBITDA $ 222 $ 270 $ 537 $ 742

~~2020~~2021 Outlook

We ~~withdrew 2020 guidance on March 31, 2020 due to uncertainties caused by COVID-19. We expect~~are updating our anticipated total revenue growth to be ~~down~~in the range of 5% to 7% in 2021, with organic revenue growth anticipated to be in the ~~fourth quarter, 6%~~range of 3% to ~~8% organically, driven primarily by~~4%, including negative impacts due to the ~~impact of COVID-19.~~

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

•Utilities revenue ~~decreased~~increased by approximately 7%1% organically through the third quarter 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 to be essentially flat 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 to face 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 ~~12%~~14% organically through the third quarter driven by ~~weakness~~strong across all major geographic regions. For 2021, we expect organic revenue growth in ~~North America,~~the high-single-digit range as activity across all segments rebounds globally and our dewatering business continues to recover, especially in the emerging markets, as demand increases and site access restrictions continue to ease. We anticipate growth to continue in the remainder of the year led by the emerging markets and western Europe. As 2020 progresses we expect industrial facilities to begin allowing access to sales teams and channel partners, but anticipate to continue experiencing slower orders and activity while non-essential work is deferred. Exposure to the impacts of soft construction and industrial markets will continue to have an effect on our dewatering business inEurope with North America ~~potentially leading to demand declines. We anticipate~~ modest ~~recovery in growth trajectory as countries and regions begin to further re-open and activity resumes.~~lagging growth.

•In the commercial markets, organic revenue ~~decline~~growth was approximately 9% through the third quarter driven by ~~weakness~~strength in the ~~emerging markets~~U.S. and the ~~United States, partially offset by strength~~emerging markets. For 2021, we expect organic revenue growth in ~~western Europe. During 2020 we~~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.~~solid during the year and anticipate continued healthy activity in Europe. We ~~anticipate mixed performance in the institutional building sector depending on the "essential" nature of the end customer and modestly soft~~expect new construction activity in North ~~America.~~America strengthening, through the year.

•In the residential markets, organic revenue ~~decline~~growth was approximately 8%20% through the third quarter driven by ~~weakness~~strength in the ~~United States~~emerging markets, North America and western 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 western Europe. Additionally, we anticipate ~~healthy~~strong demand in China for secondary water supply product ~~applications as well as modest share gains in Europe.~~applications.

In response to the changes in business 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, strengthen our

~~competitive positioning and better serve our customers. Additionally, we~~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.~~effectiveness, strengthen our competitive positioning and better serve our customers. During ~~2020,~~2021, we expect to incur ~~between $75 million and $85~~approximately $20 million in restructuring and realignment ~~costs, with approximately $25 million of these costs being non-cash charges.~~costs. We expect to realize approximately ~~$67~~$35 million of net savings in ~~2020,~~2021, consisting of ~~$25~~approximately $33 million of incremental net savings from restructuring and realignment actions initiated in ~~2019,~~2020, and approximately ~~$42~~$2 million of net savings from the restructuring, realignment and other structural cost actions initiated during this year.

Results of Operations

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2020 2019 Change 2020 2019 Change
Revenue $ 1,220 $ 1,296 (5.9) % $ 3,503 $ 3,878 (9.7) %
Gross profit 461 509 (9.4) % 1,304 1,509 (13.6) %
Gross margin 37.8 % 39.3 % (150) bp 37.2 % 38.9 % (170) bp
Total operating expenses 388 498 (22.1) % 1,116 1,218 (8.4) %
Expense to revenue ratio 31.8 % 38.4 % (660) bp 31.9 % 31.4 % 50 bp
Restructuring and realignment costs 15 30 (50.0) % 67 71 (5.6) %
Special charges 70 155 (54.8) % 81 159 (49.1) %
Adjusted operating expenses 303 313 (3.2) % 968 988 (2.0) %
Adjusted operating expenses to revenue ratio 24.8 % 24.2 % 60 bp 27.6 % 25.5 % 210 bp
Operating income 73 11 563.6 % 188 291 (35.4) %
Operating margin 6.0 % 0.8 % 520 bp 5.4 % 7.5 % (210) bp
Interest and other non-operating expense, net 23 23 — % 61 54 13.0 %
Gain from sale of business — — — % — 1 NM
Income tax expense (benefit) 13 (77) (116.9) % 21 (45) (146.7) %
Tax rate 26.2 % 623.6 % (59,740) bp 16.6 % (18.9) % 3,550 bp
Net income $ 37 $ 65 (43.1) % $ 106 $ 283 (62.5) %


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(In millions)	2021			2020			Change		2021			2020			Change
Revenue	$	1,265		$	1,220		3.7	%	$	3,872		$	3,503		10.5	%
Gross profit	472			461			2.4	%	1,482			1,304			13.7	%
Gross margin	37.3		%	37.8		%	(50)	bp	38.3		%	37.2		%	110	bp



Total operating expenses	320			388			(17.5)	%	1,037			1,116			(7.1)	%
Expense to revenue ratio	25.3		%	31.8		%	(650)	bp	26.8		%	31.9		%	(510)	bp
Restructuring and realignment costs	2			15			(86.7)	%	16			67			(76.1)	%

Special charges	1			70			(98.6)	%	3			81			(96.3)	%
Adjusted operating expenses	317			303			4.6	%	1,018			968			5.2	%
Adjusted operating expenses to revenue ratio	25.1		%	24.8		%	30	bp	26.3		%	27.6		%	(130)	bp
Operating income	152			73			108.2	%	445			188			136.7	%
Operating margin	12.0		%	6.0		%	600	bp	11.5		%	5.4		%	610	bp
Interest and other non-operating expense, net	19			23			(17.4)	%	62			61			1.6	%
Gain from sale of business	—			—			NM		2			—			NM
Income tax expense	19			13			46.2	%	71			21			238.1	%
Tax rate	13.9		%	26.2		%	(1,230)	bp	18.3		%	16.6		%	170	bp
Net income	$	114		$	37		208.1	%	$	314		$	106		196.2	%

NM - Not meaningful change

Revenue

Revenue generated during the three and nine months ended September 30, ~~2020~~2021 was ~~$1,220~~$1,265 million and ~~$3,503~~$3,872 million, reflecting ~~decreases~~increases of ~~$76~~$45 million, or ~~5.9%~~3.7%, and ~~$375~~$369 million, or ~~9.7%~~10.5%, respectively, compared to the same prior year periods. On a constant currency basis, revenue ~~declined 6.6%~~grew 2.0% and ~~8.8%~~6.8% for the three and nine months ended September 30, ~~2020.~~2021. The ~~decreases at~~increases on a constant currency ~~consisted entirely of declines in~~basis were driven by organic revenue growth of ~~$85~~$27 million and ~~$340~~$246 million, ~~respectively, reflecting significantly lower demand~~respectively. During the quarter, we experienced strong organic growth across the emerging markets and in ~~the United States and the Middle East, largely due to COVID-19,~~western Europe, partially offset by ~~growth in China and western Europe~~declines in the ~~quarter.~~U.S. On a year-to-date basis, we saw organic growth across all major geographies, where we recovered nicely from the significant impacts of the COVID-19 pandemic in the prior year.

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

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Revenue $ 531 $ 376 $ 389 $ 1,296
Organic Impact (11) (2.1) % (15) (4.0) % (59) (15.2) % (85) (6.6) %
Acquisitions/(Divestitures) — — % — — % — — % — — %
Constant Currency (11) (2.1) % (15) (4.0) % (59) (15.2) % (85) (6.6) %
Foreign currency translation (a) 4 0.8 % 3 0.8 % 2 0.5 % 9 0.7 %
Total change in revenue (7) (1.3) % (12) (3.2) % (57) (14.7) % (76) (5.9) %
2020 Revenue $ 524 $ 364 $ 332 $ 1,220
2021:


	Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(In millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Revenue	$	524			$	364			$	332			$	1,220
Organic Growth	13		2.5	%	29		8.0	%	(15)		(4.5)	%	27		2.2	%
Divestitures	—		—	%	—		—	%	(2)		(0.6)	%	(2)		(0.2)	%
Constant Currency	13		2.5	%	29		8.0	%	(17)		(5.1)	%	25		2.0	%
Foreign currency translation (a)	10		1.9	%	7		1.9	%	3		0.9	%	20		1.7	%
Total change in revenue	23		4.4	%	36		9.9	%	(14)		(4.2)	%	45		3.7	%
2021 Revenue	$	547			$	400			$	318			$	1,265

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

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Revenue $ 1,574 $ 1,149 $ 1,155 $ 3,878
Organic Impact (87) (5.5) % (104) (9.1) % (149) (12.9) % (340) (8.8) %
Acquisitions/(Divestitures) — — % — — % — — % — — %
Constant Currency (87) (5.5) % (104) (9.1) % (149) (12.9) % (340) (8.8) %
Foreign currency translation (a) (24) (1.5) % (6) (0.5) % (5) (0.4) % (35) (0.9) %
Total change in revenue (111) (7.1) % (110) (9.6) % (154) (13.3) % (375) (9.7) %
2020 Revenue $ 1,463 $ 1,039 $ 1,001 $ 3,503


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

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

Water Infrastructure

Water Infrastructure revenue ~~decreased $7~~increased $23 million, or ~~1.3%~~4.4%, for the third quarter of ~~2020 (2.1% decrease at~~2021 (2.5% increase on a constant ~~currency)~~currency basis) as compared to the prior ~~year period.~~year. Revenue benefited from $4$10 million of foreign currency translation, with the change at constant currency coming entirely from an organic ~~decline~~growth of ~~$11~~$13 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,~~across the emerging markets, as well as in ~~the emerging markets and~~ western Europe. ~~This organic revenue decline~~Organic growth for the quarter was partially offset by ~~growth~~weakness in the utility end market, particularly in ~~western Europe~~emerging markets driven by project revenue in India and ~~China.~~China in the prior year that did not recur, as well as in the U.S., with weakness in the dewatering construction and municipal business due to project timing.

From an application perspective, ~~the~~ organic revenue ~~decline during~~growth for the third quarter was ~~primarily~~ driven by our transport ~~application,~~applications. The transport applications 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 for construction,~~ mining, ~~and~~as well as modest oil and gas ~~negatively impacting the dewatering applications. The transport application also saw organic growth~~recovery, during the quarter ~~in the United States, driven by custom pump sales,~~ and in western ~~Europe. Our treatment application also had modest growth during the quarter,~~Europe, driven by strong ~~backlog execution~~industrial and wastewater utility demand. This growth was partially offset by softness in ~~China.~~the transport applications in the U.S. due to supply chain constraints. The treatment applications also had organic growth in the quarter, primarily in western Europe.

For the nine months ended September 30, ~~2020,~~2021, revenue ~~decreased $111~~increased $162 million, or ~~7.1% (5.5% decrease at constant currency) as compared to prior year. Revenue was negatively impacted by $24 million of foreign currency translation, with the change at~~11.1% (6.3% increase on a constant currency coming entirely from an organic decline of $87 million. Organic weakness for the nine month period was primarily driven by the industrial end market, particularly in North America and the emerging markets, heavily impacted by the COVID-19 pandemic during the year. Organic revenue decline during the nine month period was also impacted by weakness, to a lesser extent, in the utility end market, particularly in the United States, 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 nine months ended September 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 year. We also saw organic revenue decline within the emerging markets in the transport application, primarily in India, with India experiencing the lapping of some large projects executed in the prior year, as well as in Latin America. 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 emerging markets.

~~Applied Water~~

~~Applied Water revenue decreased $12 million, or 3.2%, for the third quarter of 2020 (4.0% decrease at constant currency)~~basis) as compared to the prior year. Revenue benefited from $3 million of foreign currency translation for the quarter, with the change at constant currency coming entirely from an organic decline of $15 million. Organic weakness for the quarter was primarily driven by the industrial end market with, general industrial weakening driven by COVID-19 impacts and restrictions, particularly in western Europe and the United States, and declines in the building services commercial end market, where weakness in the emerging markets and the United Sates were partially offset by strength in western Europe during the quarter. Organic weakness during the quarter in these end markets was partially offset by modest growth in the building services residential end market.

For the nine months ended September 30, 2020, revenue decreased $110 million, or 9.6% (9.1% decrease at constant currency) as compared to the prior year. Revenue was negatively impacted by $6 million of foreign currency translation for the period, with the change at constant currency coming entirely from an organic decline of $104 million. Organic weakness during the nine month period was driven by declines across all end markets and applications, with industrial water and commercial building services declining the most, followed by declines in building services in the residential market as well. Organic revenue declines in the segment were seen across all major geographic regions as well, particularly in the United States, the emerging markets and western Europe, where the COVID-19 pandemic restricted activities and caused a slow down and general softening in the markets served.

~~Measurement & Control Solutions~~

Measurement & Control Solutions revenue decreased $57 million, or 14.7%, for the third quarter of 2020 (15.2% at constant currency) as compared to the prior year. Revenue benefited from $2 million of foreign currency translation for the quarter, with the change at constant currency coming entirely from an organic decline of $59 million. Organic weakness for the quarter was driven by declines in the utility end market, primarily in the United States and the Middle East and, to a much lesser extent, weakness in the industrial end market in western Europe. Organic revenue declines in the segment were significantly impacted by project timing and the COVID-19 pandemic during the quarter, particularly in the United States.

From an application perspective, the organic revenue decline for the segment was primarily driven by project timing in the gas business within the energy application where large project deployments in the United States during the prior year did not repeat and we experienced project delays driven by the COVID-19 pandemic during the year. The water application also experienced organic revenue decline during the quarter, driven by the lapping of strong project deployments in the Middle East and the United States during the third quarter of the prior year and negative COVID-19 impacts, which drove market softness in the United States where travel restrictions and site closures impacted our assessment services business. Organic weakness during the quarter was partially offset by the strong electric sales in the United States within the energy application. The test and the software as a service ("SaaS") applications both had modest declines in revenue as compared to the prior year in western Europe and in the United States, respectively.

~~For the nine months ended September 30, 2020, revenue decreased $154 million, or 13.3% (12.9% at constant currency) as compared to the prior year. Revenue was negatively impacted by $5~~$70 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $92 million. Organic growth during the year was driven by strength in both the industrial and utility end markets. Organic growth in the industrial end market was particularly strong across the emerging markets, which included recovery from prior year COVID-19 impacts, particularly in Asia, Africa and Latin America, and in western Europe with continued strength in general industrial. Strength in the utility end market was led by western Europe, where operation spending was strong in the first half of the year, and in the emerging markets, where China benefited from healthy order intake coming into the year. This utility growth was partially offset by weakness in the U.S.

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

Applied Water

Applied Water revenue increased $36 million, or 9.9%, for the third quarter of 2021 (8.0% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $7 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $29 million. Organic growth for the quarter was driven by strength in commercial building services, particularly in the U.S, as we continued to execute

on healthy backlog and order intake, and in the emerging markets, driven by recovery in China. The industrial water business also grew organically in the quarter across all of our major geographic regions, where we benefited from strong order intake and timing of price increases, as well as strength in the specialty flow control applications (marine and food & beverage). The residential building services application had continued modest growth during the quarter.

For the nine months ended September 30, 2021, revenue increased $168 million, or 16.2% (12.7% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $36 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $132 million. Organic growth during the period included growth across all three of the applications and end markets in the segment. The organic growth was led by strength in industrial, which was primarily driven by market recovery and good backlog execution in the emerging markets, particularly in China and India, as well as strong performance in western Europe, driven by market recovery from COVID-19 impacts and strength in specialty flow control applications. Commercial building services had strong organic growth in North America, as we executed on healthy backlog coming into the year. Residential building services 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 recovered from the COVID-19 pandemic. Strength in North America also contributed to the growth in residential building services for the year-to-date, as we executed on healthy backlog coming into the year.

Measurement & Control Solutions

Measurement & Control Solutions revenue decreased $14 million, or 4.2%, for the third quarter of 2021 (5.1% decrease on a constant currency basis) as compared to the prior year. Revenue benefited from $3 million of foreign currency translation, with the change at constant currency coming from an organic decline of ~~$149~~$15 million and reduced revenue related to divestiture impacts of $2 million. Organic weakness ~~for~~in the ~~period~~quarter was driven by declines in the utility end market, primarily in North America, which more than offset modest strength in the ~~United States~~industrial end market.

In order to simplify and focus the application discussion, beginning with the first quarter of 2021, we are aggregating the test application into the water application and the ~~Middle East,~~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 decline during the quarter was driven by declines in the electric business within the energy application in North America, marginally offset by ~~modest organic growth~~increased revenue in ~~western Europe during~~ the ~~year. To a lesser extent, the test~~gas business. The water application also experienced a decrease, primarily due to supply chain constraints in North America in our metrology business, which were partially offset by growth in our test and assessment service businesses.

For the nine months ended September 30, 2021, revenue increased $39 million, or 3.9% (1.5% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $24 million of foreign currency translation during the nine month period, with the change at constant currency driven by organic ~~weakness~~growth of $22 million which was partially offset by reduced revenue related to divestiture impacts of $7 million. Organic revenue growth during the period was driven by strength in the industrial end market across all of our major geographic ~~regions during the period.~~regions. Organic ~~revenue declines~~growth in the ~~segment were significantly impacted~~industrial end market was marginally offset by weakness in the ~~COVID-19 pandemic during the period.~~

utility end market in North America.

From an application perspective, ~~the~~ organic revenue ~~decline for~~growth during the ~~segment~~period was driven by the water application, ~~where the~~with growth across all major geographic regions, driven by COVID-19 ~~pandemic drove market softness~~recovery, coupled with strong backlog execution. Growth in the ~~United States~~water applications was largely attributable to our test business, as well as growth in our metrology business in the first half of the year. Organic revenue growth was partially offset by a decline in the energy application during the period driven by both the electric and ~~we lapped strong~~gas businesses, primarily in the U.S. Declines in the electric business resulted from electronic component shortages while declines in the gas business reflect large project deployments in the ~~Middle East~~U.S. during the prior ~~year. The energy application also had decline in organic revenue~~year that did not repeat, as ~~compared to~~well as project delays during the ~~prior~~ year ~~primarily in North America as we lapped a few large gas project deployments and have been negatively impacted~~driven by the COVID-19 pandemic. 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 the lapping of a couple large prior year project executions in the Middle East. The SaaS application had a modest decline in revenue as compared to the prior year, primarily in the United States.

Orders / Backlog

An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the third quarter of ~~2020~~2021 were ~~$1,246~~$1,518 million, ~~a decrease~~an

increase of ~~$100~~$272 million, or ~~7.4%~~21.8%, over the prior year ~~(8.2% decrease at~~(19.9% increase on a constant ~~currency)~~currency basis). Orders received during the nine months ended September 30, ~~2020~~2021 were ~~$3,739~~$4,716 million, ~~a decrease~~an increase of ~~$314~~$977 million, or ~~7.7%~~26.1%, over the prior year ~~(6.5% decrease at~~(22.2% increase on a constant ~~currency)~~currency basis). Order intake benefited from ~~$10~~$24 million ~~of foreign currency translation during the quarter~~ and ~~was negatively impacted by $49~~$147 million of foreign currency translation for the three and nine months ended September 30, ~~2020.~~2021, respectively. The ~~change at~~increase on a constant currency basis was primarily driven ~~entirely~~ by organic ~~declines~~order growth of ~~$110~~$250 million and ~~$265~~$840 million for the three and nine months ended September 30, ~~2020,~~2021, respectively.

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

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Orders $ 586 $ 376 $ 384 $ 1,346
Organic Impact (32) (5.5) % (4) (1.1) % (74) (19.3) % (110) (8.2) %
Acquisitions/(Divestitures) — — % — — % — — % — — %
Constant Currency (32) (5.5) % (4) (1.1) % (74) (19.3) % (110) (8.2) %
Foreign currency translation (a) 4 0.7 % 3 0.8 % 3 0.8 % 10 0.7 %
Total change in orders (28) (4.8) % (1) (0.3) % (71) (18.5) % (100) (7.4) %
2020 Orders $ 558 $ 375 $ 313 $ 1,246
2021:


	Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Orders	$	558			$	375			$	313			$	1,246
Organic Growth	53		9.5	%	64		17.1	%	133		42.5	%	250		20.1	%
Divestitures	—		—	%	—		—	%	(2)		(0.6)	%	(2)		(0.2)	%
Constant Currency	53		9.5	%	64		17.1	%	131		41.9	%	248		19.9	%
Foreign currency translation (a)	12		2.2	%	7		1.9	%	5		1.6	%	24		1.9	%
Total change in orders	65		11.6	%	71		18.9	%	136		43.5	%	272		21.8	%
2021 Orders	$	623			$	446			$	449			$	1,518


		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		$	1,704			$	1,169			$	1,180			$	4,053
Organic Impact		4		0.2	%	(89)		(7.6)	%	(180)		(15.3)	%	(265)		(6.5)	%
Acquisitions/(Divestitures)		—		—	%	—		—	%	—		—	%	—		—	%
2020 Orders																		2020 Orders	$	1,670			$	1,073			$	996			$	3,739
Organic Growth																		Organic Growth	123		7.4	%	296		27.6	%	421		42.3	%	840		22.5	%
Divestitures																		Divestitures	—		—	%	—		—	%	(10)		(1.0)	%	(10)		(0.3)	%
Constant Currency	Constant Currency	4		0.2	%	(89)		(7.6)	%	(180)		(15.3)	%	(265)		(6.5)	%	Constant Currency	123		7.4	%	296		27.6	%	411		41.3	%	830		22.2	%
Foreign currency translation (a)	Foreign currency translation (a)	(38)		(2.2)	%	(7)		(0.6)	%	(4)		(0.3)	%	(49)		(1.2)	%	Foreign currency translation (a)	80		4.8	%	40		3.7	%	27		2.7	%	147		3.9	%
Total change in orders	Total change in orders	(34)		(2.0)	%	(96)		(8.2)	%	(184)		(15.6)	%	(314)		(7.7)	%	Total change in orders	203		12.2	%	336		31.3	%	438		44.0	%	977		26.1	%
2020 Orders		$	1,670			$	1,073			$	996			$	3,739
2021 Orders																		2021 Orders	$	1,873			$	1,409			$	1,434			$	4,716

Water Infrastructure

Water Infrastructure segment orders ~~decreased $28~~increased $65 million, or ~~4.8%~~11.6%, to ~~$558~~$623 million ~~(5.5% decrease at~~(9.5% on a constant ~~currency)~~currency basis) for the third quarter of ~~2020~~2021 as compared to the prior year. Order ~~intake during~~growth for the quarter benefited from $4$12 million of foreign currency ~~translation, with~~translation. Organic orders increased during the ~~change at constant currency coming from organic order decline~~quarter as strength in the transport application which was partially offset by growth in the treatment application during the quarter. Organic decline in the transport application was driven by the lapping of a large project order in India in the prior year, along with market weakness in construction, oil and gas and mining impacting the dewatering transport application, primarily in the United States. Organic growth in the treatment application was primarily driven bybenefited from strong order intake in ~~Asia Pacific and~~ North America ~~during~~and western Europe driven by healthy demand, as well as increased demand for dewatering applications in the ~~quarter. The COVID-19 pandemic contributed to the negative dynamics that impacted organic order growth during~~emerging markets. Treatment orders were down slightly for the quarter.

For the nine months ended September 30, ~~2020,~~2021, orders ~~decreased $34~~increased $203 million, or ~~2.0%~~12.2%, to ~~$1,670~~$1,873 million ~~(0.2%~~(7.4% 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 $38~~benefited from $80 million of foreign currency ~~translation, with the change at~~translation. The order increase on a constant currency ~~coming from~~basis consisted of organic order growth in ~~orders in the treatment application, which was partially offset by a decline in organic orders in~~both the transport ~~application.~~and treatment applications. Organic growth in the ~~treatment~~transport application was driven by ~~strong order intake~~healthy market conditions in North America ~~partially~~and western Europe, marginally offset by ~~large project orders placed during the prior year~~a slight net decline in the emerging ~~markets. The transport~~markets, where we had a significant project order of greater than $100 million in India during the second quarter of 2020 which offset order strength in the rest of the emerging markets during period. Organic orders for the treatment application ~~experienced an organic order decline~~also increased during the period ~~primarily~~due to order growth in the

first half of the year, driven by ~~market weakness in construction, oil and gas and mining impacting the dewatering application~~strength in North America, ~~largely offset by the net year over year positive impact of significant project orders~~emerging markets, particularly in ~~India. The COVID-19 pandemic also negatively impacted organic order growth for the segment during the period.~~China, and western Europe.

Applied Water

Applied Water segment orders ~~decreased $1~~increased $71 million, or ~~0.3%~~18.9%, to ~~$375~~$446 million ~~(1.1% decrease at~~(17.1% increase on a constant ~~currency)~~currency basis) for the third quarter of ~~2020~~2021 as compared to the prior year. Order ~~intake during~~growth for the quarter benefited from $3$7 million of foreign currency translation. The order ~~decrease~~increase on a constant currency basis was ~~primarily~~ driven entirely by organic ~~weakness during the quarter~~order growth, primarily in the U.S. commercial building services and industrial end ~~market in the United States~~markets, where we benefited from strong demand recovery, amplified by longer lead times for delivering product, and to a lesser extent, in the emerging markets ~~particularly in the Middle East, which was mostly offset by strong order intake in the residential end market in the United States.~~and western Europe.

For the nine months ended September 30, ~~2020,~~2021, orders ~~decreased $96~~increased $336 million, or ~~8.2%~~31.3%, to ~~$1,073~~$1,409 million ~~(7.6% decrease at~~(27.6% 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 $40 million of foreign currency translation. The order ~~decrease~~increase on a constant currency basis was ~~primarily~~ driven by organic ~~weakness~~order growth in the U.S. across all end markets ~~in the United States~~ and applications, where we benefited from strong demand, amplified by early ordering to ~~a lesser extent, reduced order intake~~mitigate longer lead times; in the emerging markets, ~~and~~particularly in China where order intake was weakened by COVID-19 impacts in the prior year; as well as in western ~~Europe during the period.~~

~~The organic order growth for the segment during the three and nine month periods was negatively impacted by the COVID-19 pandemic.~~Europe.

Measurement & Control Solutions

Measurement & Control Solutions segment orders ~~decreased $71~~increased $136 million, or ~~18.5%~~43.5%, to ~~$313~~$449 million ~~(19.3% decrease at~~(41.9% increase on a constant ~~currency)~~currency basis) for the third quarter of ~~2020~~2021 as compared to the prior year. Order ~~intake during~~growth for the quarter benefited from $3$5 million of foreign currency translation. The order ~~decrease~~increase on a constant currency basis consisted almost entirely of organic order growth of $133 million, or 42.5%. Organic order growth was ~~driven~~led by ~~an organic decline~~the energy application, primarily in our metrology business, where the electric and gas businesses benefited from COVID-19 recovery, coupled with increased order intake due to electronic component shortages. Order intake in the water application which was negatively impacted by the lapping of strong prior year orders, coupled with negative COVID-19 impacts, including travel restrictions and site closures. Order intake in the energy applications declinedalso grew organically during the quarter, ~~driven by negative COVID-19 impacts, coupled with the lapping of large prior year gas and electric project deployments. The SaaS application also~~which experienced ~~an organic order decline during the quarter as market conditions softened as a result of the COVID-19 pandemic. Organic~~strong order intake in the ~~test application grew modestly during the quarter.~~U.S. metrology business, which also benefited from COVID-19 recovery and increased order intake due to electronic component shortages.

For the nine months ended September 30, ~~2020,~~2021, orders ~~decreased $184~~increased $438 million, or ~~15.6%~~44.0%, to ~~$996~~$1,434 million ~~(15.3% decrease at~~(41.3% 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 $4~~benefited from $27 million of foreign currency translation. The order ~~decrease~~increase on a constant currency basis included organic order growth of $421 million, or 42.3%, which was ~~driven~~partially offset by a $10 million reduction in orders related to divestiture impacts during the period. Organic order growth was led by the water application, ~~where we lapped prior year orders, and, to a lesser extent, the~~primarily in our metrology business, but also from our test business as well. The energy ~~application, where prior year gas project deployments more than offset strong electric order intake~~applications also had good organic growth during the period. The ~~SaaS application also contributed to~~growth on a year-to-date basis across all the ~~organic decline during~~applications in this segment was impacted by similar dynamics impacting the ~~period, driven by the lapping of large project deployment orders in North America during the prior year. The test application, primarily in the U.K.~~

~~and the United States, also experienced a reduction in order intake during the period. The COVID-19 pandemic significantly impacted the organic~~ order growth ~~during~~for the ~~period.~~quarter.

Backlog

Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays ~~can~~ occur from time to time. Total backlog was ~~$2,192~~$2,964 million at September 30, ~~2020,~~2021, an increase of ~~$324~~$772 million or ~~17.3%~~35.2%, as compared to September 30, ~~2019~~2020 backlog of ~~$1,868~~$2,192 million, and an increase of ~~$391~~$840 million or ~~21.7%~~39.5%, 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 ~~32%~~35% of the backlog at September 30, ~~2020~~2021 will be recognized as revenue in the remainder of ~~2020.~~2021, subject to supply constraints. There were no significant order cancellations during the quarter.

Gross Margin

Gross margin as a percentage of revenue decreased ~~150 and 170~~50 basis points to ~~37.8%~~37.3% and ~~37.2%~~increased 110 basis points to 38.3% for the three and nine months ended September 30, ~~2020,~~2021, as compared to ~~39.3%~~37.8% and ~~38.9%~~37.2% for the comparative ~~2019~~2020 periods. The gross margin decrease for the quarter was primarily driven by cost inflation ~~unfavorable mix, unfavorable volume, impacted by COVID-19~~ and increased ~~inventory management~~logistics costs, ~~which were~~ partially offset by cost reductions from our global procurement and productivity improvement ~~initiatives and price realization.~~initiatives. The gross margin ~~decrease~~increase for the nine month period was primarily driven by cost ~~inflation, increased inventory management costs, unfavorable mix, unfavorable volume, impacted by COVID-19,~~

reductions from our productivity, restructuring and other ~~lesser impacts, which were~~cost saving initiatives and favorable volume, partially offset by ~~cost reductions from our global procurement and productivity improvement initiatives and price realization.~~inflation.

Operating Expenses

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

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2020 2019 Change 2020 2019 Change
Selling, general and administrative expenses ("SG&A") $ 266 $ 273 (2.6) % $ 851 $ 870 (2.2) %
SG&A as a % of revenue 21.8 % 21.1 % 70 bp 24.3 % 22.4 % 190 bp
Research and development expenses ("R&D") 45 44 2.3 % 138 142 (2.8) %
R&D as a % of revenue 3.7 % 3.4 % 30 bp 3.9 % 3.7 % 20 bp
Restructuring and asset impairment charges 19 33 (42.4) % 69 58 19.0 %
Goodwill impairment charge 58 148 (60.8) % 58 148 (60.8) %
Operating expenses $ 388 $ 498 (22.1) % $ 1,116 $ 1,218 (8.4) %
Expense to revenue ratio 31.8 % 38.4 % (660) bp 31.9 % 31.4 % 50 bp
2020:


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(In millions)	2021			2020			Change		2021			2020			Change
Selling, general and administrative expenses ("SG&A")	$	273		$	266		2.6	%	$	878		$	851		3.2	%
SG&A as a % of revenue	21.6		%	21.8		%	(20)	bp	22.7		%	24.3		%	(160)	bp
Research and development expenses ("R&D")	49			45			8.9	%	152			138			10.1	%
R&D as a % of revenue	3.9		%	3.7		%	20	bp	3.9		%	3.9		%	—	bp
Restructuring and asset impairment charges	(2)			19			(110.5)	%	7			69			(89.9)	%
Goodwill impairment charge	—			58			—	%	—			58			—	%
Operating expenses	$	320		$	388		(17.5)	%	$	1,037		$	1,116		(7.1)	%
Expense to revenue ratio	25.3		%	31.8		%	(650)	bp	26.8		%	31.9		%	(510)	bp

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

SG&A expenses ~~decreased~~increased by $7 million to $273 million, or 21.6% of revenue, in the third quarter of 2021, as compared to $266 million, or 21.8% of revenue, in the ~~third quarter of~~comparable 2020 ~~as compared~~period; and increased by $27 million to ~~$273~~$878 million, or ~~21.1%~~22.7% of revenue, in the ~~comparable 2019 period; and decreased $19 million~~nine months ended September 30, 2021, as compared to $851 million, or 24.3% of revenue, in the ~~nine months ended September 30,~~comparable 2020 ~~as compared to $870 million, or 22.4% of revenue, for the nine months ended~~period. Revenue growth driven by favorable volume was higher than SG&A increases resulting in ~~2019. The increase in~~a lower SG&A as a ~~percent~~percentage of ~~revenue for~~sales. Cost increases in both periods ~~was primarily~~were driven by ~~the drop in revenue, which was significantly driven by impacts of the COVID-19 pandemic, as well as~~ cost inflation and ~~additional investment~~increased investments in strategic growth ~~initiatives. Cost~~initiatives, partially offset by cost reductions from

~~global procurement~~ our productivity, restructuring and ~~productivity improvement~~other cost saving initiatives ~~including restructuring savings, partially offsets these items.~~and decreased quality management costs.

Research and Development ("R&D") Expenses

R&D expense was $49 million, or 3.9% of revenue, in the third quarter of 2021, as compared to $45 million, or 3.7% of revenue, in the ~~third quarter of~~comparable 2020 ~~as compared to $44 million, or 3.4% of revenue, in the comparable period of 2019;~~period; and was ~~$138~~$152 million, or 3.9% of revenue, in the nine months ended September 30, ~~2020,~~2021, as compared to ~~$142~~$138 million, or ~~3.7%~~3.9% 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 nine months ended September 30, 2021, we recognized restructuring net charges of $(2) million and $6 million, respectively, of which $(2) million and $4 million relate to actions previously announced in 2020 and prior. These charges included reduction of headcount across all segments, asset impairments within our Measurement & Control Solutions segment, and accrual recoveries in our Measurement & Control Solutions segment.

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, 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 nine months ended September 30, 2020, we recognized restructuring charges of $8 million and $48 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.~~

The following is a roll-forward for the nine months ended September 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 670 621
Actual reductions and reversals (604) (465)
Planned reductions - September 30 262 225


	2021	2020
Planned reductions - January 1	319	196
Additional planned reductions	73	670
Actual reductions and reversals	(234)	(604)
Planned reductions - September 30	158	262

The following table presents expected restructuring spend in ~~2020~~2021 and thereafter:


(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total
Actions Commenced in 2021:
Total expected costs	$	4	$	—	$	—	$	—	$	4
Costs incurred during Q1 2021	1		—		—		—		1
Costs incurred during Q2 2021	1		—		—		—		1
Costs incurred during Q3 2021	—		—		—		—		—
Total expected costs remaining	$	2	$	—	$	—	$	—	$	2

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

(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2020:
Total expected costs $ 27 $ 11 $ 35 $ 3 $ 76
Costs incurred during Q1 2020 1 — — — 1
Costs incurred during Q2 2020 5 2 30 — 37
Costs incurred during Q3 2020 7 1 1 — 9
Total expected costs remaining $ 14 $ 8 $ 4 $ 3 $ 29
Actions Commenced in 2019:
Total expected costs $ 19 $ 5 $ 27 $ — $ 51
Costs incurred during 2019 18 5 27 — 50
Costs incurred during Q1 2020 1 — — — 1
Costs incurred during Q2 2020 1 — — — 1
Costs incurred during Q3 2020 (1) — — — (1)
Total expected costs remaining $ — $ — $ — $ — $ —
During the third quarter of 2021, we recorded an adjustment of $3 million to decrease the liability within the Measurement & Control Solutions segment, related to our 2019 actions. As a result of this adjustment, the estimated total cost of the 2019 actions decreased to $24 million for the Measurement & Control Solutions segment. The 2019 actions are complete.

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

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

We currently expect to incur ~~between $55 million and $60~~approximately $8 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~~$33 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 expected to be taken in 2021, we anticipate approximately ~~$22~~$1 million of total net savings ~~in 2020 from the restructuring actions initiated~~to be realized during ~~this year.~~2021.

Asset Impairment

During the third quarter of 2020, we determined that certain assets including software and proprietary technology within our Measurement & Control Solutions segment ~~including software and proprietary technology~~ were impaired. Accordingly we recognized an impairment charge of $11 million. Refer to Note 9,7, "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 customer relationships, were impaired. Accordingly we recognized an impairment charge of $3 million. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.

~~Goodwill Impairment Charge~~

During the third quarter of 2020, the Company recorded a goodwill impairment charge of $58 million related to the AIA goodwill reporting unit within our Measurement & Control Solutions segment. The AIA reporting unit is comprised of our assessment services business (primarily the Pure acquisition) as well as our digital solutions business. The impairment resulted from management's updated forecast of future cash flows for the AIA businesses, which reflects significant negative volume impacts, primarily on our assessment services business, due to travel restrictions and site closures as a result of the COVID-19 pandemic. Our ongoing investment in the AIA businesses also continues to impact near term profitability. These factors drove a decrease in the fair value, based on a discounted cash flow valuation, of the AIA reporting unit that is below its carrying value as of the third quarter, requiring an impairment charge. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.

During the third quarter of 2019, the Company recorded a goodwill impairment charge of $148 million related to the AIA goodwill reporting unit within our Measurement & Control Solutions segment. The impairment resulted from a downward revision of forecasted future cash flows. Factors that contributed to the revised forecast in the third quarter include lower than expected results as compared to prior forecasts, largely as a result of slower-than-expected conversion of pipeline opportunities to revenue. Additionally, we have continued to invest in the AIA platform ahead of the adoption curve, which has also impacted the near term profitability of the business. These factors drove a decrease in the fair value, based on a discounted cash flow valuation, of the AIA reporting unit that is below its carrying value as of the third quarter, requiring an impairment charge. Refer to Note 9,7, "Goodwill and Other Intangible Assets," for additional information.

Operating Income

Operating income during the third quarter of ~~2020~~2021 was ~~$73~~$152 million, reflecting an increase of ~~563.6%~~108.2% compared to ~~$11~~$73 million in the third quarter of ~~2019.~~2020. Operating margin was ~~6.0%~~12.0% for the third quarter of ~~2020~~2021 versus ~~0.8%~~6.0% for the comparable period in ~~2019,~~2020, an increase of ~~520~~600 basis points. Operating margin benefited from ~~decreases in special charges of $85 million and decreases~~a decrease in restructuring and realignment costs of ~~$15~~$13 million as compared to the third quarter of ~~2019.~~2020 and a decrease in special charges of $69 million. Excluding the impact of these items, adjusted operating income was $155 million with an adjusted operating margin of 12.3% in the third quarter of 2021 as compared to adjusted operating income of $158 million with an adjusted operating margin of 13.0% in the third quarter of ~~2020 as compared to adjusted operating income of $196 million with an adjusted operating margin of 15.1% in the third quarter of 2019.~~2020. The decrease in adjusted operating margin was primarily due to cost ~~inflation; unfavorable volume, impacted significantly by COVID-19; unfavorable mix;~~inflation, increased spending on strategic investments, increased logistics costs and ~~increased inventory management costs.~~unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving ~~initiatives.~~initiatives, price realization, favorable volume, and other lesser impacts.

Operating income for the nine months ended September 30, ~~2020~~2021 was $445 million, reflecting an increase of 136.7% compared to $188 million ~~reflecting a decrease of 35.4% compared to $291 million~~ in ~~2019.~~2020. Operating margin was ~~5.4%~~11.5% for the nine months ended September 30, ~~2020~~2021 versus ~~7.5%~~5.4% for the comparable period in ~~2019, a decrease~~2020, an increase of ~~210~~610 basis points. Operating margin benefited from ~~decreases~~a decrease in restructuring and realignment costs of $51 million and a decrease in special charges of $78 million ~~and decreases in restructuring and realignment costs of $4 million~~ as compared to ~~the prior year.~~2020. Excluding the impact of these items, adjusted operating income was $464 million with an adjusted operating margin of 12.0% for the nine months ended September 30, 2021 as compared to adjusted operating income of $336 million with an adjusted operating margin of 9.6% ~~for the nine months ended September 30, 2020 as compared to adjusted operating income of $521 million with an adjusted operating margin of 13.4%~~ in ~~2019.~~2020. The ~~decrease~~increase in adjusted operating margin was primarily due to unfavorable volume, impacted significantly by COVID-19; cost inflation; increased inventory management costs; unfavorable mix and increased spending on strategic investments. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving ~~initiatives.~~

initiatives and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation and increased spending on strategic investments.

4644

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

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2020 2019 Change 2020 2019 Change
Water Infrastructure
Operating income $ 89 $ 97 (8.2) % $ 201 $ 246 (18.3) %
Operating margin 17.0 % 18.3 % (130) bp 13.7 % 15.6 % (190) bp
Restructuring and realignment costs 8 7 14.3 % 21 25 (16.0) %
Adjusted operating income $ 97 $ 104 (6.7) % $ 222 $ 271 (18.1) %
Adjusted operating margin 18.5 % 19.6 % (110) bp 15.2 % 17.2 % (200) bp
Applied Water
Operating income $ 56 $ 61 (8.2) % $ 144 $ 179 (19.6) %
Operating margin 15.4 % 16.2 % (80) bp 13.9 % 15.6 % (170) bp
Restructuring and realignment costs 2 3 (33.3) % 8 10 (20.0) %
Adjusted operating income $ 58 $ 64 (9.4) % $ 152 $ 189 (19.6) %
Adjusted operating margin 15.9 % 17.0 % (110) bp 14.6 % 16.4 % (180) bp
Measurement & Control Solutions
Operating loss $ (62) $ (136) (54.4) % $ (120) $ (94) 27.7 %
Operating margin (18.7) % (35.0) % 1,630 bp (12.0) % (8.1) % (390) bp
Restructuring and realignment costs 5 20 (75.0) % 38 36 5.6 %
Special charges 69 155 (55.5) % 79 159 (50.3) %
Adjusted operating income (loss) $ 12 $ 39 (69.2) % $ (3) $ 101 (103.0) %
Adjusted operating margin 3.6 % 10.0 % (640) bp (0.3) % 8.7 % (900) bp
Corporate and other
Operating loss $ (10) $ (11) (9.1) % $ (37) $ (40) (7.5) %
Special charges 1 — NM 2 — NM
Adjusted operating loss $ (9) $ (11) (18.2) % $ (35) $ (40) (12.5) %
Total Xylem
Operating income $ 73 $ 11 563.6 % $ 188 $ 291 (35.4) %
Operating margin 6.0 % 0.8 % 520 bp 5.4 % 7.5 % (210) bp
Restructuring and realignment costs 15 30 (50.0) % 67 71 (5.6) %
Special charges 70 155 (54.8) % 81 159 (49.1) %
Adjusted operating income $ 158 $ 196 (19.4) % $ 336 $ 521 (35.5) %
Adjusted operating margin 13.0 % 15.1 % (210) bp 9.6 % 13.4 % (380) bp


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(In millions)	2021			2020			Change		2021			2020			Change
Water Infrastructure
Operating income	$	101		$	89		13.5	%	$	265		$	201		31.8	%
Operating margin	18.5		%	17.0		%	150	bp	16.3		%	13.7		%	260	bp
Restructuring and realignment costs	1			8			(87.5)	%	10			21			(52.4)	%

Adjusted operating income	$	102		$	97		5.2	%	$	275		$	222		23.9	%
Adjusted operating margin	18.6		%	18.5		%	10	bp	16.9		%	15.2		%	170	bp
Applied Water
Operating income	$	60		$	56		7.1	%	$	190		$	144		31.9	%
Operating margin	15.0		%	15.4		%	(40)	bp	15.7		%	13.9		%	180	bp
Restructuring and realignment costs	2			2			—	%	5			8			(37.5)	%
Special charges	—			—			—	%	1			—			NM
Adjusted operating income	$	62		$	58		6.9	%	$	196		$	152		28.9	%
Adjusted operating margin	15.5		%	15.9		%	(40)	bp	16.2		%	14.6		%	160	bp
Measurement & Control Solutions
Operating income (loss)	$	7		$	(62)		111.3	%	$	29		$	(120)		124.2	%
Operating margin	2.2		%	(18.7)		%	2,090	bp	2.8		%	(12.0)		%	1,480	bp

Restructuring and realignment costs	(1)			5			120.0	%	1			38			(97.4)	%
Special charges	—			69			NM		—			79			NM
Adjusted operating income (loss)	$	6		$	12		50.0	%	$	30		$	(3)		1,100.0	%
Adjusted operating margin	1.9		%	3.6		%	(170)	bp	2.9		%	(0.3)		%	320	bp
Corporate and other
Operating loss	$	(16)		$	(10)		60.0	%	$	(39)		$	(37)		5.4	%


Special charges	1			1			—	%	2			2			—	%
Adjusted operating loss	$	(15)		$	(9)		66.7	%	$	(37)		$	(35)		5.7	%
Total Xylem
Operating income	$	152		$	73		108.2	%	$	445		$	188		136.7	%
Operating margin	12.0		%	6.0		%	600	bp	11.5		%	5.4		%	610	bp
Restructuring and realignment costs	2			15			(86.7)	%	16			67			(76.1)	%

Special charges	1			70			(98.6)	%	3			81			(96.3)	%
Adjusted operating income	$	155		$	158		(1.9)	%	$	464		$	336		38.1	%
Adjusted operating margin	12.3		%	13.0		%	(70)	bp	12.0		%	9.6		%	240	bp

NM - Not meaningful percentage change

Water Infrastructure

Operating income for our Water Infrastructure segment ~~decreased $8~~increased $12 million, or ~~8.2%~~13.5%, for the third quarter of ~~2020~~2021 compared to the prior year, with operating margin also ~~decreasing~~increasing from ~~18.3%~~17.0% to ~~17.0%~~18.5%. Operating margin ~~was negatively impacted by~~benefited from a ~~slight increase~~decrease in restructuring and realignment costs of $1$7 million ~~in 2020.~~during the quarter. Excluding these restructuring and realignment costs, adjusted operating income ~~decreased $7~~increased $5 million, or ~~6.7%~~5.2%, with adjusted operating margin increasing from 18.5% to 18.6%. The increase in adjusted operating margin for the quarter was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives, decreased inventory management cost, and other lesser impacts. These items were partially offset by cost inflation and increased spending on strategic investments.

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

Applied Water

Operating income for our Applied Water segment increased $4 million, or 7.1%, for the third quarter of 2021 compared to the prior year, with operating margin decreasing from 15.4% to 15.0%. Operating margin was impacted by restructuring and realignment costs of $2 million in both years. Excluding these restructuring and realignment costs, adjusted operating income increased $4 million, or 6.9%, with adjusted operating margin decreasing from ~~19.6%~~15.9% to ~~18.5%~~15.5%. The decrease in adjusted operating margin for the quarter was primarily due to cost ~~inflation; unfavorable mix; increased inventory management costs; unfavorable volume, impacted significantly by COVID-19, and~~inflation, increased spending on strategic ~~investments.~~investments, increased logistics costs, and inventory management costs. These impacts were partially offset by increased cost ~~reductions~~reduction from our productivity, restructuring and other cost saving ~~initiatives.~~

initiatives, favorable volume, and price realization.

For the nine months ended September 30, ~~2020,~~2021, operating income ~~decreased $45~~for our Applied Water segment increased $46 million, or ~~18.3%~~31.9%, as compared to the prior year, with operating margin also ~~decreasing~~increasing from ~~15.6%~~13.9% to ~~13.7%~~15.7%. Operating margin benefited from a decrease in restructuring and realignment costs of $4$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 $49~~increased $44 million, or ~~18.1%~~28.9%, with adjusted operating margin ~~decreasing~~increasing from ~~17.2%~~14.6% to ~~15.2%~~16.2%. The ~~decrease~~increase in adjusted operating margin during the period was primarily due to 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 offset cost reductions from our productivity, restructuring and other cost saving initiatives and ~~price realization.~~favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation, increased logistics cost, increased spending on strategic investments, and increased inventory management costs.

~~Applied Water~~Measurement & Control Solutions

Operating income for our ~~Applied Water~~Measurement & Control Solutions segment ~~decreased $5~~increased $69 million, or ~~8.2%~~111.3%, for the third quarter of ~~2020~~2021 compared to the prior year, with operating margin ~~also decreasing~~increasing from ~~16.2%~~(18.7)% to ~~15.4%~~2.2%. Operating margin benefited from ~~a slight decrease in~~decreased restructuring and realignment costs of $1$6 million, ~~in 2020.~~and $69 million of special charges that were incurred during 2020 that did not recur during the quarter. Excluding these ~~restructuring and realignment costs,~~items, adjusted operating income decreased $6 million, or ~~9.4%~~50.0%, with adjusted operating margin decreasing from ~~17.0%~~3.6% to ~~15.9%~~1.9%. The decrease in adjusted operating margin for the quarter was primarily due to cost ~~inflation;~~inflation, unfavorable volume, ~~impacted significantly by COVID-19; increased spending on strategic investments~~ and ~~other various lesser impacts.~~unfavorable mix. These impacts were partially offset by increased cost reductions from our restructuring, productivity and other cost saving initiatives, decreased quality management costs, and price realization.

For the nine months ended September 30, ~~2020,~~2021, operating income ~~decreased $35~~for our Measurement & Control Solutions segment increased $149 million, or ~~19.6%~~124.2%, as compared to the prior year, with operating margin ~~also decreasing~~increasing from ~~15.6%~~(12.0)% to ~~13.9%~~2.8%. Operating margin benefited from a ~~slight~~ decrease in restructuring and realignment costs of $2$37 million during the year and $79 million of special charges incurred in ~~2020.~~2020 that did not recur. Excluding these ~~restructuring and realignment costs,~~items, adjusted operating income ~~decreased $37~~increased $33 million, ~~or 19.6%,~~ with adjusted operating margin ~~decreasing~~increasing from ~~16.4%~~(0.3)% to ~~14.6%~~2.9%. The ~~decrease~~increase in adjusted operating margin during the period was primarily due to ~~unfavorable volume, impacted significantly by COVID-19;~~ cost ~~inflation~~reductions from our restructuring, productivity and ~~increased inventory~~other cost saving initiatives and decreased quality management ~~costs.~~costs, primarily due to a specific warranty charge recorded during the prior year that did not recur related to a firmware issue that was identified and addressed timely. These impacts were partially offset by cost ~~reductions from our productivity and other cost saving initiatives.~~

~~Measurement & Control Solutions~~

Operating loss for our Measurement & Control Solutions segment decreased $74 million, or 54.4%, for the third quarter of 2020 compared to the prior year, resulting in an operating loss of $62 million, with operating margin increasing from (35.0)% to (18.7)%. Operating margin benefited from decreases in special charges of $86 million and decreases in restructuring and realignment costs of $15 million in 2020. Excluding these items, adjusted operating income decreased $27 million, or 69.2%, with adjusted operating margin decreasing from 10.0% to 3.6%. The decrease in adjusted operating margin for the quarter was primarily due to unfavorable volume, impacted significantly by COVID-19; unfavorable mix; cost inflation; increased quality management costs; increased spending on strategic investments and other various lesser impacts. These impacts were partially offset by cost reductions from our productivity and other cost saving initiatives and price realization.

For the nine months ended September 30, 2020, operating loss increased $26 million, or 27.7%, as compared to the prior year, resulting in an operating loss of $120 million, with operating margin also decreasing from (8.1)% to (12.0)%. Operating margin benefited from a decrease in special charges of $80 million, which was slightly offset by increased restructuring and realignment costs of $2 million in 2020. Excluding these items, adjusted operating income decreased $104 million, or 100.3%, resulting in an adjusted operating loss of $3 million, with adjusted operating margin decreasing from 8.7% to (0.3)%. The decrease in adjusted operating margin during the period was driven by unfavorable volume, impacted significantly by COVID-19; cost inflation; increased quality management costs, primarily due to a $15 million warranty charge recorded during the first quarter for a firmware issue in some of our meters; unfavorable mix and increased spending on strategic investments. These impacts were partially offset by cost reductions from our productivity and other cost saving initiatives.inflation.

Corporate and other

Operating loss for corporate and other ~~decreased $1~~increased $6 million, or ~~9.1%~~60.0%, ~~for~~during the third quarter of ~~2020~~2021 compared to the prior year ~~period.~~period primarily due to increased spending on strategic initiatives and timing of employee related costs across quarters. For the nine months ended September 30, ~~2020,~~2021, operating loss for corporate and other ~~decreased $3~~increased $2 million, or ~~7.5%~~5.4%, compared to the same prior year period. The ~~decreases~~increase in cost ~~are the result of cost saving actions taken during the year.~~is primarily driven by increased spending on strategic initiatives partially offset by reduced costs related to COVID-19 initiatives.

4846

Interest Expense

Interest expense was ~~$22~~$21 million for the three months ended September 30, 2021, essentially flat with the comparative prior year period. Interest expense was $63 million and $56 million for the ~~three and~~ nine months ended September 30, 2021 and 2020, ~~and $16 million and $52 million for the three and nine months ended September 30, 2019.~~respectively. The increase in interest expense ~~for both periods~~ is primarily driven by the issuance of our Green Bond during the second quarter of ~~2020.~~2020, partially offset by reduced interest expense in 2021 due to our net investment hedges and interest expense on 2020 short term borrowings. See Note ~~12,~~10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt and related interest.

Income Tax Expense

The income tax provision for the three months ended September 30, ~~2020~~2021 was ~~$13~~$19 million resulting in an effective tax rate of ~~26.2%~~13.9%, compared to a ~~benefit of $77~~$13 million expense resulting in an effective tax rate of ~~623.6% (on a pre-tax loss for the period)~~26.2% for the same period in ~~2019.~~2020. The income tax provision for the nine months ended September 30, ~~2020~~2021 was ~~$21~~$71 million resulting in an effective tax rate of ~~16.6%~~18.3%, compared to a ~~benefit of $45~~$21 million expense resulting in an effective tax rate of ~~(18.9)%~~16.6% for the same period in ~~2019.~~2020. The effective tax rate for the three ~~and nine~~ month ~~periods~~period ended September 30, 2020 differs from the United States federal statutory rate primarily due to the mix of earnings in jurisdictions, partially offset by the Global Intangible Low-Taxed Income ("GILTI") inclusion and goodwill impairment charge. Additionally, the effective tax rate for the three and nine month periods ended September 30, 20202021 differs from the same ~~periods in 2019 due primarily to the impact of the changes in tax law in Switzerland in 2019 along with the impact of the larger goodwill impairment charge on income before taxes in 2019.~~

~~Other Comprehensive Income (Loss)~~

~~Other comprehensive income was $13 million for the three months ended September 30, 2020 compared to a loss of $37 million for the same~~ period in 2019. Foreign currency translation contributed favorable impacts during the quarter of $10 million, driven primarily by the strengthening of the Euro, the British Pound, the Chinese Yuan, the Polish Zloty and various other currencies as compared2020 due to the U.S. Dollar in 2020 versus the weakening of these currencies in the same prior year period. 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 was a favorable impact from the movement of tax on the net investment hedgesunfavorable earnings mix as compared to the prior year ~~of $31 million during~~and favorable equity compensation deductions and goodwill impairment charge in the ~~quarter. Favorable impacts from pension activity and gain in derivative hedge agreements during the quarter also contributed to the increase in in other comprehensive income during the quarter.~~

~~For~~prior year. The effective tax rate for the nine ~~months~~month period ended September 30, ~~2020, other comprehensive loss was $22 million compared to a loss of $28 million for~~2021 differs from the same period in 2019. Foreign currency translation contributed unfavorable impacts during the period of $44 million, driven primarily by the movement in our Euro net investment hedges and the weakening of the South African Rand as compared2020 due to the ~~U.S. Dollar, which was greater in 2020 than the weakening~~impact of tax settlements in the prior year. These unfavorable currency translation impacts were partially offset by the strengthening of the Euro 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. Net unfavorable currency translation impacts were partially offset by the favorable impact from the movement of tax on the net investment hedges as compared to the prior year of $27 million, favorable impacts from gain in derivative hedge agreements of $16 million and favorable pension activity during thecurrent period.

Liquidity and Capital Resources

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

Nine Months Ended
September 30,
(In millions) 2020 2019 Change
Operating activities $ 454 $ 451 $ 3
Investing activities (326) (185) (141)
Financing activities 550 (99) 649
Foreign exchange (a) — (10) 10
Total $ 678 $ 157 $ 521


	Nine Months Ended
	September 30,
(In millions)	2021		2020		Change
Operating activities	$	318	$	454	$	(136)
Investing activities	(113)		(326)		213
Financing activities	(806)		550		(1,356)
Foreign exchange (a)	(19)		—		(19)
Total	$	(620)	$	678	$	(1,298)

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

Sources and Uses of Liquidity

Operating Activities

Net cash provided by operating activities was ~~$454~~$318 million for the nine months ended September 30, ~~2020~~2021 as compared to ~~$451~~$454 million in the comparable prior year period. This ~~slight increase~~decrease was primarily driven by ~~a significant decrease in~~higher working capital levels, higher interest payments, and increased cash ~~paid~~used for income taxes ~~during the current year as compared to the prior year,~~and payroll and other taxes, partially from delayed timing of payments in the prior year related to COVID-19 related ~~concessions, as well as increases in accrued expenses, mostly due to timing,~~concessions. Partially offsetting these items was increased net cash earnings and ~~improved working capital, which were largely offset by a decrease in cash from earnings.~~lower prepayments.

Investing Activities

Cash used in investing activities was ~~$326~~$113 million for the nine months ended September 30, ~~2020~~2021 as compared to ~~$185~~$326 million in the comparable prior year period. This ~~increase~~decrease in cash used of ~~$141~~$213 million was mainly driven by ~~$200 million of cash paid for~~spending on time deposit investments ~~during~~in 2020 ~~partially offset by lower spending on capital expenditures compared to the prior year and an $18 million reduction~~that did not reoccur in ~~spending on acquisitions.~~2021.

Financing Activities

Cash ~~generated~~used by financing activities was ~~$550~~$806 million for the nine months ended September 30, ~~2020~~2021 as compared to cash ~~used~~generated of ~~$99~~$550 million in the comparable prior year period. This net ~~increase~~decrease in cash ~~used~~generated by financing activities during the period was primarily driven by the issuance of our Green Bond and ~~higher levels of short-term~~short term debt ~~during the year, partially offset by~~in 2020, and the repayment of ~~short-term~~Senior Notes due 2021. Partially offsetting these items was the repayment of short term debt ~~during 2020 and an increase~~ in ~~share repurchase activity of $22 million.~~2020.

Funding and Liquidity Strategy

Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. As a result of uncertainties caused by the COVID-19 pandemic, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends. ~~Additionally, we have committed to reducing our annual capital expenditures.~~ We will continue to evaluate aspects of our spending and anticipate our capital expenditures will gradually begin to increase to normal levels as the year progresses. We have elected to utilize certain federal, state and foreign tax programs related to timing of tax payments and deductions to further manage our liquidity, and the liabilities associated with these programs are appropriately classifiedmarkets 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 continued to evolve favorably from an operational perspective

~~during the third quarter of 2020, and we~~We 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 September 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 provide for continued access to the full capacity of our credit facilities 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~~$2.1 billion, consisting of ~~$1.4~~$1.3 billion of cash and $800 million of available credit facilities ~~and $200 million in short-term investments~~ as disclosed in Note ~~12,~~10, "Credit Facilities and Debt", of our condensed consolidated financial statements. ~~Our debt repayment obligations in 2020 consist~~On October 1st, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of ~~$40 million in outstanding commercial paper.~~$600 million. Our next ~~long term~~long-term debt maturity is ~~October 2021.~~March 2023.

~~Risk~~Risks 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 ~~54% and 52%~~56% of our revenue from ~~non-United States~~non-U.S. operations for both the three and nine months ended September 30, 2021 and approximately 54% and 52% for the three and nine months ended September 30, 2020, ~~respectively, and approximately 51% for both the three and nine month periods ended September 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 September 30, ~~2020,~~2021, we have provided a deferred tax liability of $6 million for net foreign withholding taxes and state income taxes on ~~$503~~$116 million of earnings expected to be repatriated to the ~~United States~~U.S. parent as deemed necessary in the future.

5148

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.

During the fourth quarter of 2019 we completed our annual goodwill assessment. Our 2019 impairment analysis indicated that the fair value of the AIA goodwill reporting unit, within our Measurement & Control Solutions segment, exceeded its carrying value by less than 20%. The AIA reporting unit is comprised of our assessment services business (primarily the Pure acquisition) as well as our digital solutions business. We used the income approach to determine the fair value of 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 reporting unit is expected to generate over its remaining life. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate was based on the weighted average cost of capital appropriate for the reporting unit.

In the third quarter of 2020, management updated forecasts of future cash flows for the ~~AIA~~Advanced Infrastructure Analytics ("AIA") businesses, which ~~reflect~~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~~near-term profitability. Based on these factors, we determined that there were indicators that the AIA reporting unit’s goodwill may be impaired, and accordingly, we performed an interim goodwill impairment test as of July 1, 2020. The results of the impairment test showed that the fair value of the AIA reporting unit was lower than the carrying value, resulting in a $58 million goodwill impairment charge. As of September 30, ~~2020~~2021, the remaining goodwill balance in our AIA reporting unit after recording the goodwill impairment charge was $112 million.

Also, during the third quarter of 2020, due to the factors discussed above, we assessed whether the carrying amounts of the AIA reporting unit’s long-lived assets may not be recoverable and therefore impaired. Our assessment resulted in an impairment charge of $11 million, primarily related to software and proprietary technology. The charge was calculated using an income approach.

The fair value of our reporting units and intangible assets is judgmental in nature and involves the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, and future economic and market conditions. In addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units when determining the carrying value of each reporting unit also require judgment. The uncertainty of the future impact of the COVID-19 pandemic may also contribute to further deterioration of our future cash flows. If we do not achieve our forecasts, it is possible that the goodwill of the AIA reporting unit could be deemed to be impaired again in a future period.

The risks and potential impacts of COVID-19 on the fair value of our assets are included in our risk factor disclosures referenced under “Item 1A. Risk Factors" in the Company's ~~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.~~2020 Annual Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

5349

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 September 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)

7/1/2021 - 7/31/2021

—

$~~288~~228

8/1/2021 - 8/31/2021

—

$~~288~~228

9/1/2021 - 9/30/2021

—

$~~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~~stockholders and maintains our focus on growth. There were no shares repurchased under this program during the three months ended September 30, ~~2020.~~2021. There are up to ~~$288~~$228 million in shares that may still be purchased under this plan as of September 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.

5450

XYLEM INC.

EXHIBIT INDEX


Exhibit Number		Description	Location

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

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







~~10.1~~	~~Xylem Annual Incentive Plan for the Senior Leadership Team (Formerly "Annual Incentive Plan for Executive Officers") restated, with administrative changes only, on August 11, 2020~~	~~Filed herewith.~~



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

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

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

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

101.0		The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 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 September 30, ~~2020~~2021 formatted in Inline XBRL and contained in Exhibit 101.0.

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

~~October 29, 2020~~November 2, 2021

5652


	September 30, 2020		December 31, 2019

ASSETS
Current assets:
Cash and cash equivalents	$	1,402	$	724
Short-term investments	200		0
Receivables, less allowances for discounts, returns and doubtful accounts of $40 and $35 in 2020 and 2019, respectively	968		1,036
Inventories	582		539
Prepaid and other current assets	159		151

Total current assets	3,311		2,450
Property, plant and equipment, net	633		658
Goodwill	2,795		2,839
Other intangible assets, net	1,090		1,174
Other non-current assets	619		589
Total assets	$	8,448	$	7,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	495	$	597
Accrued and other current liabilities	745		628
Short-term borrowings and current maturities of long-term debt	40		276
Total current liabilities	1,280		1,501
Long-term debt	3,053		2,040
Accrued postretirement benefits	455		445
Deferred income tax liabilities	283		310
Other non-current accrued liabilities	502		447
Total liabilities	5,573		4,743
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 194.6 shares and 193.9 shares in 2020 and 2019, respectively	2		2
Capital in excess of par value	2,021		1,991
Retained earnings	1,828		1,866
Treasury stock – at cost 14.5 shares and 13.7 shares in 2020 and 2019, respectively	(588)		(527)
Accumulated other comprehensive loss	(396)		(375)
Total stockholders’ equity	2,867		2,957
Non-controlling interests	8		10
Total equity	2,875		2,967
Total liabilities and stockholders’ equity	$	8,448	$	7,710


	September 30, 2020						December 31, 2019
(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles
Customer and distributor relationships	$	929	$	(391)	$	538	$	945	$	(352)	$	593
Proprietary technology and patents	202		(125)		77		204		(111)		93
Trademarks	141		(59)		82		148		(52)		96
Software	471		(249)		222		428		(206)		222
Other	21		(17)		4		20		(16)		4
Indefinite-lived intangibles	167		0		167		166		0		166
Other Intangibles	$	1,931	$	(841)	$	1,090	$	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	334	75.35
Vested	(251)	63.86
Forfeited	(38)	75.41
Outstanding at September 30, 2020	557	$	74.59