UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~June 30, 2022~~March 31, 2023


☐			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.)

301 Water Street SE, Washington, DC 20003

(Address of principal executive offices) (Zip code)

(202) 869-9150

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange of which registered

Common Stock, par value $0.01 per share

XYL

New York Stock Exchange

~~2.250% Senior Notes due 2023~~

~~XYL23~~

~~New York Stock Exchange~~

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

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

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

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of ~~July 29, 2022,~~April 28, 2023, there were ~~180,181,765~~180,616,578 outstanding shares of the registrant’s common stock, par value $0.01 per share.

Xylem Inc.

Table of Contents


ITEM			PAGE
PART I – Financial Information
Item 1	-	Financial Statements:
		Condensed Consolidated Income Statements for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30, 2022~~March 31 , 202 3 and ~~2021~~202 2 (Unaudited)	4
		Condensed Consolidated Balance Sheets as of ~~June 30, 2022~~March 31,2023 and December 31, ~~2021~~202 2 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the ~~Six~~Th ree Months Ended ~~June 30, 2022~~March 31, 2023 and ~~2021~~202 2 (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	3128
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	5345
Item 4	-	Controls and Procedures	5346
PART II – Other Information
Item 1	-	Legal Proceedings	5447
Item 1A	-	Risk Factors	5447
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	5447
Item 3	-	Defaults Upon Senior Securities	5447
Item 4	-	Mine Safety Disclosures	5447
Item 5	-	Other Information	5447
Item 6	-	Exhibits	5447
		Signatures	5650

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)


		Three Months				Six Months

For the period ended June 30,		2022		2021		2022		2021
For the three months ended March 31,										For the three months ended March 31,	2023		2022
Revenue	Revenue	$	1,364	$	1,351	$	2,636	$	2,607	Revenue	$	1,448	$	1,272
Cost of revenue	Cost of revenue	844		831		1,649		1,597		Cost of revenue	902		805
Gross profit	Gross profit	520		520		987		1,010		Gross profit	546		467
Selling, general and administrative expenses	Selling, general and administrative expenses	314		304		618		605		Selling, general and administrative expenses	354		304
Research and development expenses	Research and development expenses	53		53		105		103		Research and development expenses	53		52
Restructuring and asset impairment charges	Restructuring and asset impairment charges	7		3		7		9		Restructuring and asset impairment charges	8		—

Operating income	Operating income	146		160		257		293		Operating income	131		111
Interest expense	Interest expense	12		21		25		42		Interest expense	9		13

Other non-operating income (expense), net	Other non-operating income (expense), net	2		(3)		1		(1)		Other non-operating income (expense), net	4		(1)
Gain from sale of business	Gain from sale of business	—		2		1		2		Gain from sale of business	—		1
Income before taxes	Income before taxes	136		138		234		252		Income before taxes	126		98
Income tax expense	Income tax expense	24		25		40		52		Income tax expense	27		16
Net income	Net income	$	112	$	113	$	194	$	200	Net income	$	99	$	82

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.62	$	0.63	$	1.07	$	1.11	Basic	$	0.55	$	0.45
Diluted	Diluted	$	0.62	$	0.62	$	1.07	$	1.10	Diluted	$	0.54	$	0.45
Weighted average number of shares:	Weighted average number of shares:									Weighted average number of shares:
Basic	Basic	180.2		180.1		180.2		180.2		Basic	180.4		180.2
Diluted	Diluted	180.6		181.3		180.8		181.4		Diluted	181.3		181.0

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in millions)


		Three Months				Six Months
For the period ended June 30,		2022		2021		2022		2021
For the three months ended March 31,										For the three months ended March 31,	2023		2022
Net income	Net income	$	112	$	113	$	194	$	200	Net income	$	99	$	82
Other comprehensive income (loss), before tax:	Other comprehensive income (loss), before tax:									Other comprehensive income (loss), before tax:
Foreign currency translation adjustment	Foreign currency translation adjustment	(41)		19		(44)		29		Foreign currency translation adjustment	22		(3)

Net change in derivative hedge agreements:	Net change in derivative hedge agreements:									Net change in derivative hedge agreements:
Unrealized gain (loss)	Unrealized gain (loss)	(9)		4		(15)		(7)		Unrealized gain (loss)	4		(6)
Amount of loss (gain) reclassified into net income		3		1		5		(2)
Amount of loss reclassified into net income										Amount of loss reclassified into net income	5		2
Net change in post-retirement benefit plans:	Net change in post-retirement benefit plans:									Net change in post-retirement benefit plans:

Amortization of prior service credit		(1)		—		(1)		(1)
Amortization of net actuarial loss into net income		4		5		8		11

Amortization of actuarial (gain) loss into net income										Amortization of actuarial (gain) loss into net income	(1)		4

Other comprehensive income (loss), before tax	Other comprehensive income (loss), before tax	(44)		29		(47)		30		Other comprehensive income (loss), before tax	30		(3)
Income tax expense (benefit) related to items of other comprehensive income (loss)		27		1		30		15
Income tax (benefit) expense related to items of other comprehensive income (loss)										Income tax (benefit) expense related to items of other comprehensive income (loss)	(5)		3
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax	(71)		28		(77)		15		Other comprehensive income (loss), net of tax	35		(6)
Comprehensive income	Comprehensive income	$	41	$	141	$	117	$	215	Comprehensive income	$	134	$	76

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022

ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	1,113	$	1,349	Cash and cash equivalents	$	837	$	944

Receivables, less allowances for discounts, returns and credit losses of $41 and $44 in 2022 and 2021, respectively		1,024		953
Receivables, less allowances for discounts, returns and credit losses of $36 and $50 in 2023 and 2022, respectively						Receivables, less allowances for discounts, returns and credit losses of $36 and $50 in 2023 and 2022, respectively	1,123		1,096
Inventories	Inventories	852		700		Inventories	857		799
Prepaid and other current assets	Prepaid and other current assets	185		158		Prepaid and other current assets	193		173

Total current assets	Total current assets	3,174		3,160		Total current assets	3,010		3,012
Property, plant and equipment, net	Property, plant and equipment, net	608		644		Property, plant and equipment, net	631		630
Goodwill	Goodwill	2,714		2,792		Goodwill	2,738		2,719
Other intangible assets, net	Other intangible assets, net	975		1,016		Other intangible assets, net	915		930
Other non-current assets	Other non-current assets	718		664		Other non-current assets	646		661
Total assets	Total assets	$	8,189	$	8,276	Total assets	$	7,940	$	7,952
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	648	$	639	Accounts payable	$	710	$	723
Accrued and other current liabilities	Accrued and other current liabilities	782		752		Accrued and other current liabilities	784		867
Short-term borrowings and current maturities of long-term debt		521		—

Total current liabilities	Total current liabilities	1,951		1,391		Total current liabilities	1,494		1,590
Long-term debt	Long-term debt	1,879		2,440		Long-term debt	1,881		1,880
Accrued post-retirement benefits	Accrued post-retirement benefits	408		438		Accrued post-retirement benefits	285		286
Deferred income tax liabilities	Deferred income tax liabilities	292		287		Deferred income tax liabilities	215		222
Other non-current accrued liabilities	Other non-current accrued liabilities	456		494		Other non-current accrued liabilities	476		471
Total liabilities	Total liabilities	4,986		5,050		Total liabilities	4,351		4,449
Commitments and contingencies (Note 16)		0		0
Commitments and contingencies (Note 17)						Commitments and contingencies (Note 17)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 195.9 shares and 195.6 shares in 2022 and 2021, respectively		2		2
Common stock – par value $0.01 per share:						Common stock – par value $0.01 per share:
Authorized 750.0 shares, issued 196.5 shares and 196.0 shares in 2023 and 2022, respectively						Authorized 750.0 shares, issued 196.5 shares and 196.0 shares in 2023 and 2022, respectively	2		2
Capital in excess of par value	Capital in excess of par value	2,111		2,089		Capital in excess of par value	2,152		2,134
Retained earnings	Retained earnings	2,238		2,154		Retained earnings	2,331		2,292
Treasury stock – at cost 15.8 shares and 15.2 shares in 2022 and 2021, respectively		(708)		(656)
Treasury stock – at cost 15.9 shares and 15.8 shares in 2023 and 2022, respectively						Treasury stock – at cost 15.9 shares and 15.8 shares in 2023 and 2022, respectively	(716)		(708)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(448)		(371)		Accumulated other comprehensive loss	(191)		(226)
Total stockholders’ equity	Total stockholders’ equity	3,195		3,218		Total stockholders’ equity	3,578		3,494
Non-controlling interests	Non-controlling interests	8		8		Non-controlling interests	11		9
Total equity	Total equity	3,203		3,226		Total equity	3,589		3,503
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	8,189	$	8,276	Total liabilities and stockholders’ equity	$	7,940	$	7,952

See accompanying notes to condensed consolidated financial statements.

~~XYLEM~~.XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
For the six months ended June 30, 2022 2021
Operating Activities
Net income $ 194 $ 200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 56 59
Amortization 62 65
Share-based compensation 18 17
Restructuring and asset impairment charges 7 9
Gain from sale of business (1) (2)
Other, net 6 6
Payments for restructuring (5) (18)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (119) (66)
Changes in inventories (189) (89)
Changes in accounts payable 40 36
Other, net (37) (11)
Net Cash – Operating activities 32 206
Investing Activities
Capital expenditures (95) (80)
Proceeds from sale of business 1 2
Proceeds from the sale of property, plant and equipment 3 —
Cash received from investments 4 —
Cash paid for investments (7) —
Other, net 10 9
Net Cash – Investing activities (84) (69)
Financing Activities
Repurchase of common stock (52) (68)
Proceeds from exercise of employee stock options 3 9
Dividends paid (110) (102)
Other, net 1 (1)
Net Cash – Financing activities (158) (162)
Effect of exchange rate changes on cash (26) (10)
Net change in cash and cash equivalents (236) (35)
Cash and cash equivalents at beginning of year 1,349 1,875
Cash and cash equivalents at end of period $ 1,113 $ 1,840
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 40 $ 58
Income taxes (net of refunds received) $ 42 $ 60


For the three months ended March 31,	2023		2022
Operating Activities
Net income	$	99	$	82
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	28		28
Amortization	32		30
Share-based compensation	12		9
Restructuring and asset impairment charges	8		—


Gain from sale of business	—		(1)
Other, net	3		3
Payments for restructuring	(6)		(3)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	(28)		(64)
Changes in inventories	(55)		(106)
Changes in accounts payable	(14)		20



Other, net	(98)		(79)
Net Cash – Operating activities	(19)		(81)
Investing Activities
Capital expenditures	(49)		(49)

Proceeds from sale of business	—		1
Proceeds from the sale of property, plant and equipment	—		1
Cash received from investments	2		4
Cash paid for investments	—		(6)
Cash received from cross-currency swaps	11		7
Other, net	(1)		(1)
Net Cash – Investing activities	(37)		(43)
Financing Activities




Repurchase of common stock	(8)		(51)
Proceeds from exercise of employee stock options	7		1
Dividends paid	(60)		(55)

Other, net	(2)		(1)
Net Cash – Financing activities	(63)		(106)
Effect of exchange rate changes on cash	12		(2)
Net change in cash and cash equivalents	(107)		(232)
Cash and cash equivalents at beginning of year	944		1,349
Cash and cash equivalents at end of period	$	837	$	1,117
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	11	$	23
Income taxes (net of refunds received)	$	49	$	15

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 3three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note ~~17,~~18, "Segment ~~Information",~~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, ~~2021~~2022 ("~~2021~~2022 Annual Report") in preparing these unaudited condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our ~~2021~~2022 Annual Report. Certain prior year amounts have been reclassified to conform to the current year presentation.

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

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

Note 2. Recently Issued Accounting Pronouncements

Recently Adopted Pronouncements

In September 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-04, "Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations." This guidance requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The new standard does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. The ASU became effective January 1, 2023, except for the rollforward requirement, which becomes effective January 1, 2024. The disclosures related to our adoption of the standard are included below:

The Company facilitates the opportunity for suppliers to participate in voluntary supply chain financing programs with third-party financial institutions. Xylem agrees on commercial terms, including payment terms, with suppliers regardless of program participation. The company does not determine the terms or conditions of the arrangement between suppliers and the third-party financial institutions. Participating suppliers are paid directly by the third-party financial institution. Xylem pays the third-party financial institution the stated amount of confirmed invoices from its designated suppliers at the original invoice amount on the original maturity dates of the invoices, ranging from 45-180 days. Xylem does not pay fees related to these programs. Xylem or the third-party financial institutions may terminate the agreements upon at least 30 days’ notice. As of March 31, 2023, the total outstanding balance under these programs is $121 million presented on our Condensed Consolidated Balance Sheet within "Accounts payable."

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This guidance requires an acquirer to apply the guidance in ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities in a business combination, rather than using fair value. The ASU is effective for fiscal years beginning after December 15, 2022 and we adopted this guidance as of January 1, 2023. The guidance will be applied prospectively to business combinations after the adoption. The adoption of this guidance did not impact our financial condition or results of operations. We are currently evaluating the impact of the guidance in light of the proposed acquisition of Evoqua Water Technologies Corp. (“Evoqua”) pursuant to the Agreement and Plan of Merger dated as of January 22, 2023.

Note 3. Revenue

Disaggregation of Revenue

The following table illustrates the sources of revenue:


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
(in millions)	(in millions)	2022		2021		2022		2021		(in millions)	2023		2022
Revenue from contracts with customers	Revenue from contracts with customers	$	1,312	$	1,302	$	2,534	$	2,513	Revenue from contracts with customers	$	1,383	$	1,222
Lease Revenue	Lease Revenue	52		49		102		94		Lease Revenue	65		50
Total	Total	$	1,364	$	1,351	$	2,636	$	2,607	Total	$	1,448	$	1,272

~~The following table reflects revenue from contracts with customers by application.~~
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2022 2021 2022 2021
Water Infrastructure
     Transport $ 432 $ 414 $ 825 $ 784
     Treatment 104 106 194 200
Applied Water*
     Commercial Building Services 147 155 308 303
Residential Building Services 79 71 153 135
     Industrial Water 204 188 394 369
Measurement & Control Solutions
     Water 279 288 544 571
     Energy 67 80 116 151
Total $ 1,312 $ 1,302 $ 2,534 $ 2,513

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

The following table reflects revenue from contracts with customers by application.


	Three Months Ended
	March 31,
(in millions)	2023		2022
Water Infrastructure
Transport	$	436	$	393
Treatment	88		90

Applied Water
Commercial Building Services	183		161
Residential Building Services	70		73
Industrial Water	200		191

Measurement & Control Solutions
Water	334		265
Energy	72		49



Total	$	1,383	$	1,222

The following table reflects revenue from contracts with customers by geographical region.


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
(in millions)	(in millions)	2022		2021		2022		2021		(in millions)	2023		2022
Water Infrastructure	Water Infrastructure									Water Infrastructure
United States	United States	$	165	$	142	$	312	$	265	United States	$	176	$	147
Western Europe	Western Europe	190		190		376		363		Western Europe	190		186
Emerging Markets (a)	Emerging Markets (a)	120		133		221		255		Emerging Markets (a)	105		101
Other	Other	61		55		110		101		Other	53		49

Applied Water	Applied Water									Applied Water
United States	United States	219		202		440		396		United States	244		221
Western Europe	Western Europe	101		99		195		191		Western Europe	104		94
Emerging Markets (a)	Emerging Markets (a)	79		81		159		159		Emerging Markets (a)	73		80
Other	Other	31		32		61		61		Other	32		30

Measurement & Control Solutions	Measurement & Control Solutions									Measurement & Control Solutions
United States	United States	212		224		393		437		United States	257		181
Western Europe	Western Europe	59		69		128		143		Western Europe	77		69
Emerging Markets (a)	Emerging Markets (a)	50		49		94		95		Emerging Markets (a)	48		44
Other	Other	25		26		45		47		Other	24		20

Total	Total	$	1,312	$	1,302	$	2,534	$	2,513	Total	$	1,383	$	1,222

(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, 2021 $ 117 $ 166
  Additions, net 78 99
  Revenue recognized from opening balance — (93)
  Billings transferred to accounts receivable (74) —
  Other — (1)
Balance at June 30, 2021 $ 121 $ 171
Balance at January 1, 2022 $ 125 $ 164
  Additions, net 63 97
  Revenue recognized from opening balance — (75)
  Billings transferred to accounts receivable (61) —
  Other (4) (3)
Balance at June 30, 2022 $ 123 $ 183


(in millions)	Contract Assets (a)		Contract Liabilities
Balance at January 1, 2023	$	151	$	183
Additions, net	48		58
Revenue recognized from opening balance	—		(50)
Billings transferred to accounts receivable	(48)		—
Foreign currency and other	—		—
Balance at March 31, 2023	$	151	$	191

Balance at January 1, 2022	$	125	$	164
Additions, net	34		62
Revenue recognized from opening balance	—		(50)
Billings transferred to accounts receivable	(39)		—
Foreign currency and other	(2)		(1)
Balance at March 31, 2022	$	118	$	175

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

Performance obligations

Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of ~~June 30, 2022,~~March 31, 2023, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to ~~$498~~$447 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following ~~three years.~~60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

Note 3.4. Restructuring and Asset Impairment Charges

Restructuring

From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position itself. During the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, we incurred restructuring ~~charges~~costs of $6 million. 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~~effectiveness, strengthen our competitive positioning and better serve our customers. The charges included the reduction of headcount across all segments.

During the three ~~and six months~~ ended ~~June 30, 2021,~~March 31, 2022, we ~~recognized~~incurred restructuring charges of $3 million and $8 million, respectively, of which $2 million and $6 million relate to actions previously announced in 2020. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment.

that were less than $1 million.

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


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
(in millions)	(in millions)	2022		2021		2022		2021		(in millions)	2023		2022
By component:	By component:									By component:
Severance and other charges	Severance and other charges	$	6	$	4	$	6	$	8	Severance and other charges	$	6	$	—

Asset impairment		—		—		—		1

Reversal of restructuring accruals		—		(1)		—		(1)
Total restructuring charges		$	6	$	3	$	6	$	8

Total restructuring costs										Total restructuring costs	$	6	$	—
Asset impairment charges	Asset impairment charges	1		—		1		1		Asset impairment charges	2		—
Total restructuring and asset impairment charges	Total restructuring and asset impairment charges	$	7	$	3	$	7	$	9	Total restructuring and asset impairment charges	$	8	$	—

By segment:	By segment:									By segment:
Water Infrastructure	Water Infrastructure	$	2	$	3	$	2	$	7	Water Infrastructure	$	2	$	—
Applied Water	Applied Water	1		—		1		1		Applied Water	1		—
Measurement & Control Solutions	Measurement & Control Solutions	4		—		4		1		Measurement & Control Solutions	5		—

The following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within "Accrued and other current liabilities" and "Other non-current accrued liabilities", for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021:~~
(in millions) 2022 2021
Restructuring accruals - January 1 $ 7 $ 29
Restructuring charges, net 6 8
Cash payments (5) (18)
Asset impairment — (1)
Restructuring accruals - June 30 $ 8 $ 18
By segment:
Water Infrastructure $ 1 $ 3
Applied Water — 1
Measurement & Control Solutions 4 11
Regional selling locations (a) 1 3
Corporate and other 2 —
2022:


(in millions)	2023		2022
Restructuring accruals - January 1	$	10	$	7
Restructuring costs, net	6		—
Cash payments	(6)		(3)
Asset impairment	—		—

Restructuring accruals - March 31	$	10	$	4

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

(a)Regional selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense 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 ~~2022~~2023 and thereafter:

(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2022:
Total expected costs $ 2 $ 1 $ 3 $ — $ 6
Costs incurred during Q1 2022 — — — — —
Costs incurred during Q2 2022 2 1 2 — 5
Total expected costs remaining $ — $ — $ 1 $ — $ 1
Actions Commenced in 2021:
Total expected costs $ 3 $ — $ 1 $ — $ 4
Costs incurred during 2021 3 — — — 3
Costs incurred during Q1 2022 — — — — —
Costs incurred during Q2 2022 — — — — —
Total expected costs remaining $ — $ — $ 1 $ — $ 1


(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total







Actions Commenced in 2023:
Total expected costs	$	1	$	1	$	4	$	—	$	6

Costs incurred during Q1 2023	1		1		3		—		5


Total expected costs remaining	$	—	$	—	$	1	$	—	$	1

During 2023, we also incurred charges of $1 million within the Water Infrastructure segment related to actions commenced in prior years.

The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in ~~2022~~2023 consist primarily of severance charges. The Water Infrastructure and Applied Water actions are complete and the Measurement & Control Solutions actions are expected to continue through the end of ~~2022.~~2023.

The Water Infrastructure and Measurement & Control Solutions actions commenced in 2021 consist primarily of severance charges. The Water Infrastructure actions are complete and the Measurement & Control Solutions actions are expected to continue through the end of 2022.Asset Impairment

During the ~~second~~first quarter of ~~2022,~~2023, we ~~also incurred charges of $1 million~~determined that internally developed in-process software within ~~the~~our Measurement & Control Solutions segment ~~related~~was impaired as a result of actions taken to ~~actions commenced prior~~prioritize strategic investments and we therefore recognized an impairment charge of $2 million. Refer to ~~2021.~~Note 8, "Goodwill and Other Intangible Assets," for additional information.

Note 4.5. Income Taxes

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

The income tax provision for the three months ended ~~June 30, 2022~~March 31, 2023 was ~~$24~~$27 million resulting in an effective tax rate of ~~17.5%~~21.7%, compared to a ~~$25~~$16 million expense resulting in an effective tax rate of ~~18.5%~~16.4% for the same period in 2021. The income tax provision for the six months ended June 30, 2022 was $40 million resulting in an effective tax rate of 17.0%, compared to a $52 million expense resulting in an effective tax rate of 20.7% for the same period in 2021.2022. The effective tax rate for the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2022~~March 31, 2023 was ~~lower~~higher than the U.S. federal statutory rate primarily due to ~~favorable~~the impact of earnings mix and ~~tax settlement benefits, partially offset by the Global Intangible Low Taxed Income ("GILTI") inclusion.~~

nondeductible transaction costs.

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. Xylem filed an appeal with the Administrative Court of ~~Vaxjo,~~Växjö, which rendered a decision adverse to Xylem in June 2022 for ~~$80~~SEK800 million (approximately $77 million), consisting of the full tax assessment amount plus penalties and interest. Xylem ~~intends to appeal~~has appealed this decision with the intermediate appellate court, the Administrative Court of Appeal (the “Court”). At this time, management, in consultation with external legal advisors, continues to believe it is more likely than not that Xylem will prevail on the proposed assessment and will continue to vigorously defend our position through the appellate process. The appeal to the Court is expected to take approximately one year; however, there can be no assurance as to the timing of the Court’s decision. Both parties will have the ability to seek appeal of the Court’s decision to the Supreme Administrative Court of Sweden. There can be no assurance that the final determination by the authorities will not be materially different than our position. As of ~~June 30, 2022,~~March 31, 2023, we ~~have~~do not ~~recorded~~have any unrecognized tax benefits related to this uncertain tax position.

Note 5.6. Earnings Per Share

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


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
		2022		2021		2022		2021			2023		2022
Net income (in millions)	Net income (in millions)	$	112	$	113	$	194	$	200	Net income (in millions)	$	99	$	82
Shares (in thousands):	Shares (in thousands):									Shares (in thousands):
Weighted average common shares outstanding	Weighted average common shares outstanding	180,123		180,072		180,164		180,162		Weighted average common shares outstanding	180,371		180,205
Add: Participating securities (a)	Add: Participating securities (a)	33		34		29		24		Add: Participating securities (a)	25		26
Weighted average common shares outstanding — Basic	Weighted average common shares outstanding — Basic	180,156		180,106		180,193		180,186		Weighted average common shares outstanding — Basic	180,396		180,231
Plus incremental shares from assumed conversions: (b)	Plus incremental shares from assumed conversions: (b)									Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options	Dilutive effect of stock options	438		897		513		845		Dilutive effect of stock options	622		587
Dilutive effect of restricted stock units and performance share units	Dilutive effect of restricted stock units and performance share units	56		346		129		380		Dilutive effect of restricted stock units and performance share units	301		203

Weighted average common shares outstanding — Diluted	Weighted average common shares outstanding — Diluted	180,650		181,349		180,835		181,411		Weighted average common shares outstanding — Diluted	181,319		181,021
Basic earnings per share	Basic earnings per share	$	0.62	$	0.63	$	1.07	$	1.11	Basic earnings per share	$	0.55	$	0.45
Diluted earnings per share	Diluted earnings per share	$	0.62	$	0.62	$	1.07	$	1.10	Diluted earnings per share	$	0.54	$	0.45

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

(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note ~~13,~~14, "Share-Based Compensation ~~Plans",~~Plans," to the condensed consolidated financial statements for further detail on the performance share units.

Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2022 2021 2022 2021
Stock options 1,647 1,227 1,491 1,238
Restricted stock units 362 318 346 302
Performance share units 270 345 252 349


	Three Months Ended
	March 31,
(in thousands)	2023	2022
Stock options	1,357	1,355
Restricted stock units	332	330
Performance share units	241	233

Note 6.7. Inventories

The components of total inventories are summarized as follows:


(in millions)	(in millions)	June 30, 2022		December 31, 2021		(in millions)	March 31, 2023		December 31, 2022
Finished goods	Finished goods	$	318	$	236	Finished goods	$	314	$	286
Work in process	Work in process	71		58		Work in process	71		58
Raw materials	Raw materials	463		406		Raw materials	472		455
Total inventories	Total inventories	$	852	$	700	Total inventories	$	857	$	799

Note 7.8. Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying value of goodwill by reportable segment for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 are as follows:
(in millions)
Water
Infrastructure
Applied Water Measurement & Control Solutions Total
Balance as of January 1, 2022 $ 656 $ 515 $ 1,621 $ 2,792
Activity in 2022
Foreign currency and other (19) (15) (44) (78)
Balance as of June 30, 2022 $ 637 $ 500 $ 1,577 $ 2,714


(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Total
Balance as of January 1, 2023	$	638	$	502	$	1,579	$	2,719
Activity in 2023


Foreign currency and other	5		4		10		19
Balance as of March 31, 2023	$	643	$	506	$	1,589	$	2,738

Other Intangible Assets

Information regarding our other intangible assets is as follows:


		June 30, 2022						December 31, 2021							March 31, 2023						December 31, 2022
(in millions)	(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles		(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles
Customer and distributor relationships	Customer and distributor relationships	$	914	$	(473)	$	441	$	929	$	(456)	$	473	Customer and distributor relationships	$	788	$	(385)	$	403	$	784	$	(371)	$	413
Proprietary technology and patents	Proprietary technology and patents	198		(144)		54		201		(142)		59		Proprietary technology and patents	166		(121)		45		165		(118)		47
Trademarks	Trademarks	138		(76)		62		141		(72)		69		Trademarks	138		(84)		54		137		(80)		57
Software	Software	525		(274)		251		548		(303)		245		Software	531		(285)		246		514		(268)		246
Other	Other	20		(18)		2		21		(18)		3		Other	5		(3)		2		5		(3)		2
Indefinite-lived intangibles	Indefinite-lived intangibles	165		—		165		167		—		167		Indefinite-lived intangibles	165		—		165		165		—		165
Other Intangibles	Other Intangibles	$	1,960	$	(985)	$	975	$	2,007	$	(991)	$	1,016	Other Intangibles	$	1,793	$	(878)	$	915	$	1,770	$	(840)	$	930

Amortization expense related to finite-lived intangible assets was $32 million and ~~$62~~$30 million for the ~~three and six-month~~three-month periods ended ~~June 30,~~March 31, 2023 and 2022, ~~respectively,~~respectively.

During the first quarter of 2023, 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 and ~~$33 million and $65 million for the three and six month periods ended June 30, 2021, respectively.~~we therefore recognized an impairment charge of $2 million.

Note 8.9. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Foreign Exchange Risk

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

Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures for which we enter into cash flow hedges relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling ~~$278~~$517 million and ~~$301~~$255 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. As of ~~June 30, 2022,~~March 31, 2023, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase U.S. Dollar and sell Canadian Dollar, purchase Polish Zloty and sell Euro, sell Canadian Dollar and purchase Euro, and sell Australian Dollar and purchase ~~Euro, and to purchase Polish Zloty and sell~~ Euro. The purchased notional amounts associated with these currency derivatives are ~~$112~~$219 million, ~~$83~~$144 million, ~~$30~~$58 million, ~~$15~~$26 million, ~~$14~~$26 million, ~~$13~~$25 million and ~~$11~~$19 million, respectively. As of December 31, ~~2021~~2022 the purchased notional amounts associated with these currency derivatives ~~are $130~~were $105 million, ~~$88~~$73 million, ~~$31~~$29 million, ~~$14~~$13 million, ~~$14~~$13 million, $13 million and ~~$11~~$9 million, respectively.

Hedges of Net Investments in Foreign Operations

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

Cross-Currency Swaps

Beginning in 2015, we entered into cross-currency swaps to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. During the second quarter of 2019, third quarter of 2020, and second quarter of 2022 we entered into additional cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was ~~$1,587~~$1,653 million and ~~$1,151~~$1,616 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Foreign Currency Denominated Debt

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023.On December 12th, 2022 our Senior Notes due March 2023 were settled with cash on hand for a total of $527 million.

Previously, the entirety of the outstanding balance was designated as a hedge of a net investment in certain foreign subsidiaries. On June 2, 2022, we de-designated the entirety of the outstanding balance of the €500 million 2.250% Senior Notes, or $533 million from the net investment hedge relationship. Previously, the entirety of the outstanding balance, or $563 million as of December 31, 2021, net of unamortized discount, was designated as a hedge of a net investment in certain foreign subsidiaries.

~~Fair Value Hedges of Foreign Exchange Risk~~

The de-designation of our 2.250% Senior Notes of €500 million resulted in exposure to fluctuations in the Euro-U.S. Dollar exchange rate. We use currency forward agreements to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.

On June 2, 2022, we entered into a currency forward agreement with a total notional amount of €500 million, designating the agreement as a fair value hedge of our Euro denominated notes. As of June 30, 2022, the total notional amount of the fair value hedge was $522 million.

Effectiveness of derivatives designated as fair value hedges is assessed using the spot method. The changes in the fair value of these derivatives due to movements in spot exchange rates are recorded in Selling, general and administrative Expenses. Changes in the fair value of the 2.250% Senior Notes of €500 million related to spot exchange rates are also recorded in Selling, general and administrative expenses. Changes in the spot-forward differential and counterparty non-performance risk of the derivatives are excluded from the assessment of hedge effectiveness and will be recognized in Accumulated other comprehensive loss (AOCL). Amounts in AOCL are recognized in earnings, specifically Interest expense, using a systematic and rational method over the life of the hedging instrument.

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2022 2021 2022 2021
Cash Flow Hedges
Foreign Exchange Contracts
Amount of gain (loss) recognized in OCI $ (13) $ 4 $ (19) $ (7)
Amount of (gain) loss reclassified from OCI into Revenue 2 1 4 (1)
Amount of (gain) loss reclassified from OCI into Cost of revenue 1 — 1 (1)
Net Investment Hedges
Cross-Currency Swaps
Amount of gain recognized in OCI $ 93 $ 2 $ 94 $ 32
Amount of income recognized in Interest expense 7 5 13 10
Foreign Currency Denominated Debt
Amount of gain (loss) recognized in OCI $ 23 $ (6) $ 31 $ 20
Fair Value Hedges
Foreign Exchange Contracts
Amount of gain recognized in OCI $ 4 $ — $ 4 $ —
Amount of (loss) recognized in Selling, general and administrative expenses $ (11) $ — $ (11) $ —
Amount recognized in Interest expense $ (1) $ — $ (1) $ —


	Three Months Ended
	March 31,
(in millions)	2023		2022
Cash Flow Hedges
Foreign Exchange Contracts
Amount of gain (loss) recognized in OCL	$	4	$	(6)
Amount of loss reclassified from OCL into Revenue	3		2
Amount of loss reclassified from OCL into Cost of revenue	2		—

Net Investment Hedges
Cross-Currency Swaps
Amount of gain (loss) recognized in OCL	$	(22)	$	1
Amount of income recognized in Interest expense	7		6
Foreign Currency Denominated Debt
Amount of gain recognized in OCL	$	—	$	8

As of ~~June 30, 2022, $17~~March 31, 2023, $3 million of net ~~losses~~gains on cash flow hedges are expected to be reclassified into earnings in the next 12 months.

As of ~~June 30, 2022,~~March 31, 2023, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration.

~~As of June 30, 2022, $4 million of net losses on the fair value hedges are expected to be reclassified into earnings in the next 12 months.~~

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

The fair values of our derivative contracts currently included in our hedging program were as follows:


(in millions)	(in millions)	June 30, 2022		December 31, 2021		(in millions)	March 31, 2023		December 31, 2022
Derivatives designated as hedging instruments	Derivatives designated as hedging instruments					Derivatives designated as hedging instruments
Assets	Assets					Assets
Cash Flow Hedges	Cash Flow Hedges					Cash Flow Hedges
Prepaid and other current assets	Prepaid and other current assets	$	1	$	—	Prepaid and other current assets	$	6	$	—
Net Investment Hedges	Net Investment Hedges					Net Investment Hedges
Other non-current assets	Other non-current assets	$	77	$	8	Other non-current assets	$	66	$	79
Liabilities	Liabilities					Liabilities
Cash Flow Hedges	Cash Flow Hedges					Cash Flow Hedges
Accrued and other current liabilities	Accrued and other current liabilities	$	(14)	$	(1)	Accrued and other current liabilities	$	(2)	$	—
Net Investment Hedges	Net Investment Hedges					Net Investment Hedges
Other non-current accrued liabilities	Other non-current accrued liabilities	$	(1)	$	(26)	Other non-current accrued liabilities	$	(14)	$	(6)
Fair Value Hedges
Accrued and other current liabilities		$	(8)	$	—

Our long-term debt, due in 2023, was de-designated from the hedging relationship in June 2022. The fair value of the long-term debt designated as a net investment hedge was $577 million as of December 31, 2021.

Note 9.10. Accrued and Other Current Liabilities

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


(in millions)	(in millions)	June 30, 2022		December 31, 2021		(in millions)	March 31, 2023		December 31, 2022
Compensation and other employee-benefits	Compensation and other employee-benefits	$	248	$	273	Compensation and other employee-benefits	$	216	$	285
Customer-related liabilities	Customer-related liabilities	208		186		Customer-related liabilities	222		210
Accrued taxes	Accrued taxes	115		86		Accrued taxes	156		186
Lease liabilities	Lease liabilities	71		69		Lease liabilities	67		69
Accrued warranty costs	Accrued warranty costs	37		40		Accrued warranty costs	37		37
Other accrued liabilities	Other accrued liabilities	103		98		Other accrued liabilities	86		80
Total accrued and other current liabilities	Total accrued and other current liabilities	$	782	$	752	Total accrued and other current liabilities	$	784	$	867

1716

Note ~~10.~~11. Credit Facilities and Debt

Total debt outstanding is summarized as follows:


(in millions)	(in millions)	June 30, 2022		December 31, 2021		(in millions)	March 31, 2023		December 31, 2022

2.250% Senior Notes due 2023 (a)		522		564
3.250% Senior Notes due 2026 (a)	3.250% Senior Notes due 2026 (a)	500		500		3.250% Senior Notes due 2026 (a)	500		500
1.950% Senior Notes due 2028 (a)	1.950% Senior Notes due 2028 (a)	500		500		1.950% Senior Notes due 2028 (a)	500		500
2.250% Senior Notes due 2031 (a)	2.250% Senior Notes due 2031 (a)	500		500		2.250% Senior Notes due 2031 (a)	500		500
4.375% Senior Notes due 2046 (a)	4.375% Senior Notes due 2046 (a)	400		400		4.375% Senior Notes due 2046 (a)	400		400

Debt issuance costs and unamortized discount (b)	Debt issuance costs and unamortized discount (b)	(22)		(24)		Debt issuance costs and unamortized discount (b)	(19)		(20)

Total debt	Total debt	2,400		2,440		Total debt	1,881		1,880
Less: short-term borrowings and current maturities of long-term debt	Less: short-term borrowings and current maturities of long-term debt	521		—		Less: short-term borrowings and current maturities of long-term debt	—		—
Total long-term debt	Total long-term debt	$	1,879	$	2,440	Total long-term debt	$	1,881	$	1,880

(a)The fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due ~~2023~~2026 was ~~$525~~$479 million and ~~$577~~$470 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively. The fair value of our Senior Notes due 2026 was $487 million and $537 million as of June 30,~~ 2022 ~~and December 31, 2021~~ respectively. The fair value of our Senior Notes due 2028 was ~~$446~~$443 million and ~~$497~~$430 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The fair value of our Senior Notes due 2031 was ~~$419~~$424 million and ~~$496~~$406 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The fair value of our Senior Notes due 2046 was ~~$367~~$352 million and ~~$481~~$333 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

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

Senior Notes

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

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

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

Interest on the Green Bond is payable on January 30 and July 30 of each year. As of ~~June 30, 2022,~~March 31, 2023, we are in compliance with all covenants for the Green Bond.

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023 (the "Senior Notes due 2023"). On October 11, 2016, we issued 3.250% Senior Notes of $500 million aggregate principal amount due October 2026 (the “Senior Notes due 2026”) and 4.375% Senior Notes of $400 million aggregate principal amount due October 2046 (the “Senior Notes due 2046” and, together with the Senior Notes due 2021, the Senior Notes due 2023 and the Senior Notes due 2026, the “Senior Notes”).On December 12th, 2022 our Senior Notes due 2023 were settled with cash on hand for a total of $527 million.

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.

1817

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 was payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable on March 11 of each year. Interest on the Senior Notes due~~ 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of ~~June 30, 2022,~~March 31, 2023, we are in compliance with all covenants for the Senior Notes.

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~~provided 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. On March 1, 2023, Xylem terminated the 2019 Credit Facility among the Company, certain lenders and Citibank, N.A. as Administrative Agent as a result of signing the 2023 Five-Year Revolving Credit Facility.

2023 Five-Year Revolving Credit Facility

On March 1, 2023, Xylem entered into a five year revolving credit facility (the "2023 Credit Facility") with Citibank, N.A., as Administrative Agent, and a syndicate of lenders. The 2023 Credit Facility provides for an aggregate principal amount of up to $1 billion (available in U.S. Dollars and in Euros), with increases of up to $300 million for a maximum aggregate principal amount of $1.3 billion at the request of Xylem and with the consent of the institutions providing such increased commitments.

Interest on all loans under the ~~2019~~2023 Credit Facility is payable either quarterly or at the expiration of any ~~LIBOR~~Term SOFR 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~~Term SOFR or EURIBOR rate plus an applicable margin. The ~~2019~~2023 Credit Facility includes customary provisions for implementation of replacement rates for ~~LIBOR-based~~Term SOFR-based and EURIBOR-based loans. The ~~2019~~2023 Credit Facility also includes a pricing grid that determines the applicable margin based on Xylem's credit rating, with a further adjustment ~~depending~~based on Xylem's ~~annual Sustainalytics~~achievement of certain Environmental, Social and Governance ("ESG") ~~score, determined based on the methodology in effect as of March 5, 2019.~~key performance indicators. Xylem will also pay quarterly fees to each lender for such ~~lender’s~~lender's commitment to lend accruing on such commitment at a rate based on ~~our~~Xylem's 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~~with a further adjustment based on Xylem's achievement of certain ESG ~~score).~~ key performance indicators.

The ~~2019~~2023 Credit Facility requires that Xylem maintain a consolidated total debt to consolidated EBITDA ratio (or maximum leverage ratio), which will be based on the last four fiscal ~~quarters;~~quarters. In accordance with the terms of the agreement to the 2023 Credit Facility, Xylem may not exceed a maximum leverage ratio of 4.00 to 1.00 for a period of four consecutive fiscal quarters beginning with the fiscal quarter during which a material acquisition is consummated and ina maximum leverage ratio of 3.50 to 1.00 thereafter for a minimum of four fiscal quarters before another material acquisition is consummated. In addition, the 2023 Credit Facility 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~~2023 Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the ~~2019~~2023 Credit Facility, subject to certain requirements and conditions set forth in the ~~2019~~2023 Credit Facility. As of ~~June 30, 2022,~~March 31, 2023, the ~~2019~~2023 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~~$1 billion inclusive of the ~~2019~~2023 Credit Facility. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, none of the Company's $600 million U.S. Dollar commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.

Euro Commercial Paper Program

On June 3, 2019, Xylem entered into a Euro commercial paper program with ING Bank N.V., as administrative agent, and a syndicate of dealers. The Euro commercial paper program provides for a maximum issuing balance of up to €500 million (approximately ~~$522~~$544 million) which may be denominated in a variety of currencies. The maximum issuing balance may be increased in accordance with the Dealer Agreement. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, none of the Company's Euro commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.

Note ~~11.~~12. Post-retirement Benefit Plans

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


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
(in millions)	(in millions)	2022		2021		2022		2021		(in millions)	2023		2022
Domestic defined benefit pension plans:	Domestic defined benefit pension plans:									Domestic defined benefit pension plans:
Service cost	Service cost	$	—	$	—	$	1	$	1	Service cost	$	1	$	1
Interest cost	Interest cost	1		1		2		2		Interest cost	1		1
Expected return on plan assets	Expected return on plan assets	(1)		(1)		(3)		(3)		Expected return on plan assets	(1)		(2)

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

Amortization of net actuarial loss		3		4		6		8
Amortization of actuarial (gain) loss										Amortization of actuarial (gain) loss	(1)		3

Net periodic benefit cost	Net periodic benefit cost	$	7	$	7	$	13	$	14	Net periodic benefit cost	$	2	$	6
Total net periodic benefit cost	Total net periodic benefit cost	$	7	$	8	$	14	$	16	Total net periodic benefit cost	$	3	$	7

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

The total net periodic benefit cost for other post-retirement employee benefit plans was less than $1 million, including net credits recognized into ~~other~~"Other comprehensive income (loss)" of less than $1 million, for both the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

We contributed ~~$10 million and $12~~$5 million to our defined benefit plans ~~during~~for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021, respectively.~~2022. Additional contributions ranging between approximately $7$14 million and ~~$13~~$18 million are expected to be made during the remainder of ~~2022.~~

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 in2022~~.

2023.

2019

Note ~~12.~~13. Equity

The following table shows the changes in stockholders' equity for the ~~six~~three months ended ~~June 30, 2022:~~March 31, 2023:
Common
Stock Capital in Excess of Par Value Retained
Earnings Accumulated Other
Comprehensive Loss Treasury Stock Non-Controlling Interest Total
Balance at January 1, 2022 $ 2 $ 2,089 $ 2,154 $ (371) $ (656) $ 8 $ 3,226
Net income — — 82 — — — 82
Other comprehensive loss, net — — — (6) — — (6)
Dividends declared ($0.30 per share) — — (55) — — — (55)
Stock incentive plan activity — 10 — — (6) — 4
Repurchase of common stock — — — — (45) — (45)
Balance at March 31, 2022 $ 2 $ 2,099 $ 2,181 $ (377) $ (707) $ 8 $ 3,206
Net income — — 112 — — — 112
Other comprehensive income, net — — — (71) — — (71)
Dividends declared ($0.30 per share) — — (55) — — — (55)
Stock incentive plan activity — 12 — — (1) — 11
Balance at June 30, 2022 $ 2 $ 2,111 $ 2,238 $ (448) $ (708) $ 8 $ 3,203


	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, 2023	$	2	$	2,134	$	2,292	$	(226)	$	(708)	$	9	$	3,503


Net income	—		—		99		—		—		—		99
Other comprehensive income, net	—		—		—		35		—		—		35
Other activity	—		—		—		—		—		2		2
Dividends declared ($0.33 per share)	—		—		(60)		—		—		—		(60)
Stock incentive plan activity	—		18		—		—		(8)		—		10

Balance at March 31, 2023	$	2	$	2,152	$	2,331	$	(191)	$	(716)	$	11	$	3,589

The following table shows the changes in stockholders' equity for the ~~six~~three months ended ~~June 30, 2021:~~March 31, 2022:
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


	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, 2022	$	2	$	2,089	$	2,154	$	(371)	$	(656)	$	8	$	3,226

Net income	—		—		82		—		—		—		82
Other comprehensive loss, net	—		—		—		(6)		—		—		(6)
Dividends declared ($0.30 per share)	—		—		(55)		—		—		—		(55)
Stock incentive plan activity	—		10		—		—		(6)		—		4
Repurchase of common stock	—		—		—		—		(45)		—		(45)
Balance at March 31, 2022	$	2	$	2,099	$	2,181	$	(377)	$	(707)	$	8	$	3,206

2220

Note ~~13.~~14. Share-Based Compensation Plans

Share-based compensation expense was $9$12 million and ~~$18~~$9 million during the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, ~~respectively, and $8 million and $17 million during the three and six months ended June 30, 2021,~~ respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $9$10 million, ~~$35~~$41 million and ~~$17~~$21 million, respectively, at ~~June 30, 2022~~March 31, 2023 and is expected to be recognized over a weighted average period of ~~2.0, 2.1~~2.3, 2.3 and 2.4 years, respectively. The amount of cash received from the exercise of stock options was $3$7 million and $9$1 million for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. As of March 31, 2023, there were approximately 3 million shares of common stock available for future awards.

Stock Option Grants

The following is a summary of the changes in outstanding stock options for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023:
Share units
(in thousands)
Weighted
Average
Exercise
Price / Share
Weighted Average
Remaining
Contractual
Term (Years)
Aggregate Intrinsic Value
(in millions)
Outstanding at January 1, 2022 1,827 $ 64.12 6.1 102
Granted 306 86.76
Exercised (58) 48.07
Forfeited and expired (20) 90.49
Outstanding at June 30, 2022 2,055 $ 67.69 6.2 $ 32
Options exercisable at June 30, 2022 1,432 $ 59.14 5.1 $ 30
Vested and expected to vest as of June 30, 2022 1,980 $ 66.91 6.1 $ 31


	Share units (in thousands)	Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2023	1,935	$	67.55	5.9	$	83
Granted	227	101.09
Exercised	(132)	48.39
Forfeited and expired	(4)	102.22
Other	14	73.16
Outstanding at March 31, 2023	2,040	$	72.48	6.3	$	66
Options exercisable at March 31, 2023	1,495	$	65.08	5.3	$	59
Vested and expected to vest as of March 31, 2023	1,962	$	71.53	5.9	$	65

The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 was ~~$2.1~~$7.0 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 ~~2022~~2023 grants:


Volatility	~~26.20~~27.30		%
Risk-free interest rate	~~1.59~~4.25		%
Dividend yield	~~1.38~~1.31		%
Expected term (in years)	~~5.6~~5.4
Weighted-average fair value / share	$	~~19.86~~29.06

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

2321

Restricted Stock Unit Grants

The following is a summary of restricted stock unit activity for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023. 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			Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022		484	$	88.47
Outstanding at January 1, 2023					Outstanding at January 1, 2023	553	$	88.88
Granted	Granted	323	86.42		Granted	259	101.09
Vested	Vested	(215)	84.40		Vested	(211)	101.85
Forfeited	Forfeited	(26)	91.34		Forfeited	(9)	96.03
Outstanding at June 30, 2022		566	$	88.72
Outstanding at March 31, 2023					Outstanding at March 31, 2023	592	$	94.12

Performance Share Units

Performance share units awarded under the long-term incentive plan vest based upon performance by the Company over a three-year period against targets approved by the Leadership Development & Compensation Committee ("LDCC") of the Company's Board of Directors prior to the grant date.

For the 2023-2025 performance period, the LDCC approved granting performance share units under two plan designs: (I) on the basis of the Evoqua acquisition closing by 1/22/2024 ("Combined Company" Design) or (II) on the basis that the Evoqua acquisition does not close by 1/22/2024 ("Xylem Stand-Alone" Design).

The Xylem Stand-Alone Design makes no change to our existing grant structure in which performance share units are awarded at 100% of target with actual payout contingent upon the achievement of a pre-set, three-year adjusted Return on Invested Capital ("ROIC") performance target for ROIC performance share unit grants, a pre-set third-year revenue target for Revenue performance share unit grants and a three-year relative TSR performance for TSR performance share unit grants.

For simplicity, the performance share unit grants tied to the ROIC performance target will be referred to as the “ROIC performance share unit grants” prior to the acquisition closing.

The Combined Company Design would replace the ROIC metric with a pre-set, third-year adjusted earnings before interest, taxes, depreciation and amortization expense (“EBITDA”) performance target for the combined company.

ROIC Performance Share Unit Grants

The following is a summary of ~~Return on Invested Capital ("ROIC")~~ROIC performance share unit grants for the ~~six~~three months ended ~~June 30, 2022.~~March 31, 2023. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant:


		Share units (in thousands)	Weighted Average Grant Date Fair Value / Share			Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022		177	$	84.84
Outstanding at January 1, 2023					Outstanding at January 1, 2023	146	$	88.78
Granted	Granted	35	86.76		Granted	33	101.09

Forfeited (a)	Forfeited (a)	(59)	75.49		Forfeited (a)	(63)	81.13
Outstanding at June 30, 2022		153	$	88.89
Outstanding at March 31, 2023					Outstanding at March 31, 2023	116	$	97.75

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

TSR Performance Share Unit Grants

The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the ~~six~~three months ended ~~June 30, 2022:~~March 31, 2023:


		Share units (in thousands)	Weighted Average Grant Date Fair Value / Share			Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022		177	$	102.96
Outstanding at January 1, 2023					Outstanding at January 1, 2023	178	$	100.67
Granted	Granted	70	71.14		Granted	65	109.68
Adjustment for Market Condition Achieved (a)	Adjustment for Market Condition Achieved (a)	22	89.62		Adjustment for Market Condition Achieved (a)	40	102.55
Vested	Vested	(75)	89.62		Vested	(102)	102.55
Forfeited	Forfeited	(7)	87.54		Forfeited	—	—
Outstanding at June 30, 2022		187	$	100.64
Outstanding at March 31, 2023					Outstanding at March 31, 2023	181	$	103.82

(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 ~~2022~~2023 grants:




Volatility	~~33.3~~35.9	%
Risk-free interest rate	~~1.44~~4.66	%

Revenue Performance Share Unit Grants

The following is a summary of our Revenue performance share unit grants for the ~~six~~three months ended ~~June 30, 2022:~~March 31, 2023:


		Share units (in thousands)	Weighted Average Grant Date Fair Value / Share			Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022		—	$	—
Outstanding at January 1, 2023					Outstanding at January 1, 2023	32	86.77
Granted	Granted	35	86.76		Granted	33	101.09

Forfeited	Forfeited	(1)	86.76		Forfeited	—	—
Outstanding at June 30, 2022		34	$	86.76
Outstanding at March 31, 2023					Outstanding at March 31, 2023	65	$	94.01

The fair value of the Revenue performance share unit awards is determined using the closing price of our common stock on date of grant. The shares will vest contingent upon the achievement of a pre-set, three-year Revenue target.

Note ~~14.~~15. Capital Stock

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and March 31, 2022, the Company repurchased less than 0.1 million shares of common stock for ~~$0.5~~$8 million and ~~approximately~~less than 0.6 million shares of common stock for ~~$52~~$51 million, respectively. For the three and six months ended June 30, 2021, the Company repurchased less than 0.1 million shares of common stock for $1 million and approximately 0.7 million shares of common stock for $68 million, respectively 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 stockholders and maintains our focus on growth. There were no shares repurchased under the program for the three months ended ~~June 30, 2022.~~March 31, 2023. For the ~~six~~three months ended ~~June 30,~~March 31, 2022, we repurchased approximately 0.5 million shares for approximately $46 million. There were no shares repurchased under the program for the three months ended June 30, 2021. For the six months ended June 30, 2021, we repurchased 0.6 million shares for approximately $60$45 million. There are up to $182 million in shares that may still be purchased under this plan as of ~~June 30, 2022.~~March 31, 2023.

Aside from the aforementioned repurchase program, we repurchased less than 0.1 million shares and approximately 0.1 million shares for ~~less than $1~~$8 million and ~~approximately~~ $6 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. ~~Likewise, we repurchased less than 0.1 million shares and approximately 0.1 million shares for $1 million and $8 million for the three and six months ended June 30, 2021, respectively.~~

Note ~~15.~~16. Accumulated Other Comprehensive Loss

The following table provides the components of ~~Accumulated other comprehensive loss~~AOCL for the ~~six~~three months ended ~~June 30, 2022:~~March 31, 2023:


(in millions)	(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total		(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total
Balance at January 1, 2022		$	(101)	$	(268)	$	(2)	$	(371)
Balance at January 1, 2023										Balance at January 1, 2023	$	(180)	$	(41)	$	(5)	$	(226)
Foreign currency translation adjustment	Foreign currency translation adjustment	(3)		—		—		(3)		Foreign currency translation adjustment	22		—		—		22
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	(2)		—		—		(2)		Tax on foreign currency translation adjustment	5		—		—		5

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net		—		4		—		4
Amortization of actuarial gain on post-retirement benefit plans into other non-operating income, net										Amortization of actuarial gain on post-retirement benefit plans into other non-operating income, net	—		(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)		Income tax impact on amortization of post-retirement benefit plan items	—		1		—		1
Unrealized loss on derivative hedge agreements		—		—		(6)		(6)
Unrealized gain on derivative hedge agreements										Unrealized gain on derivative hedge agreements	—		—		4		4
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		—		—		2		2

Balance at March 31, 2022		$	(106)	$	(265)	$	(6)	$	(377)
Foreign currency translation adjustment		(41)		—		—		(41)
Tax on foreign currency translation adjustment		(28)		—		—		(28)

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net		—		4		—		4
Income tax impact on amortization of post-retirement benefit plan items		—		(1)		—		(1)

Unrealized gain on derivative hedge agreements		—		—		(9)		(9)
Income tax benefit on unrealized gain on derivative hedge agreements		—		—		1		1
Reclassification of unrealized loss on foreign exchange agreements into revenue	Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		2		2		Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		3		3
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	—		—		2		2

Balance at June 30, 2022		$	(175)	$	(262)	$	(11)	$	(448)

Balance at March 31, 2023										Balance at March 31, 2023	$	(153)	$	(41)	$	3	$	(191)

The following table provides the components of ~~accumulated other comprehensive loss~~AOCL for the ~~six~~three months ended ~~June 30, 2021:~~March 31, 2022:


(in millions)	(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total		(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total
Balance at January 1, 2021		$	(86)	$	(330)	$	3	$	(413)
Balance at January 1, 2022										Balance at January 1, 2022	$	(101)	$	(268)	$	(2)	$	(371)

Foreign currency translation adjustment	Foreign currency translation adjustment	10		—		—		10		Foreign currency translation adjustment	(3)		—		—		(3)
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	(14)		—		—		(14)		Tax on foreign currency translation adjustment	(2)		—		—		(2)

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net		—		5		—		5
Amortization of actuarial loss on post-retirement benefit plans into other non-operating income, net										Amortization of actuarial loss on post-retirement benefit plans into other non-operating income, net	—		4		—		4

Income tax impact on amortization of post-retirement benefit plan items	Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)		Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized loss on derivative hedge agreements	Unrealized loss on derivative hedge agreements	—		—		(11)		(11)		Unrealized loss on derivative hedge agreements	—		—		(6)		(6)
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	Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		1		1		Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		2		2

Balance at June 30, 2021		$	(70)	$	(323)	$	(5)	$	(398)

Balance at March 31, 2022										Balance at March 31, 2022	$	(106)	$	(265)	$	(6)	$	(377)

Note ~~16.~~17. Commitments and Contingencies

Legal Proceedings

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

See Note 4,5, "Income ~~Taxes",~~Taxes," of our condensed consolidated financial statements for a description of a pending tax litigation matter.

Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claims, we do not believe it is reasonably possible that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of operations, or financial condition. We have estimated and accrued $4 million and $5 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022, respectively, for these general legal matters.

Guarantees

We obtain certain stand-by letters of credit, bank guarantees, surety bonds and insurance letters of credit from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the amount of surety bonds, bank guarantees, insurance letters of credit, stand-by letters of credit as well as revenue and customs guarantees was ~~$447~~$426 million and ~~$415~~$451 million, respectively.

Environmental

In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned and/or operated by Xylem or for which we are responsible, 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 $4 million~~and$3 million~~ as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 for environmental matters.

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

Warranties

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


(in millions)	(in millions)	2022		2021		(in millions)	2023		2022
Warranty accrual – January 1	Warranty accrual – January 1	$	57	$	65	Warranty accrual – January 1	$	54	$	57
Net charges for product warranties in the period	Net charges for product warranties in the period	11		17		Net charges for product warranties in the period	6		5
Settlement of warranty claims	Settlement of warranty claims	(12)		(18)		Settlement of warranty claims	(6)		(6)
Foreign currency and other	Foreign currency and other	(2)		(1)		Foreign currency and other	1		—
Warranty accrual - June 30		$	54	$	63
Warranty accrual - March 31						Warranty accrual - March 31	$	55	$	56

Note ~~17.~~18. Segment Information

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

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

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The accounting policies of each segment are the same as those described in the Summary of Significant Accounting Policies section of Note 1 in the ~~2021~~2022 Annual Report. The following table contains financial information for each reportable segment:


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
(in millions)	(in millions)	2022		2021		2022		2021		(in millions)	2023		2022
Revenue:	Revenue:									Revenue:
Water Infrastructure	Water Infrastructure	$	589	$	569	$	1,122	$	1,078	Water Infrastructure	$	589	$	533
Applied Water	Applied Water	429		414		854		807		Applied Water	453		425
Measurement & Control Solutions	Measurement & Control Solutions	346		368		660		722		Measurement & Control Solutions	406		314
Total	Total	$	1,364	$	1,351	$	2,636	$	2,607	Total	$	1,448	$	1,272
Operating Income (Loss):	Operating Income (Loss):									Operating Income (Loss):
Water Infrastructure	Water Infrastructure	$	108	$	93	$	182	$	164	Water Infrastructure	$	70	$	74
Applied Water	Applied Water	61		64		120		130		Applied Water	83		59
Measurement & Control Solutions	Measurement & Control Solutions	(5)		13		(15)		22		Measurement & Control Solutions	20		(10)
Corporate and other	Corporate and other	(18)		(10)		(30)		(23)		Corporate and other	(42)		(12)
Total operating income	Total operating income	$	146	$	160	$	257	$	293	Total operating income	$	131	$	111
Interest expense	Interest expense	$	12	$	21	$	25	$	42	Interest expense	$	9	$	13

Other non-operating income, net	Other non-operating income, net	2		(3)		1		(1)		Other non-operating income, net	4		(1)
Gain from sale of business	Gain from sale of business	—		2		1		2		Gain from sale of business	—		1
Income before taxes	Income before taxes	$	136	$	138	$	234	$	252	Income before taxes	$	126	$	98
Depreciation and Amortization:	Depreciation and Amortization:									Depreciation and Amortization:
Water Infrastructure	Water Infrastructure	$	14	$	13	$	27	$	26	Water Infrastructure	$	14	$	13
Applied Water	Applied Water	5		6		10		12		Applied Water	5		5
Measurement & Control Solutions	Measurement & Control Solutions	34		37		68		73		Measurement & Control Solutions	34		34
Regional selling locations (a)	Regional selling locations (a)	4		4		9		9		Regional selling locations (a)	5		4
Corporate and other	Corporate and other	2		2		4		4		Corporate and other	2		2
Total	Total	$	59	$	62	$	118	$	124	Total	$	60	$	58
Capital Expenditures:	Capital Expenditures:									Capital Expenditures:
Water Infrastructure	Water Infrastructure	$	13	$	13	$	30	$	24	Water Infrastructure	$	14	$	17
Applied Water	Applied Water	5		3		8		7		Applied Water	8		4
Measurement & Control Solutions	Measurement & Control Solutions	21		20		43		41		Measurement & Control Solutions	18		21
Regional selling locations (b)	Regional selling locations (b)	5		5		10		8		Regional selling locations (b)	6		5
Corporate and other	Corporate and other	2		—		4		—		Corporate and other	3		2
Total	Total	$	46	$	41	$	95	$	80	Total	$	49	$	49

(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.

Note 19. Subsequent Events

On April 26, 2023 the Company closed the minority investment contemplated by the previously disclosed agreement with Global Omnium Idrica, S.L. ("Idrica,") a leader in water data management and analytics, and entered into an agreement to distribute Idrica’s GoAigua technology globally. The investment was funded with cash on hand for approximately €100 million (approximately $110 million).


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

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

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

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by impacts from the war between Russia and Ukraine, as well as the ongoing coronavirus (“COVID-19”) pandemic and related macroeconomic conditions (including inflation). Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector spending, inflation, interest rates and related monetary policy by governments in response to inflation, and the strength of the residential and commercial real estate markets, on economic activity and our operations; geopolitical events, including the war between Russia and Ukraine, and regulatory, economic and other risks associated with our global sales and operations, including with respect to domestic content requirements applicable to projects with governmental funding; ~~continued uncertainty around~~ the ~~ongoing~~global impact of the COVID-19 ~~pandemic’s magnitude, duration~~pandemic on the macroeconomy and ~~impacts on~~ our business, operations, growth, and financial condition; actual or potential other epidemics, pandemics or global health crises; availability, shortage or delays in receiving electronic components (in particular, semiconductors), parts and raw materials from our supply chain; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, energy supply, supply chain shortages, logistics challenges, tight labor markets, prevailing price changes, tariffs and other factors; demand for our ~~products;~~products, disruption, competition or pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; our ability to retain and attract senior management and other diverse and key talent, as well as competition for overall talent and labor; difficulty predicting our financial results; defects, security, warranty and liability claims, and recalls with respect to products; availability, regulation or interference with radio spectrum used by certain of our products; uncertainty related to restructuring and realignment actions and related ~~charges~~costs and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; volatility in served markets or impacts on our business and operations due to weather conditions, including the effects of climate change; fluctuations in foreign currency exchange rates; our ability to borrow or refinance our existing indebtedness, and uncertainty around the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, our products, competition, and the environment and climate change; changes in our effective tax rates or tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 ("~~2021~~2022 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).

Additionally, risks and uncertainties relating to our plans to acquire Evoqua could cause our actual results to differ, perhaps materially, from those indicated by these forward-looking statements, including: the risk that the conditions to the closing of the transaction are not satisfied, including the risk that required approvals of the transaction from the shareholders of Xylem, stockholders of Evoqua or from regulators are not obtained; litigation relating to the transaction; uncertainties as to the timing of the consummation of the transaction and the ability of each party to consummate the transaction; risks that the proposed transaction disrupts the current plans or operations of Xylem or Evoqua; the ability of Xylem and Evoqua to retain and hire key personnel; competitive responses to the proposed transaction; the need to incur additional or unexpected costs, charges or expenses related to the transaction or integration of the combined companies; potential adverse reactions or changes to relationships with customers, suppliers, distributors and other business partners resulting from the announcement

or completion of the transaction; impacts to our share price and dilution of shareholders' ownership; the combined company’s ability to achieve the synergies expected from the transaction, as well as delays, challenges and expenses associated with integrating the combined company’s existing businesses.

Forward-looking and other statements in this Report regarding our environmental and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or are required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking social, environmental and ~~sustainability related~~sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. All forward-looking statements made herein are based on information currently available to us as of the date of this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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 of scarcity, resilience, and affordability 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~~capabilities 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~~and outdoor water ~~and coastal~~ environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners, as well as direct sales depending on the regional availability of distribution channels and the type of product.

~~COVID-19 Pandemic Update and Related Macroeconomic Impacts~~

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

Our markets and operations have largely demonstrated resilience against the effects of the pandemic. However, we have experienced, and may continue to experience, shortages in the supply of components, including electronics, particularly semiconductors ("chips"), parts and raw materials. For example, China has adopted and continues to rely upon a “zero-COVID” policy pursuant to which it has declared a number of total and partial lockdowns in cities throughout China that has, and may continue to adversely affect the global supply chain. As a result of these measures, our production facilities located in China have experienced, and may continue to experience in the future, reduced production levels.

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~~To counteract the ongoing impacts on our supply chain, we are taking various actions, including building inventory to support backlog execution, qualifying alternative supply chains~~Evoqua Acquisition

On January 22, 2023, Xylem entered into a definitive agreement under which Xylem will acquire Evoqua, a leader in mission-critical water treatment solutions and ~~redesigning our products. We expect chip supply to modestly improve in each successive quarter in 2022.~~

~~We have also experienced, and continue to experience, increased inflation, freight and logistics costs, and are engaging in various mitigation strategies, including enhanced price realization efforts.~~

~~We continue to assess the evolving nature of the pandemic and related macroeconomic impacts on our business, employees, supply chain, customers and communities, and take appropriate actions~~services, in an ~~effort~~all-stock transaction that reflects an implied enterprise value of approximately $7.5 billion. The transaction, which is anticipated to ~~mitigate adverse consequences.~~close in mid-2023, is subject to approval by shareholders of Xylem and stockholders of Evoqua, the receipt of required regulatory approvals and other customary closing conditions.

~~Risk related~~Evoqua, a leader in North America water treatment, complements Xylem’s distinctive portfolio of solutions with advanced water and wastewater treatment capabilities, a powerful and extensive network of service professionals and access to ~~the pandemic, supply chain and macroeconomic issues, including inflation, are described in further detail under "Item 1A. Risk Factors" in the Company's 2021 Annual Report.~~a number of attractive industrial markets with resilient, recurring revenue streams.

Executive Summary

Xylem reported revenue for the ~~second~~first quarter of ~~2022~~2023 of ~~$1,364~~$1,448 million, an increase of ~~1.0%~~13.8% compared to ~~$1,351~~$1,272 million reported in the ~~second~~first quarter of ~~2021.~~2022. On a constant currency basis, revenue increased by ~~$73~~$221 million, or ~~5.4%~~17.4%, driven by strong organic revenue growth across all three segments and in the Applied Water and Water Infrastructure segments, partially offset by organic declines in Measurement & Control Solutions. These results were driven by organic growth in the industrial, residential and utilities end markets, partially offset by organic declines in commercial.all of our major geographic regions.

We generated operating income of ~~$146~~$131 million (margin of ~~10.7%~~9.0%) during the ~~second~~first quarter of ~~2022,~~2023, as compared to ~~$160~~$111 million (margin of ~~11.8%~~8.7%) in ~~2021.~~2022. Operating income in the ~~second~~first quarter of ~~2022~~2023 included an increase in special charges of $24 million and an unfavorable impact from increased restructuring and realignment costs of $2$7 million as compared to the ~~second~~first quarter of ~~2021, as well as an increase in special charges of $1 million.~~2022. Excluding the impact of ~~these items,~~special charges and restructuring and realignment costs, adjusted operating income was ~~$155~~$167 million (adjusted margin of ~~11.4%~~11.5%) during the ~~second~~first quarter of ~~2022~~2023 as compared to ~~$166~~$116 million (adjusted margin of ~~12.3%~~9.1%) in ~~2021.~~2022. The ~~decrease~~increase in adjusted operating margin was primarily due to ~~cost~~price realization, productivity savings and favorable volume. These impacts were partially offset by inflation, unfavorable mix, increased employee related costs, increased spending on strategic investments and ~~some unfavorable mix. These impacts were partially offset by strong price realization and productivity savings.~~increased inventory management costs.

Additional financial highlights for the quarter ended ~~June 30, 2022~~March 31, 2023 include the following:

•Orders of ~~$1,684~~$1,570 million, ~~up 1.4%~~down 8.5% from ~~$1,660~~$1,715 million in the prior year period, and ~~up 5.8%~~down 5.4% on an organic basis.

•Earnings per share of ~~$0.62, flat~~$0.54, up 20% compared to prior year ($~~0.66, flat~~0.72, up 53% versus prior year, on an adjusted basis).

•Net income as a percent of revenue of ~~8.2%~~6.8%, ~~down 20~~up 40 basis points compared to ~~8.4%~~6.4% in the prior year. EBITDA margin of ~~15.1%~~13.0%, down ~~110~~10 basis points when compared to ~~16.2%~~13.1% in the prior year ~~(16.6%~~(16.3% on an adjusted basis, ~~down 70~~up 210 basis points)

•Net cash flow used in operating activities of ~~$32~~$19 million for the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, a decrease of ~~$174~~$62 million during the same period of the prior year. Negative free cash flow of ~~$63~~$35 million, ~~down $189~~an improvement of $95 million from the prior year.

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Key Performance Indicators and Non-GAAP Measures

Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, free cash flow, 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 non-GAAP measures to be key performance indicators, as well as the related reconciling items to the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures may not be comparable to similarly-titled measures reported by other companies.

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

•"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This approach is used for countries whose functional currency is not the U.S. ~~Dollar.~~dollar.

•"adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share, respectively, adjusted to exclude restructuring and realignment costs, special charges, gain or loss from sale of businesses and tax-related special items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below.
Three Months Ended Six Months Ended
June 30, June 30,
(In millions, except for per share data) 2022 2021 2022 2021
Net income & Earnings per share $ 112 $ 0.62 $ 113 $ 0.62 $ 194 $ 1.07 $ 200 $ 1.10
Restructuring and realignment, net of tax of $2 and $3 for 2022 and $1 and $3 for 2021 6 0.03 5 0.03 9 0.06 11 0.06
Special charges, net of tax of $0 and $1 for 2022 and $1 and $1 for 2021 3 0.02 2 0.01 4 0.02 5 0.03
Tax-related special items (1) (0.01) 1 0.01 (2) (0.01) 7 0.04
Gain from sale of business, net of tax of $0 for 2022 — — (2) (0.01) (1) (0.01) (2) —
Adjusted net income & Adjusted earnings per share $ 120 $ 0.66 $ 119 $ 0.66 $ 204 $ 1.13 $ 221 $ 1.23


	Three Months Ended
	March 31,
(in millions, except for per share data)	2023					2022
Net income & Earnings per share	$	99		$	0.54	$	82	$	0.45
Restructuring and realignment	11			0.06		4		0.02
Special charges	25		(a)	0.15		2		0.01
Tax-related special items	—			—		(1)		—
(Gain) loss from sale of business	—			—		(1)		—
Tax effects of adjustments (b)	(5)			(0.03)		(2)		(0.01)
Adjusted net income & Adjusted earnings per share	$	130		$	0.72	$	84	$	0.47


(a) The special charges in the quarter primarily relate to acquisition and integration costs related to the pending acquisition of Evoqua.
(b) The tax effects of adjustments are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction.

•"adjusted operating expenses" and "adjusted gross profit" defined as operating expenses and gross profit, respectively, 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.

•“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 costs related to the UKU.K. pension plan buy-out.

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

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


		Six Months Ended					Three Months Ended
		June 30,					March 31,
(In millions)		2022		2021
Net cash provided by operating activities		$	32	$	206
(in millions)						(in millions)	2023		2022
Net cash used by operating activities						Net cash used by operating activities	$	(19)	$	(81)
Capital expenditures	Capital expenditures	(95)		(80)		Capital expenditures	(49)		(49)
Cash paid in excess of tax provision for R&D law change adoption						Cash paid in excess of tax provision for R&D law change adoption	33		—
Free cash flow	Free cash flow	$	(63)	$	126	Free cash flow	$	(35)	$	(130)
Net cash used in investing activities	Net cash used in investing activities	$	(84)	$	(69)	Net cash used in investing activities	$	(37)	$	(43)
Net cash used in financing activities		$	(158)	$	(162)
Net cash provided (used) by financing activities						Net cash provided (used) by financing activities	$	(63)	$	(106)

3532

~~2022~~2023 Outlook

We are updating our total revenue growth ~~to be in the range of 3% to 5% in 2022, with~~and organic revenue growth ~~anticipated~~ to be in the range of 8% to ~~10%.~~9% in 2023. The following is a summary of our organic revenue performance and the organic revenue outlook by end ~~markets:~~

market.

•Utilities revenue was flat through the first half of the year on an organic basis driven by strength in western Europe and tempered growth in North America offset by weakness in the emerging markets. For 2022, we expect organic revenue growth in the mid-single-digit range, as utilities remain focused on mission-critical applications in wastewater and operational activity and demand continues to be healthy and resilient. We expect uneven growth from China and India as multi-year government funding programs are deployed. On the clean water side, the timing of large project deployments has been impacted by the global shortage of electronic components. We anticipate that with modest easing of chip shortages, these deployments will ramp up based on our strong backlog position and orders momentum. Additionally, we can expect continued momentum in the global test and treatment markets and rising demand, and focus on pipeline assessment services.

•~~Industrial revenue~~ increased by approximately ~~11% through~~23% in the first ~~half of the year~~quarter on an organic basis driven by strength across all major geographic regions. For ~~2022,~~the remainder of 2023, we now expect organic revenue growth in the ~~high-single-digit to low-double-digit range based on steady global demand. We~~low teens. On the clean water side, we continue to expect improvements in chip supply throughout 2023 allowing for large deal deployments already secured in our backlog. Additionally, we can expect continued momentum for water quality products and increased demand for pipeline assessment services due to aging infrastructure and climate challenges. We expect wastewater utilities to remain focused on mission-critical applications in wastewater. Long-term capital expenditure outlook is strong due to aging infrastructure and the emerging markets’ continued advancement.

•Industrial revenue increased by approximately 13% in the first quarter on an organic basis driven by strength across all major geographic regions. For 2023, we now expect organic revenue growth in the mid-single-digits. We expect to see ~~robust~~continued strong growth in our dewatering business, ~~especially in the emerging markets. In the U.S.~~driven by healthy mining demand and ~~western Europe, we~~strategic growth investments. We expect ~~sustained~~ demand in light industrial ~~activity reflecting our strong orders~~to remain resilient in the emerging markets and ~~backlog, and considerable traction from new product introductions and large account activity~~to moderate in ~~western Europe.~~developed markets.

•In the commercial markets, organic revenue ~~for the first half of the year~~ increased by approximately 4%16% in the first quarter on an organic basis driven by ~~western Europe and~~strength in the U.S. and western Europe. For ~~2022,~~the remainder of 2023, we now expect organic revenue growth in the ~~mid-single to high-single digit range.~~mid-single-digits. We expect ~~solid~~sustained demand across replacement ~~business~~products and energy efficient related projects, partially offset by moderation in new ~~product introductions in the U.S. and Europe. We also expect modest share gains, with demand for eco-friendly products supported by increase in funding for green buildings in Europe.~~construction, a smaller portion of our portfolio.

•In the residential markets, organic revenue ~~increased~~decreased by approximately ~~14% through~~2% in the first ~~half of the year~~quarter on an organic basis predominately driven by ~~strength in the U.S. growth and western Europe, marginally offset by weakness~~project timing in the emerging markets. This market is primarily driven by solid replacement revenue serviced through our distribution network. For ~~2022,~~2023, we continue to expect ~~double-digit~~a low-single-digit organic revenue ~~growth. We anticipate activity~~decline due to ~~remain healthy from increased residential users~~normalizing demand in the U.S. ~~and western Europe.~~, partially offset by continued resilience in the emerging markets.

We will continue to strategically execute restructuring and realignment actions in an effort to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. During ~~2022,~~2023, we expect to incur approximately ~~$20~~$25 million and ~~$25~~$35 million in restructuring and realignment costs.

3633

Results of Operations


		Three Months Ended								Six Months Ended									Three Months Ended
		June 30,								June 30,									March 31,
(In millions)		2022			2021			Change		2022			2021			Change
(in millions)																		(in millions)	2023			2022			Change
Revenue	Revenue	$	1,364		$	1,351		1.0	%	$	2,636		$	2,607		1.1	%	Revenue	$	1,448		$	1,272		13.8	%
Gross profit	Gross profit	520			520			—	%	987			1,010			(2.3)	%	Gross profit	546			467			16.9	%
Gross margin	Gross margin	38.1		%	38.5		%	(40)	bp	37.4		%	38.7		%	(130)	bp	Gross margin	37.7		%	36.7		%	100	bp

Total operating expenses	Total operating expenses	374			360			3.9	%	730			717			1.8	%	Total operating expenses	415			356			16.6	%
Expense to revenue ratio	Expense to revenue ratio	27.4		%	26.6		%	80	bp	27.7		%	27.5		%	20	bp	Expense to revenue ratio	28.7		%	28.0		%	70	bp
Restructuring and realignment costs	Restructuring and realignment costs	8			6			33.3	%	12			14			(14.3)	%	Restructuring and realignment costs	11			4			175.0	%

Special charges	Special charges	1			—			NM	%	2			2			—	%	Special charges	25			1			2,400.0	%
Adjusted operating expenses	Adjusted operating expenses	365			354			3.1	%	716			701			2.1	%	Adjusted operating expenses	379			351			8.0	%
Adjusted operating expenses to revenue ratio	Adjusted operating expenses to revenue ratio	26.8		%	26.2		%	60	bp	27.2		%	26.9		%	30	bp	Adjusted operating expenses to revenue ratio	26.2		%	27.6		%	(140)	bp
Operating income	Operating income	146			160			(8.8)	%	257			293			(12.3)	%	Operating income	131			111			18.0	%
Operating margin	Operating margin	10.7		%	11.8		%	(110)	bp	9.7		%	11.2		%	(150)	bp	Operating margin	9.0		%	8.7		%	30	bp

Interest and other non-operating expense, net	Interest and other non-operating expense, net	10			24			(58.3)	%	24			43			(44.2)	%	Interest and other non-operating expense, net	5			14			(64.3)	%
Gain from sale of business	Gain from sale of business	—			2			—		1			2			(50.0)		Gain from sale of business	—			1			(100.0)	%
Income tax expense	Income tax expense	24			25			(4.0)	%	40			52			(23.1)	%	Income tax expense	27			16			68.8	%
Tax rate	Tax rate	17.5		%	18.5		%	(100)	bp	17.0		%	20.7		%	(370)	bp	Tax rate	21.7		%	16.4		%	530	bp
Net income	Net income	$	112		$	113		(0.9)	%	$	194		$	200		(3.0)	%	Net income	$	99		$	82		20.7	%

NM - Not meaningful change

Revenue

Revenue generated during the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 was ~~$1,364 million and $2,636~~$1,448 million, reflecting ~~increases~~an increase of ~~$13~~$176 million, or ~~1.0%~~13.8%, ~~and $29 million, or 1.1%, respectively,~~ compared to the same prior year ~~periods.~~period. On a constant currency basis, revenue grew ~~5.4% and 4.7%~~17.4% for the three ~~and six~~ months ended ~~June 30, 2022.~~March 31, 2023. The ~~increases~~increase on a constant currency basis ~~were~~was driven by organic revenue growth of ~~$76~~$221 million, ~~and $127 million respectively,~~ reflecting strong organic growth across all three segments and in western Europe and the U.S. for both periods, as the emerging markets were flat for the quarter and a decline for the year-to-date, with the COVID lockdowns mandated by the government in China offsetting organic growth in other partsall of ~~the region.~~our major geographic regions.

The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to revenue during the three ~~and six~~ months ended ~~June 30, 2022:~~
Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2021 Revenue $ 569 $ 414 $ 368 $ 1,351
Organic Growth 54 9.5 % 30 7.2 % (8) (2.2) % 76 5.6 %
Divestitures — — % — — % (3) (0.8) % (3) (0.2) %
Constant Currency 54 9.5 % 30 7.2 % (11) (3.0) % 73 5.4 %
Foreign currency translation (a) (34) (6.0) % (15) (3.6) % (11) (3.0) % (60) (4.4) %
Total change in revenue 20 3.5 % 15 3.6 % (22) (6.0) % 13 1.0 %
2022 Revenue $ 589 $ 429 $ 346 $ 1,364
March 31, 2023:


	Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2022 Revenue	$	533			$	425			$	314			$	1,272
Organic Growth	81		15.2	%	41		9.6	%	99		31.5	%	221		17.4	%
Divestitures	—		—	%	—		—	%	—		—	%	—		—	%
Constant Currency	81		15.2	%	41		9.6	%	99		31.5	%	221		17.4	%
Foreign currency translation (a)	(25)		(4.7)	%	(13)		(3.1)	%	(7)		(2.2)	%	(45)		(3.5)	%
Total change in revenue	56		10.5	%	28		6.6	%	92		29.3	%	176		13.8	%
2023 Revenue	$	589			$	453			$	406			$	1,448

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

3734

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2021 Revenue $ 1,078 $ 807 $ 722 $ 2,607
Organic Growth 97 9.0 % 70 8.7 % (40) (5.5) % 127 4.9 %
Divestitures — — % — — % (5) (0.7) % (5) (0.2) %
Constant Currency 97 9.0 % 70 8.7 % (45) (6.2) % 122 4.7 %
Foreign currency translation (a) (53) (4.9) % (23) (2.9) % (17) (2.4) % (93) (3.6) %
Total change in revenue 44 4.1 % 47 5.8 % (62) (8.6) % 29 1.1 %
2022 Revenue $ 1,122 $ 854 $ 660 $ 2,636

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

Water Infrastructure

Water Infrastructure revenue increased ~~$20~~$56 million, or ~~3.5%~~10.5%, for the ~~second~~first quarter of ~~2022 (9.5%~~2023 (15.2% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by ~~$34~~$25 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of ~~$54~~$81 million. Organic growth for the quarter was driven by strength in both the ~~industrial~~utility and ~~utility end markets. The~~ industrial end market had organic growth across all major geographic regions, with particular strength in western Europe where we benefited from price realization and strong backlog execution, as well as strong dewatering demand in the emerging markets. The utilities end market ~~also~~ experienced organic growth of $46 million led by strength in the U.S. driven by strong price realization, solid backlog coming into the year and ~~order intake execution, as well as~~higher demand in our rental business. Western Europe also experienced strong organic growth due to robust demand in utilities' capital spending coupled with good price ~~realization,~~realization. The industrial end market had $35 million of organic growth across all major geographic regions, particularly in the emerging markets, driven by projects in both Latin America and Africa, and in western Europe ~~where we saw strong demand in utilities' capital spending. Strength in~~and the ~~utilities end market was partially offset by weakness in the emerging markets, mostly~~U.S. due to ~~the negative impact of continued COVID lockdowns in China early on in the quarter.~~good price realization.

From an application perspective, organic revenue growth ~~for the second quarter~~ was ~~primarily~~almost entirely driven byfrom our transport ~~applications reflecting strong~~applications. Transport experienced $79 million of revenue growth, across all three of our major ~~geographies, with particular strength~~geographic regions, particularly in the U.S., where we ~~executed on a~~experienced strong ~~backlog, experienced solid~~ price realization, had solid backlog coming into the year and ~~healthy order intake, and in western Europe from solid price realization and increased demand in utility capital projects. We also~~ experienced ~~solid growth in emerging markets where Africa and Latin America benefited from robust mining and~~higher rental demand in our dewatering business. Western Europe also experienced strong price realization along with demand from utility capital projects. Transport also grew in emerging markets, driven by projects in our dewatering business, particularity in Latin America and Africa. Organic revenue for the treatment application was ~~also up modestly~~$2 million for the quarter, driven by healthy market conditions and solid backlog execution in western Europe and the U.S., partially offset by the negative impact in China as a result of the COVID lockdowns early in the quarter.

~~For the six months ended June 30, 2022,~~Applied Water

Applied Water revenue increased ~~$44~~$28 million, or ~~4.1% (9.0%~~6.6%, for the first quarter of 2023 (9.6% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by ~~$53~~$13 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of ~~$97~~$41 million. Organic growth ~~for the period~~ was driven by strength in ~~both~~ the ~~industrial~~commercial and ~~utility end markets. The~~ industrial end ~~market had organic~~markets/applications, whereas the residential end market/application was down slightly versus the comparable period. Organic revenue growth ~~across all major geographies, with particular strength~~ in ~~western Europe, Latin America and~~ the ~~U.S. The utilities end market also experienced organic growth~~first quarter was led by strength in commercial building services of $26 million, particularly in the U.S. ~~and western Europe, bolstered by~~where we benefited from strong price realization ~~solid~~and backlog execution, ~~and timing of projects as compared to prior year; which was partially offset by weakness in the emerging markets, primarily due to the negative impact of continued COVID lockdowns in China.~~

From an application perspective, organic revenue growth during the six-month period was driven almost entirely by our transport applications. Transport experienced strong revenue growth the U.S., where we executed on a strong backlog and experienced solid price realization, and in western Europe, ~~from solid~~driven by strong price realization. Industrial water had strong organic growth in the quarter of $16 million, across all three of our major geographic regions, driven primarily by western Europe due to good price realization and ~~strong utility project backlog execution.~~healthy demand. The U.S. benefited from good price realization and the emerging markets ~~had strong growth in dewatering from mining~~saw healthy demand ~~in Latin America and Africa, which was partially offset by declines in China due to COVID lockdowns. Organic revenue~~ for the ~~treatment application~~quarter. Residential building services was ~~also up modestly~~down $1 million organically for the period, as revenue growth from project deliveries and strong backlog execution in western Europe and the U.S. more than offset the negative impact in China as a result of the continued COVID lockdowns.quarter.

Measurement & Control Solutions

~~Applied Water~~

~~Applied Water~~Measurement & Control Solutions revenue increased ~~$15~~$92 million, or ~~3.6%~~29.3%, for the ~~second~~first quarter of ~~2022 (7.2%~~2023 (31.5% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by ~~$15~~$7 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of ~~$30~~$99 million, ~~driven by strength in the industrial and residential end markets, partially offset by modest declines in the commercial end market. Organic~~or 31.5%. The segment experienced organic revenue growth ~~in the second quarter was led by strength in the industrial water application in the U.S. where we benefited from price realization and strong backlog execution,~~across all three major geographic regions and in ~~western Europe where we benefited from investments that drove strong growth in manufacturing output. Residential building services also grew organically during~~both of the ~~quarter, primarily from price realization and strong backlog execution in the U.S., partially offset by declines in China impacted by COVID related project delays. Organic growth~~segment's end markets for the quarter, ~~was partially offset~~driven by the declines in the commercial building services application in the U.S., impacted by supply constraints more than offsetting the growth in western Europe due to healthy order intake and stocking by distributors.

~~For the six months ended June 30, 2022, revenue increased $47 million, or 5.8% (8.7% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $23~~$91 million of ~~foreign currency translation during the six month period, with the change at constant currency coming entirely from~~ organic growth of $70 million. Organic growth during the period was driven by strength in every end market and across all major geographic regions, with particular strength in the U.S. and western Europe. Organic revenue growth during the six month period was led by strength in the industrial water application in the U.S. where we benefited from price realization and strong backlog execution, and in western Europe, driven by healthy order intake. The residential building services application also grew organically during the period, primarily in the U.S. driven by price realization and strong backlog execution. Commercial building services also grew organically during the period, particularly in western Europe due to distributors maintaining higher stock levels, and in the U.S. where we benefited from price realization and strong backlog execution.

~~Measurement & Control Solutions~~

Measurement & Control Solutions revenue decreased $22 million, or 6.0%, for the second quarter of 2022 (3.0% decrease on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $11 million of foreign currency translation, with the change at constant currency coming from an organic decline of $8 million and reduced revenue related to divestiture impacts of $3 million. Organic weakness in the quarter was driven by declines in the utility end ~~markets~~market, primarily in the U.S., due to strong backlog execution, enabled by recovery on prior year component constraints and ~~western Europe while the emerging markets remained relatively flat as compared to the prior year.~~strong price realization. The industrial end market ~~experienced modest growth.~~saw $8 million organic revenue growth driven by backlog execution in our test business.

From an application perspective, organic revenue ~~decline~~growth during the quarter was driven by ~~declines~~both the water and energy applications. The water application had strong organic growth of $76 million, driven by strength in the U.S. due to lapping of prior year component constraints, strong price realization, and strength in our test and pipeline assessment services businesses. Better component availability and higher demand in western Europe also contributed to the growth. The energy applications experienced growth of $23 million, driven by our metrology business in the U.S. as ~~a result~~well as lapping of ~~continued~~prior year electronic component ~~shortages affecting our smart metering business. The water applications had modest growth in the emerging markets where we executed on strong backlog.~~

For the six months ended June 30, 2022, revenue decreased $62 million, or 8.6% (6.2% decrease on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $17 million of foreign currency translation, with the change at constant currency coming from an organic decline of $40 million and reduced revenue related to divestiture impacts of $5 million. Organic weakness in the period was driven by declines in the utility end market across all major geographic regions, primarily driven by electronic component shortages which more than offset modest growth in the industrial end market.

From an application perspective, organic revenue declined during the six-month period driven by weakness in both the energy and water applications, primarily in the U.S. as a result of continued electronic component shortages affecting our smart metering business. Declines in the water applications were slightly offset by modest growth in the emerging markets from strong backlog execution in our test business.shortages.

3935

Orders / Backlog

An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the ~~second~~first quarter of ~~2022~~2023 were ~~$1,684~~$1,570 million, ~~an increase~~a decrease of ~~$24~~$145 million, or ~~1.4%~~8.5%, over the prior year ~~(5.5% increase on a constant currency basis). Orders received during the six months ended June 30, 2022 were $3,399 million, an increase of $201 million, or 6.3%, over the prior year (9.6% increase~~(5.4% decrease on a constant currency basis). Order intake was negatively impacted by ~~$67 million and $107~~$53 million of foreign currency ~~translation~~translation. The decrease on a constant currency basis for the ~~three and six months ended June 30, 2022, respectively.~~quarter primarily consisted of organic order declines of $92 million, or 5.4%, as compared to the prior year.

The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three ~~and six~~ months ended ~~June 30, 2022:~~March 31, 2023:


		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
2021 Orders		$	639			$	486			$	535			$	1,660
Organic Growth		134		21.0	%	9		1.9	%	(47)		(8.8)	%	96		5.8	%
Divestitures		—		—	%	—		—	%	(5)		(0.9)	%	(5)		(0.3)	%
2022 Orders																		2022 Orders	$	660			$	505			$	550			$	1,715
Organic Impact																		Organic Impact	8		1.2	%	(4)		(0.8)	%	(96)		(17.5)	%	(92)		(5.4)	%
Acquisitions/(Divestitures)																		Acquisitions/(Divestitures)	—		—	%	—		—	%	—		—	%	—		—	%
Constant Currency	Constant Currency	134		21.0	%	9		1.9	%	(52)		(9.7)	%	91		5.5	%	Constant Currency	8		1.2	%	(4)		(0.8)	%	(96)		(17.5)	%	(92)		(5.4)	%
Foreign currency translation (a)	Foreign currency translation (a)	(42)		(6.6)	%	(15)		(3.1)	%	(10)		(1.9)	%	(67)		(4.0)	%	Foreign currency translation (a)	(29)		(4.4)	%	(18)		(3.6)	%	(6)		(1.1)	%	(53)		(3.1)	%
Total change in orders	Total change in orders	92		14.4	%	(6)		(1.2)	%	(62)		(11.6)	%	24		1.4	%	Total change in orders	(21)		(3.2)	%	(22)		(4.4)	%	(102)		(18.5)	%	(145)		(8.5)	%
2022 Orders		$	731			$	480			$	473			$	1,684
2023 Orders																		2023 Orders	$	639			$	483			$	448			$	1,570

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

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2021 Orders $ 1,250 $ 963 $ 985 $ 3,198
Organic Growth 207 16.6 % 47 4.9 % 65 6.6 % 319 10.0 %
Divestitures — — % — — % (11) (1.1) % (11) (0.4) %
Constant Currency 207 16.6 % 47 4.9 % 54 5.5 % 308 9.6 %
Foreign currency translation (a) (66) (5.3) % (25) (2.6) % (16) (1.6) % (107) (3.3) %
Total change in orders 141 11.3 % 22 2.3 % 38 3.9 % 201 6.3 %
2022 Orders $ 1,391 $ 985 $ 1,023 $ 3,399

Water Infrastructure

Water Infrastructure segment orders ~~increased $92~~decreased $21 million, or ~~14.4%~~3.2%, to ~~$731~~$639 million ~~(21.0%~~(1.2% increase on a constant currency basis) for the ~~second~~first quarter of ~~2022~~2023 as compared to the prior year. Order ~~growth~~intake for the quarter was negatively impacted by $42 million of foreign currency translation. The order increase on a constant currency basis in the quarter was driven by organic order growth in our transport applications across all major geographic regions, primarily in the U.S., where we benefited from strong market demand and large infrastructure projects. Transport also had organic order growth in western Europe, where we saw healthy demand and capital spending from utility customers and in emerging markets, primarily from continued mining demand in Africa. For the treatment application, organic orders declined in the quarter, primarily due to in weakness in the emerging markets from the impact of COVID lockdowns in China.

For the six months ended June 30, 2022, orders increased $141 million, or 11.3%, to $1,391 million (16.6% on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by $66$29 million of foreign currency translation. Organic orders increased during the ~~period as strength~~quarter primarily in the transport applications, ~~came primarily from the U.S. where we benefited from~~driven by strong ~~market demand, large infrastructure projects and mining demand for the dewatering business. There was also order growth from water utility customers in western Europe~~project orders and dewatering ~~demand~~strength in the emerging markets, ~~coming from Africa~~ and ~~Latin America,~~in the U.S., partially offset by reduced order ~~declines~~intake in ~~India where there was a large project order in the prior year, and China impacted by the COVID lockdowns.~~western Europe. The treatment application saw a slight decrease in orders ~~due to the prolonged COVID lockdowns in China, which more than offset project order wins in~~driven by western Europe where we had project orders in the ~~period.~~prior year which did not recur and order declines in Russia.

Applied Water

Applied Water segment orders decreased $6$22 million, or ~~1.2%~~4.4%, to ~~$480~~$483 million ~~(1.9% increase~~(0.8% decrease on a constant currency basis) for the ~~second~~first quarter of ~~2022~~2023 as compared to the prior year. Order ~~growth~~intake for the quarter was negatively impacted by ~~$15~~$18 million of foreign currency translation. ~~The order increase on a constant currency basis was driven~~Weakness in the U.S. from lapping strong demand in the prior year, partially offset by strength ~~across all major geographic regions, primarily~~in the emerging markets ~~where we saw~~as a result of strong project ~~orders in Africa and distributor order strength in India.~~

For the six months ended June 30, 2022, orders increased $22 million, or 2.3%, to $985 million (4.9% increase on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by $25 million of foreign currency translation. The order increase on a constant currency basis was driven by strength across all major geographic regions. This reflects demand and timing of orders to address longer lead times in the U.S and western Europe, and strong project orders in the emerging markets.orders.

Measurement & Control Solutions

Measurement & Control Solutions segment orders decreased ~~$62~~$102 million, or ~~11.6%~~18.5%, to ~~$473~~$448 million ~~(9.7%~~(17.5% decrease on a constant currency basis) for the ~~second~~first quarter of ~~2022~~2023 as compared to the prior year. Order weakness for the quarter was negatively impacted by ~~$10~~$6 million of foreign currency ~~translation and reduced orders related to divestiture impacts of $5 million.~~translation. The ~~order decrease on a constant currency basis consisted primarily of~~ organic order declines of ~~$47~~$96 million ~~or (8.8)%. Organic orders~~in the current quarter are lapping strong organic order growth of 25% in the prior year. The order weakness for the quarter ~~decreased in water applications, primarily~~was driven by ~~moderation of~~ the ~~early increased demand and advanced ordering~~energy applications due to ~~address electronic component shortages that we benefited from~~strong orders in the prior year ~~and lapping of large prior year orders for metrology projects in the U.S. and western Europe. This decline was partially offset by strength in the energy applications driven by continued orders~~ to mitigate electronic component shortages and longer lead times.

~~For the six months ended June 30, 2022,~~ The water application also experienced reduced order intake driven by lapping of large project orders ~~increased $38 million or 3.9%, to $1,023 million (5.5% increase on a constant currency basis) as compared to~~in the prior year. Order growth for the period was negatively impacted by $16 million of foreign currency translation and reduced orders related to divestiture impacts of $11 million. The order increase on a constant currency basis consisted primarily of organic order growth of $65 million, or 6.6%. Organic orders for the period increased in the energy application, primarily driven by demand and continued advanced ordering to address electronic component shortages. This increase was offset by weakness in the water application driven by the moderation of early orders to mitigate electronic component shortages and longer lead times that drove order growth in the prior year, as well as modest order growth in our test application.

Backlog

Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays occur from time to time. Total backlog was ~~$3,757~~$3,743 million at ~~June 30, 2022,~~March 31, 2023, an increase of ~~$978~~$191 million or ~~35.2%~~5.4%, as compared to ~~June 30, 2021~~March 31, 2022 backlog of ~~$2,779~~$3,552 million, and an increase of ~~$517~~$138 million or ~~16.0%~~3.8%, as compared to December 31, ~~2021~~2022 backlog of ~~$3,240~~$3,605 million, driven by the ~~significant increase in orders~~order intake in the ~~year.~~quarter outpacing revenue. We anticipate that approximately ~~40%~~50% of the backlog at ~~June 30, 2022~~March 31, 2023 will be recognized as revenue in the remainder of ~~2022.~~2023. There were no significant order cancellations during the quarter.

Gross Margin

Gross margin as a percentage of revenue ~~decreased 40 and 130~~increased 100 basis points to ~~38.1% and 37.4%~~37.7% for the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, as compared to ~~38.5% and 38.7%~~36.7% for the comparative ~~2021~~2022 period. The gross margin ~~decrease~~increase for the quarter ~~was primarily~~included favorable impacts of 880 basis points, driven by ~~cost~~490 basis points of price realization, 240 basis points of productivity savings and 150 basis points of favorable volume. Favorable impacts in the quarter were partially offset by 780 basis points of negative impacts, driven by 410 basis points of inflation, ~~as well as~~150 basis points of unfavorable mix, 60 basis points of inventory management costs and 50 basis points of increased spending on strategic investments and unfavorable mix. These impacts were partially offset by price realization, productivity savings and net favorable impacts from exchange rate movements. The gross margin decrease for the six month period was primarily driven by cost inflation, as well as increased spending on strategic investments and unfavorable mix. These impacts were partially offset by price realization, productivity savings and net favorable impacts from foreign exchange rate movements.investments.

Operating Expenses

The following table presents operating expenses for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021:~~2022:


		Three Months Ended								Six Months Ended									Three Months Ended
		June 30,								June 30,									March 31,
(In millions)		2022			2021			Change		2022			2021			Change
Selling, general and administrative expenses ("SG&A")		$	314		$	304		3.3	%	$	618		$	605		2.1	%
(in millions)																		(in millions)	2023			2022			Change
Selling, general and administrative expenses																		Selling, general and administrative expenses	$	354		$	304		16.4	%
SG&A as a % of revenue	SG&A as a % of revenue	23.0		%	22.5		%	50	bp	23.4		%	23.2		%	20	bp	SG&A as a % of revenue	24.4		%	23.9		%	50	bp
Research and development expenses ("R&D")		53			53			—	%	105			103			1.9	%
Research and development expenses																		Research and development expenses	53			52			1.9	%
R&D as a % of revenue	R&D as a % of revenue	3.9		%	3.9		%	—	bp	4.0		%	4.0		%	—	bp	R&D as a % of revenue	3.7		%	4.1		%	(40)	bp
Restructuring and asset impairment charges	Restructuring and asset impairment charges	7			3			133.3	%	7			9			(22.2)	%	Restructuring and asset impairment charges	8			—			NM

Operating expenses	Operating expenses	$	374		$	360		3.9	%	$	730		$	717		1.8	%	Operating expenses	$	415		$	356		16.6	%
Expense to revenue ratio	Expense to revenue ratio	27.4		%	26.6		%	80	bp	27.7		%	27.5		%	20	bp	Expense to revenue ratio	28.7		%	28.0		%	70	bp

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

SG&A expenses increased by ~~$10~~$50 million to ~~$314~~$354 million, or ~~23.0%~~24.4% of revenue, in the ~~second~~first quarter of ~~2022,~~2023, as compared to $304 million, or ~~22.5%~~23.9% of revenue, in the comparable ~~2021 period;~~2022 period. Increases in SG&A primarily consisted of $23 million related to acquisition and ~~increased by $13~~integration costs, $14 million ~~to $618~~of inflation and $12 million ~~or 23.4%~~ of ~~revenue,~~investments in ~~the six months ended June 30, 2022, as compared to $605 million, or 23.2% of revenue, in the comparable 2021 period. Revenue~~strategic growth driven by favorable price realization was slightly higher than SG&A increases resulting in a slightly lower SG&A as a percentage of sales. Cost increases in the quarter were driven by increased spending on strategic investments and logistics costs, partially offset by cost reductions from our productivity, restructuring and other cost savings initiatives. Cost increases in the first half of the year were driven by increased spending on strategic investments partially offset by cost reductions from our productivity, restructuring and other cost savings initiatives.

Research and Development ("R&D") Expenses

R&D expense was $53 million, or ~~3.9%~~3.7% of revenue, in the ~~second~~first quarter of ~~2022,~~2023, as compared to ~~$53~~$52 million, or ~~4.0% of revenue in the second quarter of 2021; and was $105 million, or 4.0% of revenue, in the six months ended June 30, 2022, as compared to $103 million, or 4.0%~~4.1% of revenue in the comparable ~~2021~~2022 period. The ~~decrease in~~ R&D ~~as a percent of revenue for the quarter was primarily driven by timing of spending on strategic investments.~~spend has remained fairly consistent year over year.

4237

Restructuring and Asset Impairment Charges

Restructuring

During the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, we incurred restructuring ~~charges~~costs of $6 million. 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.~~effectiveness, strengthen our competitive positioning and better serve our customers. The charges included the reduction of headcount across all segments.

During the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, we ~~recognized~~did not incur any restructuring charges of $3 million and $8 million, respectively, of which $2 million and $6 million relate to actions previously announced in 2020. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment.

charges.

The following is a roll-forward for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ of employee position eliminations associated with restructuring activities:


		2022	2021		2023	2022
Planned reductions - January 1	Planned reductions - January 1	60	319	Planned reductions - January 1	102	60
Additional planned reductions	Additional planned reductions	69	72	Additional planned reductions	73	—
Actual reductions and reversals	Actual reductions and reversals	(48)	(202)	Actual reductions and reversals	(82)	(25)
Planned reductions - June 30		81	189
Planned reductions - March 31				Planned reductions - March 31	93	35

The following table presents expected restructuring spend in ~~2022~~2023 and ~~thereafter:~~thereafter relating to actions commenced in 2023:
(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2022:
Total expected costs $ 2 $ 1 $ 3 $ — $ 6
Costs incurred during Q1 2022 — — — — —
Costs incurred during Q2 2022 2 1 2 — 5
Total expected costs remaining $ — $ — $ 1 $ — $ 1
Actions Commenced in 2021:
Total expected costs $ 3 $ — $ 1 $ — $ 4
Costs incurred during 2021 3 — — — 3
Costs incurred during Q1 2022 — — — — —
Costs incurred during Q2 2022 — — — — —
Total expected costs remaining $ — $ — $ 1 $ — $ 1


(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total







Actions Commenced in 2023:
Total expected costs	$	1	$	1	$	4	$	—	$	6

Costs incurred during Q1 2023	1		1		3		—		5


Total expected costs remaining	$	—	$	—	$	1	$	—	$	1

During 2023, we also incurred charges of $1 million within the Water Infrastructure segment, related to actions commenced in prior years.

~~During the second quarter of 2022, we also incurred charges of $1 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2021.~~2023.

We currently expect to incur between ~~$10~~$6 million and ~~$15~~$10 million in restructuring costs for the full year. These

restructuring ~~charges~~costs are primarily related to efforts to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers.

Asset Impairment

During the first quarter of 2023, 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 and recognized an impairment charge of $2 million. Refer to Note 8, "Goodwill and Other Intangible Assets," for additional information.

Operating Income and Adjusted EBITDA

Operating income was $131 million (operating margin of 9.0%) during the ~~second~~first quarter of ~~2022 was $146~~2023, an increase of $20 million, ~~reflecting a decrease of 8.8%~~or 18.0%, when compared to ~~$160~~operating income of $111 million in(operating margin of 8.7%) during the ~~second quarter of 2021.~~prior year. Operating margin ~~was 10.7% for the second quarter~~included unfavorable impacts of ~~2022 versus 11.8% for the comparable period~~210 basis points from increases in ~~2021, a decrease of 110 basis points. Operating margin was negatively impacted by increased~~special charges and restructuring and realignment costs ~~of $2 million~~ as compared to the ~~second quarter~~prior year. Additionally, operating margin included 1,380 basis points of ~~2021,~~expansion from favorable operating impacts, consisting of a 700 basis point increase from price realization, 340 basis points from productivity savings and ~~an increase in~~340 basis points from favorable volume. Margin expansion was offset by 1,140 basis points of unfavorable impacts driven by 520 basis points of inflation, 160 basis points of increased employee related costs, 150 basis points of unfavorable mix, 140 basis points of increased spending on strategic investments and 80 basis points of increased inventory management costs. Excluding special charges ~~of $1 million. Excluding the impact of these items,~~and restructuring and realignment costs, adjusted operating income was ~~$155~~$167 million ~~with an adjusted~~(adjusted operating margin of ~~11.4% in~~11.5%) for the ~~second~~first quarter of ~~2022~~2023 as compared to adjusted operating income of ~~$166~~$116 million ~~with an adjusted~~(adjusted operating margin of 12.3% in the second quarter of 2021. The decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments and some unfavorable mix. These impacts were partially offset by strong price realization and productivity savings.

Operating income for the six months ended June 30, 2022 was $257 million, reflecting a decrease of 12.3% compared to $293 million in 2021. Operating margin was 9.7% for the six months ended June 30, 2022 versus 11.2% for9.1%) during the comparable ~~period~~quarter in 2021, a decrease of 150 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of $2 million as compared to 2021. Excluding the impact of these items, adjusted operating income was $271 million with an adjusted operating margin of 10.3% for the six months ended June 30, 2022 as compared to adjusted operating income of $309 million with an adjusted operating margin of 11.9% in 2021. The decrease in adjusted operating margin was impacted by the same dynamics impacting the decrease in adjusted operating margin for the quarter as compared to the prior year.

Adjusted EBITDA was ~~$226~~$236 million (adjusted EBITDA margin of ~~16.6%~~16.3%) during the ~~second~~first quarter of ~~2022, a decrease~~2023, an increase of $8$55 million, or ~~3.4%~~30%, when compared to adjusted EBITDA of ~~$234~~$181 million (adjusted EBITDA margin of ~~17.3%~~14.2%) during the comparable quarter in the prior year. The ~~decrease~~increase in adjusted EBITDA margin was primarily due to the same factors impacting adjusted operating margin noted ~~above.~~

Adjusted EBITDA for the six months ended June 30, 2022 was $407 million (adjusted EBITDA margin of 15.4%), a decrease of $42 million, or 9.4%, when compared to adjusted EBITDA of $449 million (adjusted EBITDA margin of 17.2%) during the comparable period in prior year. The decrease inabove; however, adjusted EBITDA margin ~~was primarily due to~~excludes the ~~same factors impacting~~impact of depreciation and amortization expense, which had a favorable impact on adjusted operating margin ~~noted above.~~year over year.

4439

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


		Three Months Ended								Six Months Ended									Three Months Ended
		June 30,								June 30,									March 31,
(In millions)		2022			2021			Change		2022			2021			Change
(in millions)																		(in millions)	2023			2022			Change
Water Infrastructure	Water Infrastructure																	Water Infrastructure
Operating income	Operating income	$	108		$	93		16.1	%	$	182		$	164		11.0	%	Operating income	$	70		$	74		(5.4)	%
Operating margin	Operating margin	18.3		%	16.3		%	200	bp	16.2		%	15.2		%	100	bp	Operating margin	11.9		%	13.9		%	(200)	bp
Restructuring and realignment costs	Restructuring and realignment costs	3			4			(25.0)	%	4			9			(55.6)	%	Restructuring and realignment costs	3			1			200.0	%

Special charges																		Special charges	—			—			NM
Adjusted operating income	Adjusted operating income	$	111		$	97		14.4	%	$	186		$	173		7.5	%	Adjusted operating income	$	73		$	75		(2.7)	%
Adjusted operating margin	Adjusted operating margin	18.8		%	17.0		%	180	bp	16.6		%	16.0		%	60	bp	Adjusted operating margin	12.4		%	14.1		%	(170)	bp
Applied Water	Applied Water																	Applied Water
Operating income	Operating income	$	61		$	64		(4.7)	%	$	120		$	130		(7.7)	%	Operating income	$	83		$	59		40.7	%
Operating margin	Operating margin	14.2		%	15.5		%	(130)	bp	14.1		%	16.1		%	(200)	bp	Operating margin	18.3		%	13.9		%	440	bp
Restructuring and realignment costs	Restructuring and realignment costs	2			2			—	%	3			3			—	%	Restructuring and realignment costs	3			1			200.0	%
Special charges	Special charges	—			—			NM		—			1			NM		Special charges	—			—			NM
Adjusted operating income	Adjusted operating income	$	63		$	66		(4.5)	%	$	123		$	134		(8.2)	%	Adjusted operating income	$	86		$	60		43.3	%
Adjusted operating margin	Adjusted operating margin	14.7		%	15.9		%	(120)	bp	14.4		%	16.6		%	(220)	bp	Adjusted operating margin	19.0		%	14.1		%	490	bp
Measurement & Control Solutions	Measurement & Control Solutions																	Measurement & Control Solutions
Operating income (loss)	Operating income (loss)	$	(5)		$	13		(138.5)	%	$	(15)		$	22		168.2	%	Operating income (loss)	$	20		$	(10)		300.0	%
Operating margin	Operating margin	(1.4)		%	3.5		%	(490)	bp	(2.3)		%	3.0		%	(530)	bp	Operating margin	4.9		%	(3.2)		%	810	bp

Restructuring and realignment costs	Restructuring and realignment costs	3			—			NM		5			2			150.0	%	Restructuring and realignment costs	5			2			150.0	%
Special charges	Special charges	1			—			NM		1			—			NM		Special charges	2			—			NM
Adjusted operating (loss) income		$	(1)		$	13		(107.7)	%	$	(9)		$	24		137.5	%
Adjusted operating income																		Adjusted operating income	$	27		$	(8)		437.5	%
Adjusted operating margin	Adjusted operating margin	(0.3)		%	3.5		%	(380)	bp	(1.4)		%	3.3		%	(470)	bp	Adjusted operating margin	6.7		%	(2.5)		%	920	bp
Corporate and other	Corporate and other																	Corporate and other
Operating loss	Operating loss	$	(18)		$	(10)		(80.0)	%	$	(30)		$	(23)		30.4	%	Operating loss	$	(42)		$	(12)		(250.0)	%

Special charges	Special charges	—			—			NM		1			1			—	%	Special charges	23			1			2,200.0	%
Adjusted operating loss	Adjusted operating loss	$	(18)		$	(10)		80.0	%	$	(29)		$	(22)		31.8	%	Adjusted operating loss	$	(19)		$	(11)		72.7	%
Total Xylem	Total Xylem																	Total Xylem
Operating income	Operating income	$	146		$	160		(8.8)	%	$	257		$	293		(12.3)	%	Operating income	$	131		$	111		18.0	%
Operating margin	Operating margin	10.7		%	11.8		%	(110)	bp	9.7		%	11.2		%	(150)	bp	Operating margin	9.0		%	8.7		%	30	bp
Restructuring and realignment costs	Restructuring and realignment costs	8			6			33.3	%	12			14			(14.3)	%	Restructuring and realignment costs	11			4			175.0	%

Special charges	Special charges	1			—			—	%	2			2			—	%	Special charges	25			1			2,400.0	%
Adjusted operating income	Adjusted operating income	$	155		$	166		(6.6)	%	$	271		$	309		(12.3)	%	Adjusted operating income	$	167		$	116		44.0	%
Adjusted operating margin	Adjusted operating margin	11.4		%	12.3		%	(90)	bp	10.3		%	11.9		%	(160)	bp	Adjusted operating margin	11.5		%	9.1		%	240	bp

NM - Not meaningful percentage change

4540

The table below provides a reconciliation of ~~total and each segment's adjusted EBITDA~~net income to consolidated EBITDA and ~~net income:~~adjusted EBITDA:


Three Months Ended
June 30, 2022
													Three Months Ended
(in millions)												(in millions)	March 31, 2023
													2023			2022			Change
Net Income	Net Income								$	112		Net Income	$	99		$	82		21	%
Net Income margin	Net Income margin								8.2		%	Net Income margin	6.8		%	6.4		%	40	bp
Depreciation	Depreciation								28			Depreciation	28			28			—	%
Amortization	Amortization								32			Amortization	32			30			7	%
Interest expense, net	Interest expense, net								10			Interest expense, net	2			11			(82)	%
Income tax expense	Income tax expense								24			Income tax expense	27			16			69	%
EBITDA	EBITDA								$206			EBITDA	$	188		$	167		13	%
Share-based compensation												Share-based compensation	12			9			33	%
Restructuring & realignment												Restructuring & realignment	11			4			175	%
		Water Infrastructure		Applied Water		Measurement & Control Solutions		Other*	Total
EBITDA		$123		$66		$28		$(11)	$206
Restructuring and realignment		3		2		3		0	8
Share-based compensation		0		1		2		6	9
Special charges	Special charges	0				1		2	3			Special charges	25			2			1150	%

Gain from sale of business												Gain from sale of business	—			(1)			(100)	%
Adjusted EBITDA	Adjusted EBITDA	$126		$69		$34		$(3)	$226			Adjusted EBITDA	$	236		$	181		30	%
Adjusted EBITDA margin	Adjusted EBITDA margin	21.4	%	16.1	%	9.8	%	NM	16.6		%	Adjusted EBITDA margin	16.3		%	14.2		%	210	bp

* Other includes Regional selling locations, corporate and other items.

The tables below provide a reconciliation of each segment's operating income (loss) to EBITDA and adjusted EBITDA:


	Three Months Ended
	March 31, 2023
(in millions)	Water Infrastructure			Applied Water Systems			Measurement & Control Solutions
Operating Income	$	70		$	83		$	20
Operating margin	11.9		%	18.3		%	4.9		%
Gain from sale of business	—			—			—
Depreciation	12			5			7
Amortization	2			—			27
Other non-operating expense	—			(1)			—
EBITDA	$	84		$	87		$	54
Share-based compensation	2			1			2
Restructuring & realignment	3			3			5
Special charges	—			—			2
Gain from sale of business	—			—			—
Adjusted EBITDA	$	89		$	91		$	63
Adjusted EBITDA margin	15.1		%	20.1		%	15.5		%

4641

Three Months Ended
June 30, 2021
Net Income $113
Net Income margin 8.4 %
Depreciation 29
Amortization 33
Interest expense, net 19
Income tax expense 25
EBITDA $219
Water Infrastructure Applied Water Measurement & Control Solutions Other* Total
EBITDA $104 $71 $49 $(5) $219
Restructuring and realignment 4 2 0 0 6
Share-based compensation 0 1 2 5 8
Special charges 0 0 0 3 3
(Gain) loss from sale of business 0 (2) 0 0 (2)
Adjusted EBITDA $108 $72 $51 $3 $234
Adjusted EBITDA margin 19.0 % 17.4 % 13.9 % NM 17.3 %
* Other includes Regional selling locations, corporate and other items.


	Three Months Ended
	March 31, 2022
(in millions)	Water Infrastructure			Applied Water Systems			Measurement & Control Solutions
Operating Income	$	74		$	59		$	(10)
Operating margin	13.9		%	13.9		%	(3.2)		%
Gain from sale of business	—			—			1
Depreciation	11			5			9
Amortization	2			—			25
Other non-operating expense	(4)			(1)			—
EBITDA	$	83		$	63		$	25
Share-based compensation	1			1			1
Restructuring & realignment	1			1			2

Gain from sale of business	$	—		$	—		$	(1)
Adjusted EBITDA	$	85		$	65		$	27
Adjusted EBITDA margin	15.9		%	15.3		%	8.6		%


	2023 versus 2022
(in millions)	Water Infrastructure			Applied Water Systems			Measurement & Control Solutions
Operating Income (Loss)	$	(4)		$	24		$	30
Operating margin	(2.0)		%	4.4		%	8.1		%
Gain from sale of business	—			—			(1)
Depreciation	1			—			(2)
Amortization	—			—			2
Other non-operating expense	4			—			—
EBITDA	$	1		$	24		$	29
Share-based compensation	1			—			1
Restructuring & realignment	2			2			3
Special charges	—			—			2
Gain from sale of business	—			—			1
Adjusted EBITDA	$	4		$	26		$	36
Adjusted EBITDA margin	(0.8)		%	4.8		%	6.9		%

2022 versus 2021
Water Infrastructure Applied Water Measurement & Control Solutions Other* Total
EBITDA $19 $(5) $(21) $(6) $(13)
Restructuring and realignment (1) 0 3 0 2
Share-based compensation 0 0 0 1 1
Special charges 0 0 1 (1) 0
(Gain) loss from sale of business 0 2 0 0 2
Adjusted EBITDA $18 $(3) $(17) $(6) $(8)
Adjusted EBITDA margin 2.4 % (1.3) % (4.1) % NM (0.7) %
* Other includes Regional selling locations, corporate and other items.

Six Months Ended
June 30, 2022
Net Income $ 194
Net Income margin 7.4 %
Depreciation 56
Amortization 62
Interest expense, net 21
Income tax expense 40
EBITDA $373
Water Infrastructure Applied Water Measurement & Control Solutions Other* Total
EBITDA $206 $129 $53 $(15) $373
Restructuring and realignment 4 3 5 0 12
Share-based compensation 1 2 3 12 18
Special charges 0 0 1 4 5
(Gain) loss from sale of business 0 0 (1) 0 (1)
Adjusted EBITDA $211 $134 $61 $1 $407
Adjusted EBITDA margin 18.8 % 15.7 % 9.2 % NM 15.4 %
* Other includes Regional selling locations, corporate and other items.

Six Months Ended
June 30, 2021
Net Income $200
Net Income margin 7.7 %
Depreciation 59
Amortization 65
Interest expense, net 38
Income tax expense 52
EBITDA $414
Water Infrastructure Applied Water Measurement & Control Solutions Other* Total
EBITDA $186 $143 $93 $(8) $414
Restructuring and realignment 9 3 2 0 14
Share-based compensation 1 2 3 11 17
Special charges 0 1 0 5 6
(Gain) loss from sale of business 0 (2) 0 0 (2)
Adjusted EBITDA $196 $147 $98 $8 $449
Adjusted EBITDA margin 18.2 % 18.2 % 13.6 % NM 17.2 %
* Other includes Regional selling locations, corporate and other items.

2022 versus 2021
Water Infrastructure Applied Water Measurement & Control Solutions Other* Total
EBITDA $20 $(14) $(40) $(7) $(41)
Restructuring and realignment (5) 0 3 0 (2)
Share-based compensation 0 0 0 1 1
Special charges 0 (1) 1 (1) (1)
(Gain) loss from sale of business 0 2 (1) 0 1
Adjusted EBITDA $15 $(13) $(37) $(7) $(42)
Adjusted EBITDA margin 0.6 % (2.5) % (4.4) % NM (1.8) %
* Other includes Regional selling locations, corporate and other items.

Water Infrastructure

Operating income for our Water Infrastructure segment ~~increased $15~~was $70 million (operating margin of 11.9%) during the first quarter of 2023, a decrease of $4 million, or ~~16.1%~~5.4%, ~~for the second quarter of 2022~~when compared to operating income of $74 million (operating margin of 13.9%) during the prior year, ~~with operating margin also increasing from 16.3% to 18.3%.~~or a total decrease of 200 basis points. Operating margin ~~benefited~~declines included unfavorable impacts of 30 basis points from ~~a decrease~~increases in restructuring and realignment costs as compared to the prior year. Additionally, operating margin declines included 1,350 basis points of ~~$1 million during the quarter.~~unfavorable operating impacts, driven by 510 basis points of inflation, 280 basis points of unfavorable mix, 180 basis points of increased spending on strategic investments, 120 basis points of employee related costs, 110 basis points of unfavorable foreign currency impacts, and 60 basis points due to inventory management costs. Margin declines were offset by 1,180 basis points from favorable operating impacts consisting of 760 basis points of price realization, 240 basis points of productivity savings and 180 basis points of favorable volume. Excluding ~~these~~ restructuring and realignment costs, adjusted operating income ~~increased $14~~was $73 million (adjusted operating margin of 12.4%) for the first quarter of 2023 as compared to adjusted operating income of $75 million (adjusted operating margin of 14.1%) for the first quarter of 2022.

Adjusted EBITDA was $89 million (adjusted EBITDA margin of 15.1%) for the first quarter of 2023, an increase of $4 million, or ~~14.4%~~(0.8)%, ~~with~~when compared to adjusted EBITDA of $85 million (adjusted EBITDA margin of 15.9%) during the prior year. The adjusted EBITDA margin was impacted by the same offsetting factors impacting the adjusted operating margin; however, adjusted EBITDA margin ~~increasing~~expansion includes a benefit from ~~17.0% to 18.8%. The increase~~a year over year reduction in adjusted operating margin for the quarter was primarily due to strong price realization, productivity savings, net favorable impacts from movements in exchange rates as well as modest favorability from volume and mix. These items were partially offset by cost inflation and increased spending on strategic investments.other non-operating expense.

~~For the six months ended June 30, 2022, operating~~Applied Water

Operating income for our Applied Water ~~Infrastructure~~ segment ~~increased $18~~was $83 million (operating margin of 18.3%) during the first quarter of 2023, an increase of $24 million, or ~~11.0%~~40.7%, when compared to operating income of $59 million (operating margin of 13.9%) during the prior year, or a total increase of 440 basis points. Operating margin expansion included unfavorable impacts of 50 basis points from increases in restructuring and realignment costs as compared to the prior ~~year, with~~year. Additionally, operating margin ~~also increasing~~expansion included 1,320 basis points from ~~15.2% to 16.2%. Operating margin benefited~~favorable operating impacts, driven by 790 basis points from ~~a decrease in restructuring~~price realization, 380 basis points from productivity savings and ~~realignment~~120 basis points of favorable mix. Margin expansion was offset by negative operating impacts of 830 basis points consisting of 570 basis points of inflation, 130 basis points of increased inventory management costs, 70 basis points of ~~$5 million in 2022.~~increased spending on strategic investments and 60 basis points of unfavorable volume. Excluding ~~these~~ restructuring and realignment costs, adjusted operating income ~~increased $13~~was $86 million ~~or 7.5%, with~~(adjusted operating margin of 19.0%) for the first quarter of 2023 as compared to adjusted operating ~~margin increasing from 16.0% to 16.6%. The increase in adjusted~~income of $60 million (adjusted operating margin of 14.1%) for the period was primarily due to strong price realization, productivity savings, favorable volume and net favorable impacts from movements in exchange rates. These items were partially offset by cost inflation and increased spending on strategic investments.first quarter of 2022.

Adjusted EBITDA was ~~$126~~$91 million (adjusted EBITDA margin of ~~21.4%~~20.1%) for the ~~second~~first quarter of ~~2022,~~2023, an increase of ~~$18~~$26 million, or ~~16.7%~~4.8%, when compared to adjusted EBITDA of ~~$108~~$65 million (adjusted EBITDA margin of ~~19.0%~~15.3%) during the prior year. The increase in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating ~~margin; however, adjusted EBITDA margin also benefited from an increase in investment income in the quarter included in other non-operating income/(expense).~~

Adjusted EBITDA was $211 million (adjusted EBITDA margin of 18.8%) for the six months ended June 30, 2022, an increase of $15 million, or 7.7%, when compared to adjusted EBITDA of $196 million (adjusted EBITDA margin of 18.2%) during 2021. The increase in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin.

~~Applied Water~~

Operating income for our Applied Water segment decreased $3 million, or 4.7%, for the second quarter of 2022 compared to the prior year, with operating margin decreasing from 15.5% to 14.2%. Operating margin was impacted by restructuring and realignment costs of $2 million in both years. Excluding these items, adjusted operating income decreased $3 million, or 4.5%, with adjusted operating margin decreasing from 15.9% to 14.7%. The decrease in adjusted operating margin for the quarter was primarily due to cost inflation and increased logistics costs, increased spending on strategic investments, as well as unfavorable volume and mix. These impacts were partially offset by strong price realization and productivity savings.

For the six months ended June 30, 2022, operating income for our Applied Water segment decreased $10 million, or 7.7%, as compared to the prior year, with operating margin decreasing from 16.1% to 14.1%. Operating margin was impacted by restructuring and realignment costs of $3 million in both years and a decrease of special charges of $1 million in the first quarter of 2022. Excluding these items, adjusted operating income decreased $11 million, or 8.2%, with adjusted operating margin decreasing from 16.6% to 14.4%. The decrease in adjusted operating margin for the period was primarily due to cost inflation and increased logistics costs. These impacts were partially offset by price realization.

Adjusted EBITDA was $69 million (adjusted EBITDA margin of 16.1%) for the second quarter of 2022, a decrease of $3 million, or 4.2%, when compared to adjusted EBITDA of $72 million (adjusted EBITDA margin of 17.4%) during the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin.

Adjusted EBITDA was $134 million (adjusted EBITDA margin of 15.7%) for the six months ended June 30, 2022, a decrease of $13 million, or 8.8%, when compared to adjusted EBITDA of $147 million (adjusted EBITDA margin of 18.2%) during the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.

Measurement & Control Solutions

Operating income for our Measurement & Control Solutions segment ~~decreased $18~~was $20 million (operating margin of 4.9%) during the first quarter of 2023, an increase of $30 million, or ~~138.5%~~300.0%, ~~for the second quarter of 2022~~when compared to operating loss of $10 million (operating margin of (3.2)%) during the prior year, ~~with operating margin decreasing from 3.5% to (1.4)%.~~or a total increase of 810 basis points. Operating margin ~~was negatively impacted during the quarter by an increase~~expansion included unfavorable impacts of 110 basis points from increases in special charges and restructuring and realignment costs of $3 million. Excluding these items, adjusted operating income decreased $14 million, or (107.7)%, with adjusted operating margin decreasing from 3.5% to (0.3)%. The decrease in adjusted operating margin for the quarter was primarily due to cost inflation, unfavorable mix, unfavorable volume and increased spending on strategic investments. These impacts were partially offset by price realization and restructuring and productivity savings.

~~For the six months ended June 30, 2022, operating income for our Measurement & Control Solutions segment decreased $37 million, or 168.2%,~~ as compared to the prior ~~year, with~~year. Additionally, operating margin ~~decreasing from 3.0% to (2.3)%. Operating margin~~expansion included 2,000 basis points of favorable operating impacts, driven by 1,220 basis points of favorable volume, 460 basis points of price realization and 320 basis points of productivity savings. Margin expansion was ~~negatively impacted~~offset by ~~an increase~~negative operating impacts of 1080 basis points driven by 430 basis points of inflation, 260 basis points of unfavorable mix, 110 basis points of increased spending on strategic investments and 120 basis points of increased employee related costs. Excluding special charges and restructuring and realignment costs, ~~of $3 million. Excluding these items,~~ adjusted operating income ~~decreased $33~~was $27 million ~~or 137.5%, with~~(adjusted operating margin of 6.7%) for the first quarter of 2023 as compared to adjusted operating ~~margin decreasing from 3.3% to (1.4)%. The decrease in adjusted~~loss of $8 million (adjusted operating margin of (2.5)%) for the ~~period was primarily due to cost inflation and unfavorable volume and mix. These impacts were partially offset by price realization as well as restructuring and productivity savings.~~first quarter of 2022.

Adjusted EBITDA was ~~$34~~$63 million (adjusted EBITDA margin of ~~9.8%~~15.5%) for the ~~second~~first quarter of ~~2022, a decrease~~2023, an increase of ~~$17~~$36 million, or ~~33.3%~~6.9%, when compared to adjusted EBITDA of ~~$51~~$27 million (adjusted EBITDA margin of ~~13.9%~~8.6%) during the prior year. The ~~decrease~~increase in adjusted EBITDA margin was due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from ~~a year over year reduction in depreciation and amortization expense.~~

~~Adjusted EBITDA was $61 million (adjusted EBITDA margin~~the relative impact of 9.2%) for the six months ended June 30, 2022, a decrease of $37 million, or 37.8%, when compared to adjusted EBITDA of $98 million (adjusted EBITDA margin of 13.6%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.

Corporate and ~~other~~Other

Operating loss for corporate and other increased $8$30 million, or ~~80.0%~~(250.0)%, during the ~~second~~first quarter of ~~2022~~2023 compared to the prior year period. ~~For~~The increase in operating loss for the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023 was primarily due to acquisition and integration costs related to the pending acquisition of Evoqua. The timing of corporate initiatives, higher employee benefit costs and increased strategic investments also contributed to the higher operating loss. Excluding acquisition and integration costs and other special charges, the operating loss for corporate and other increased $7 million, or 30.4%, compared to the same prior period. The increases in operating loss in both periods are primarily due to spending on strategic investments and other initiatives, as well as timing of certain employee-related expenses as compared to prior year.

$8 million.

Interest Expense

Interest expense was ~~$12~~$9 million and ~~$25~~$13 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, ~~and $21 million and $42 million for the three and six months ended June 30, 2021,~~ respectively. The decrease in interest expense iswas primarily driven by interest expense incurred during ~~2021~~2022 related to our ~~senior note~~2.250% Senior Notes due 2022 that ~~was~~were paid off in ~~October 2021.~~December 2022 and interest income related to additional net investment hedges executed in during 2023. See Note ~~10,~~9, “Derivative Financial Instruments” and Note 11, "Credit Facilities and ~~Debt",~~Debt," of our condensed consolidated financial statements for a description of our net investment hedges and credit facilities and long-term debt, ~~and related interest.~~respectively.

Income Tax Expense

The income tax provision for the three months ended ~~June 30, 2022~~March 31, 2023 was ~~$24~~$27 million resulting in an effective tax rate of ~~17.5%~~21.7%, compared to a ~~$25~~$16 million expense resulting in an effective tax rate of ~~18.5%~~16.4% for the same period in 2021. The income tax provision for the six months ended June 30, 2022 was $40 million resulting in an effective tax rate of 17.0%, compared to a $52 million expense resulting in an effective tax rate of 20.7% for the same period in 2021.2022. The effective tax rate for the three ~~and six month period~~months ended ~~June 30, 2022~~March 31, 2023 differs from the same period in ~~2021~~2022 due to the impact of ~~tax settlement benefits~~earnings mix and nondeductible transaction costs recorded in the current ~~period as compared to tax settlement expenses in the prior year.~~period.

Liquidity and Capital Resources

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


		Six Months Ended							Three Months Ended
		June 30,							March 31,
(In millions)		2022		2021		Change
(in millions)								(in millions)	2023		2022		Change
Operating activities	Operating activities	$	32	$	206	$	(174)	Operating activities	$	(19)	$	(81)	$	62
Investing activities	Investing activities	(84)		(69)		(15)		Investing activities	(37)		(43)		6
Financing activities	Financing activities	(158)		(162)		4		Financing activities	(63)		(106)		43
Foreign exchange (a)	Foreign exchange (a)	(26)		(10)		(16)		Foreign exchange (a)	12		(2)		14
Total	Total	$	(236)	$	(35)	$	(201)	Total	$	(107)	$	(232)	$	125

(a)The impact is primarily due to ~~weakening~~strengthening of the Euro and ~~Chinese Yuan~~Polish Zloty partially offset by ~~strengthening~~weakening of the ~~Russian Ruble.~~Canadian Dollar.

Sources and Uses of Liquidity

Operating Activities

Cash ~~generated~~used by operating activities was ~~$32~~$19 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$206~~$81 million in the comparable prior year period. The reduction in cash ~~generated~~used was primarily driven by ~~higher working capital levels,~~reduced purchases of inventory, reflecting ~~increased~~lower safety stock, ~~and higher advanced payments to suppliers to mitigate supply chain volatility and higher~~lower build up of accounts receivable ~~driven by increased sales. Increased customer advances, as well as~~reflecting improved collections, higher cash earnings and lower interest payments. Reductions in trade payables, reflecting reduced investments in inventory balances and higher income tax payments partially offset these items.

Investing Activities

Cash used in investing activities was ~~$84~~$37 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$69~~$43 million in the comparable prior year period. The ~~increase~~reduction in spending was driven by ~~higher capital expenditures driven primarily by~~cash paid for investments in ~~equipment~~the first quarter of 2022 that did repeat during the current year and ~~rental fleet.~~increased cash received from cross-currency swaps. Reduced cash received from investments partially offset these items.

Financing Activities

Cash used by financing activities was ~~$158~~$63 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 as compared to cash ~~generated~~used of ~~$162~~$106 million in the comparable prior year period. The reduction in cash used was primarily driven by ~~a decrease in share~~the lower repurchases ~~partially offset by higher dividend payments.~~of common stock.

Funding and Liquidity Strategy

Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. ~~As a result of uncertainties caused both directly and indirectly by the COVID-19 pandemic and related macroeconomic conditions, we continue to~~We continually evaluate aspects of our spending, including capital expenditures, strategic investments and dividends.

~~Historically, we have generated operating cash flow sufficient to fund our primary cash needs.~~ If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. Our securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note ~~10,~~11, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.

We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis. In addition, our existing committed credit facilities and access to the public debt markets would provide further liquidity if required.

Based on our current global cash positions, cash flows from operations and access to the capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other obligations in both the U.S. and outside of the U.S. during the year. ~~In addition, we believe our existing committed credit facilities and access to the public debt markets would provide further liquidity if required.~~ Currently, we have available liquidity of approximately ~~$1.9~~$1.8 billion, consisting of ~~$1.1 billion~~$800 million of cash and ~~$800 million~~$1 billion of available credit facilities as disclosed in Note ~~10,~~11, "Credit Facilities and Debt", of our condensed consolidated financial statements. ~~On October 1, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of $600 million. Our next long-term debt maturity is March 2023.~~

Risks related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our ~~2021~~2022 Annual Report.

Credit Facilities & Long-Term Contractual Commitments

See Note ~~10,~~11, "Credit Facilities and ~~Debt",~~Debt," of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.

Non-U.S. Operations

We generated approximately ~~54%~~51% and ~~56%~~55% of our revenue from non-U.S. operations for the ~~both~~ three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of the U.S., we expect to continue to generate significant revenue from non-U.S. operations and expect that a substantial portion of our cash will be ~~predominately~~ held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when we believe it is cost-effective to do so. We continually review our domestic and foreign cash profile and our, expected future cash generation and investment opportunities, and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. As of ~~June 30, 2022,~~March 31, 2023, we have provided a deferred tax liability of $4$6 million for net foreign withholding taxes and state income taxes on ~~$485~~$478 million of earnings expected to be repatriated to the U.S. parent as deemed necessary in the future.

Critical Accounting Estimates

Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We believe the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently ~~uncertain, particularly at this time and moving forward given the uncertainty around the magnitude and duration of the COVID-19 pandemic and related macro economic conditions.~~uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the ~~2021~~2022 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~~There have been no significant changes in the information concerning our critical accounting estimates as stated in our ~~2021~~2022 Annual Report.

The uncertainty of the future impact of the COVID-19 pandemic and related macroeconomic impacts, such as the increasing cost of capital, may contribute to the deterioration of the forecasted future cash flows of our reporting units. If we do not achieve our forecasts, it is possible that the goodwill of the Advanced Infrastructure Analytics ("AIA") reporting unit could be deemed to be impaired 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 2021 Annual Report.

~~Post-retirement Benefit Plans.~~ As described in our 2021 Annual Report, the Company has initiated the process for a full buy-out of its largest defined benefit plan in the UK. Upon completion of the buy-out, expected in the remaining period of 2022, we anticipate a settlement charge of approximately £125 million (approximately $150 million), primarily consisting of unrecognized actuarial losses.

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 ~~2021~~2022 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.

5346

PART II

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in "Item 1A. Risk Factors" of our ~~2021~~2022 Annual Report.

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

The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended ~~June 30, 2022:~~March 31, 2023:


(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PERIOD	TOTAL NUMBER OF SHARES PURCHASED	AVERAGE PRICE PAID PER SHARE (a)	TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b)	APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b)
4/1/221/23 - ~~4/30/22~~1/31/23	—	—	—	$182
5/2/1/2223 - ~~5/31/22~~2/28/23	—	—	—	$182
6/3/1/2223 - ~~6/30/22~~3/31/23	—	—	—	$182

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 stockholders and maintains our focus on growth. There were no shares repurchased under this program for the three months ended ~~June 30, 2022.~~March 31, 2023. There are up to $182 million in shares that may still be purchased under this plan as of ~~June 30, 2022.~~March 31, 2023.

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.

5447

XYLEM INC.

EXHIBIT INDEX


Exhibit Number	Description	Location

2.1	Agreement and Plan of Merger, dated as of January 22, 2023, among Xylem Inc., Fore Merger Sub, Inc. and Evoqua Water Technologies Corp.	Incorporated by reference to Exhibit 2.1 of Xylem Inc.’s Form 8-K filed on January 23, 2023 (CIK No. 1524472, File No. 1-24339)

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~~Fifth Amended and Restated By-laws of Xylem Inc.	Incorporated by reference to Exhibit ~~3.2~~3.1 of Xylem Inc.’s Form 8-K filed on ~~May~~November 15, ~~2017~~2022 (CIK No. 1524472, File No. 1-35229).



10.1	~~Annual Incentive Plan for Senior Leadership Team (Formerly "Annual Incentive Plan for Executive Officers") restated with administrative changes only, on July 11, 2022~~Letter Agreement between Xylem Inc. and Dorothy Capers	Filed herewith.

10.2	Letter Agreement between Xylem ~~Special Senior Executive Severance Pay Plan restated with administrative changes only, on July 11, 2022~~Inc. and Matthew Pine	Filed herewith.

10.3	~~Separation~~Form of 2011 Omnibus Incentive Plan Non-Qualified Stock Option Award Agreement ~~between Xylem Inc. and Colin R. Sabol~~(2023)	Filed herewith.

10.4	Form of 2011 Omnibus Incentive Plan Performance Share Unit Agreement (2023)	Filed herewith.

10.5	Form of 2011 Omnibus Incentive Plan Restricted Stock Unit Agreement (2023)	Filed herewith.

10.6	Five-Year Revolving Credit Facility Agreement, dated as of March 1, 2023 among Xylem Inc. and the Lenders party thereto.	Incorporated by reference to Exhibit 10.1 of Xylem Inc.’s Form 8-K filed on March 2, 2023 (CIK No. 1524472, File No. 1-35229)

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

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

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

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


Exhibit Number	Description	Location
101.0	The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended ~~June 30, 2022,~~March 31, 2023, formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Income Statements, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements	The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

104.0	The cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended ~~June 30, 2022~~March 31, 2023 formatted in Inline XBRL and contained in Exhibit 101.0.

	# Management contract or compensatory plan or arrangement

5549

SIGNATURES

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


						XYLEM INC.
						(Registrant)

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

~~August 2, 2022~~May 4, 2023

5650


For the six months ended June 30,	2022		2021
Operating Activities
Net income	$	194	$	200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	56		59
Amortization	62		65
Share-based compensation	18		17
Restructuring and asset impairment charges	7		9

Gain from sale of business	(1)		(2)
Other, net	6		6
Payments for restructuring	(5)		(18)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	(119)		(66)
Changes in inventories	(189)		(89)
Changes in accounts payable	40		36



Other, net	(37)		(11)
Net Cash – Operating activities	32		206
Investing Activities
Capital expenditures	(95)		(80)

Proceeds from sale of business	1		2
Proceeds from the sale of property, plant and equipment	3		—
Cash received from investments	4		—
Cash paid for investments	(7)		—
Other, net	10		9
Net Cash – Investing activities	(84)		(69)
Financing Activities




Repurchase of common stock	(52)		(68)
Proceeds from exercise of employee stock options	3		9
Dividends paid	(110)		(102)

Other, net	1		(1)
Net Cash – Financing activities	(158)		(162)
Effect of exchange rate changes on cash	(26)		(10)
Net change in cash and cash equivalents	(236)		(35)
Cash and cash equivalents at beginning of year	1,349		1,875
Cash and cash equivalents at end of period	$	1,113	$	1,840
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	40	$	58
Income taxes (net of refunds received)	$	42	$	60


Three Months Ended
June 30, 2021

Net Income								$113
Net Income margin								8.4	%
Depreciation								29
Amortization								33
Interest expense, net								19
Income tax expense								25
EBITDA								$219
	Water Infrastructure		Applied Water		Measurement & Control Solutions		Other*	Total
EBITDA	$104		$71		$49		$(5)	$219
Restructuring and realignment	4		2		0		0	6
Share-based compensation	0		1		2		5	8
Special charges	0		0		0		3	3
(Gain) loss from sale of business	0		(2)		0		0	(2)
Adjusted EBITDA	$108		$72		$51		$3	$234
Adjusted EBITDA margin	19.0	%	17.4	%	13.9	%	NM	17.3	%

* Other includes Regional selling locations, corporate and other items.


2022 versus 2021
	Water Infrastructure		Applied Water		Measurement & Control Solutions		Other*	Total
EBITDA	$19		$(5)		$(21)		$(6)	$(13)
Restructuring and realignment	(1)		0		3		0	2
Share-based compensation	0		0		0		1	1
Special charges	0		0		1		(1)	0
(Gain) loss from sale of business	0		2		0		0	2
Adjusted EBITDA	$18		$(3)		$(17)		$(6)	$(8)
Adjusted EBITDA margin	2.4	%	(1.3)	%	(4.1)	%	NM	(0.7)	%

* Other includes Regional selling locations, corporate and other items.