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 March 31, 2023

or

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

For the transition period from             to             

Commission file number: 1-35229

Xylem Inc.

(Exact name of registrant as specified in its charter)

 

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

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 April 28, 2023, there were 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 Months Ended March 31, 2023 and 2022 (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	4
		Condensed Consolidated Balance Sheets as of March 31,2023 and December 31, 2022 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (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	28
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4	-	Controls and Procedures	46
PART II – Other Information
Item 1	-	Legal Proceedings	47
Item 1A	-	Risk Factors	47
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3	-	Defaults Upon Senior Securities	47
Item 4	-	Mine Safety Disclosures	47
Item 5	-	Other Information	47
Item 6	-	Exhibits	47
		Signatures	50

2

PART I

ITEM 1.             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)

For the three months ended March 31,	2023		2022
Revenue	$	1,448	$	1,272
Cost of revenue	902		805
Gross profit	546		467
Selling, general and administrative expenses	354		304
Research and development expenses	53		52
Restructuring and asset impairment charges	8		—
Operating income	131		111
Interest expense	9		13
Other non-operating income (expense), net	4		(1)
Gain from sale of business	—		1
Income before taxes	126		98
Income tax expense	27		16
Net income	$	99	$	82
Earnings per share:
Basic	$	0.55	$	0.45
Diluted	$	0.54	$	0.45
Weighted average number of shares:
Basic	180.4		180.2
Diluted	181.3		181.0

See accompanying notes to condensed consolidated financial statements.

3

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

 

For the three months ended March 31,	2023		2022
Net income	$	99	$	82
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment	22		(3)
Net change in derivative hedge agreements:
Unrealized gain (loss)	4		(6)
Amount of loss reclassified into net income	5		2
Net change in post-retirement benefit plans:
Amortization of actuarial (gain) loss into net income	(1)		4
Other comprehensive income (loss), before tax	30		(3)
Income tax (benefit) expense related to items of other comprehensive income (loss)	(5)		3
Other comprehensive income (loss), net of tax	35		(6)
Comprehensive income	$	134	$	76

See accompanying notes to condensed consolidated financial statements.

4

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

 

	March 31, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	837	$	944
Receivables, less allowances for discounts, returns and credit losses of $36 and $50 in 2023 and 2022, respectively	1,123		1,096
Inventories	857		799
Prepaid and other current assets	193		173
Total current assets	3,010		3,012
Property, plant and equipment, net	631		630
Goodwill	2,738		2,719
Other intangible assets, net	915		930
Other non-current assets	646		661
Total assets	$	7,940	$	7,952
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	710	$	723
Accrued and other current liabilities	784		867
Total current liabilities	1,494		1,590
Long-term debt	1,881		1,880
Accrued post-retirement benefits	285		286
Deferred income tax liabilities	215		222
Other non-current accrued liabilities	476		471
Total liabilities	4,351		4,449
Commitments and contingencies (Note 17)
Stockholders’ equity:
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	2		2
Capital in excess of par value	2,152		2,134
Retained earnings	2,331		2,292
Treasury stock – at cost 15.9 shares and 15.8 shares in 2023 and 2022, respectively	(716)		(708)
Accumulated other comprehensive loss	(191)		(226)
Total stockholders’ equity	3,578		3,494
Non-controlling interests	11		9
Total equity	3,589		3,503
Total liabilities and stockholders’ equity	$	7,940	$	7,952

See accompanying notes to condensed consolidated financial statements.

5

.XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)

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.

6

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 three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note 18, "Segment Information," to the condensed consolidated financial statements for further segment background information.

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

Basis of Presentation

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

The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair statement of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022 ("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 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.

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

7

Note 2. Recently Issued Accounting Pronouncements

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
	March 31,
(in millions)	2023		2022
Revenue from contracts with customers	$	1,383	$	1,222
Lease Revenue	65		50
Total	$	1,448	$	1,272

8

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
	March 31,
(in millions)	2023		2022
Water Infrastructure
United States	$	176	$	147
Western Europe	190		186
Emerging Markets (a)	105		101
Other	53		49
Applied Water
United States	244		221
Western Europe	104		94
Emerging Markets (a)	73		80
Other	32		30
Measurement & Control Solutions
United States	257		181
Western Europe	77		69
Emerging Markets (a)	48		44
Other	24		20
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")

9

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, 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 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 $447 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

10

Note 4. Restructuring and Asset Impairment Charges

Restructuring

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

During the three ended March 31, 2022, we incurred restructuring charges that were less than $1 million.

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

	Three Months Ended
	March 31,
(in millions)	2023		2022
By component:
Severance and other charges	$	6	$	—
Total restructuring costs	$	6	$	—
Asset impairment charges	2		—
Total restructuring and asset impairment charges	$	8	$	—
By segment:
Water Infrastructure	$	2	$	—
Applied Water	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 three months ended March 31, 2023 and 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.

11

The following table presents expected restructuring spend in 2023 and thereafter:

(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 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 2023.

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 we therefore recognized an impairment charge of $2 million. Refer to Note 8, "Goodwill and Other Intangible Assets," for additional information.

Note 5. Income Taxes

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

The income tax provision for the three months ended March 31, 2023 was $27 million resulting in an effective tax rate of 21.7%, compared to a $16 million expense resulting in an effective tax rate of 16.4% for the same period in 2022. The effective tax rate for the three month period ended March 31, 2023 was higher than the U.S. federal statutory rate primarily due to the impact of earnings mix and 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 Växjö, which rendered a decision adverse to Xylem in June 2022 for SEK800 million (approximately $77 million), consisting of the full tax assessment amount plus penalties and interest. Xylem has appealed this decision with the intermediate appellate court, the Administrative Court of Appeal (the “Court”). At this time, management, in consultation with external legal advisors, continues to believe it is more likely than not that Xylem will prevail on the 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 March 31, 2023, we do not have any unrecognized tax benefits related to this uncertain tax position.

12

Note 6. Earnings Per Share

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

	Three Months Ended
	March 31,
	2023		2022
Net income (in millions)	$	99	$	82
Shares (in thousands):
Weighted average common shares outstanding	180,371		180,205
Add: Participating securities (a)	25		26
Weighted average common shares outstanding — Basic	180,396		180,231
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options	622		587
Dilutive effect of restricted stock units and performance share units	301		203
Weighted average common shares outstanding — Diluted	181,319		181,021
Basic earnings per share	$	0.55	$	0.45
Diluted earnings per share	$	0.54	$	0.45

(a)Restricted stock 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 14, "Share-Based Compensation Plans," to the condensed consolidated financial statements for further detail on the performance share units.

	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 7. Inventories

The components of total inventories are summarized as follows:

(in millions)	March 31, 2023		December 31, 2022
Finished goods	$	314	$	286
Work in process	71		58
Raw materials	472		455
Total inventories	$	857	$	799

13

Note 8. Goodwill and Other Intangible Assets

Goodwill    

Changes in the carrying value of goodwill by reportable segment for the three months ended March 31, 2023 are as follows:

(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:

	March 31, 2023						December 31, 2022
(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles
Customer and distributor relationships	$	788	$	(385)	$	403	$	784	$	(371)	$	413
Proprietary technology and patents	166		(121)		45		165		(118)		47
Trademarks	138		(84)		54		137		(80)		57
Software	531		(285)		246		514		(268)		246
Other	5		(3)		2		5		(3)		2
Indefinite-lived intangibles	165		—		165		165		—		165
Other Intangibles	$	1,793	$	(878)	$	915	$	1,770	$	(840)	$	930

Amortization expense related to finite-lived intangible assets was $32 million and $30 million for the three-month periods ended March 31, 2023 and 2022, 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 we therefore recognized an impairment charge of $2 million.

Note 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.

14

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 $517 million and $255 million as of March 31, 2023 and December 31, 2022, respectively. As of 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. The purchased notional amounts associated with these currency derivatives are $219 million, $144 million, $58 million, $26 million, $26 million, $25 million and $19 million, respectively. As of December 31, 2022 the purchased notional amounts associated with these currency derivatives were $105 million, $73 million, $29 million, $13 million, $13 million, $13 million and $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 $1,653 million and $1,616 million as of March 31, 2023 and December 31, 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.

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
	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 March 31, 2023, $3 million of net gains on cash flow hedges are expected to be reclassified into earnings in the next 12 months.

15

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

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

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

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

Note 10. Accrued and Other Current Liabilities

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

(in millions)	March 31, 2023		December 31, 2022
Compensation and other employee-benefits	$	216	$	285
Customer-related liabilities	222		210
Accrued taxes	156		186
Lease liabilities	67		69
Accrued warranty costs	37		37
Other accrued liabilities	86		80
Total accrued and other current liabilities	$	784	$	867

16

Note 11. Credit Facilities and Debt

Total debt outstanding is summarized as follows:

(in millions)	March 31, 2023		December 31, 2022
3.250% Senior Notes due 2026 (a)	500		500
1.950% Senior Notes due 2028 (a)	500		500
2.250% Senior Notes due 2031 (a)	500		500
4.375% Senior Notes due 2046 (a)	400		400
Debt issuance costs and unamortized discount (b)	(19)		(20)
Total debt	1,881		1,880
Less: short-term borrowings and current maturities of long-term debt	—		—
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 2026 was $479 million and $470 million as of March 31, 2023 and December 31, 2022 respectively. The fair value of our Senior Notes due 2028 was $443 million and $430 million as of March 31, 2023 and December 31, 2022, respectively. The fair value of our Senior Notes due 2031 was $424 million and $406 million as of March 31, 2023 and December 31, 2022, respectively. The fair value of our Senior Notes due 2046 was $352 million and $333 million as of March 31, 2023 and December 31, 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 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.

17

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 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of 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 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 2023 Credit Facility is payable either quarterly or at the expiration of any 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 Term SOFR or EURIBOR rate plus an applicable margin. The 2023 Credit Facility includes customary provisions for implementation of replacement rates for Term SOFR-based and EURIBOR-based loans. The 2023 Credit Facility also includes a pricing grid that determines the applicable margin based on Xylem's credit rating, with a further adjustment based on Xylem's achievement of certain Environmental, Social and Governance ("ESG") key performance indicators. Xylem will also pay quarterly fees to each lender for such lender's commitment to lend accruing on such commitment at a rate based on 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 with a further adjustment based on Xylem's achievement of certain ESG key performance indicators.

The 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. 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 a 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 2023 Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the 2023 Credit Facility, subject to certain requirements and conditions set forth in the 2023 Credit Facility. As of March 31, 2023, the 2023 Credit Facility was undrawn and we are in compliance with all revolver covenants.

18

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 $1 billion inclusive of the 2023 Credit Facility. As of March 31, 2023 and December 31, 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 $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 March 31, 2023 and December 31, 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 12. Post-retirement Benefit Plans

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

	Three Months Ended
	March 31,
(in millions)	2023		2022
Domestic defined benefit pension plans:
Service cost	$	1	$	1
Interest cost	1		1
Expected return on plan assets	(1)		(2)
Amortization of net actuarial loss	—		1
Net periodic benefit cost	$	1	$	1
International defined benefit pension plans:
Service cost	$	2	$	3
Interest cost	4		4
Expected return on plan assets	(3)		(4)
Amortization of actuarial (gain) loss	(1)		3
Net periodic benefit cost	$	2	$	6
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 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 comprehensive income (loss)" of less than $1 million, for both the three months ended March 31, 2023 and 2022, respectively.

We contributed $5 million to our defined benefit plans for the three months ended March 31, 2023 and 2022. Additional contributions ranging between approximately $14 million and $18 million are expected to be made during the remainder of 2023.

19

Note 13. Equity

The following table shows the changes in stockholders' equity for the three months ended March 31, 2023:

	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 three months ended March 31, 2022:<

	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	$