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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 classTrading Symbol(s)Name of each exchange of which registered
Common Stock, par value $0.01 per shareXYLNew 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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  
As of October 27, 2023, there were 241,077,780 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-
Item 2-
Item 3-
Item 4-
PART II – Other Information
Item 1-
Item 1A-
Item 2-
Item 3-
Item 4-
Item 5-
Item 6-
2

PART I

ITEM 1.             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(in millions, except per share data)

 Three MonthsNine Months
For the periods ended September 30,2023202220232022
Revenue from products$1,720 $1,243 $4,535 $3,625 
Revenue from services356 137 711 391 
Revenue2,076 1,380 5,246 4,016 
Cost of revenue from products1,043 740 2,730 2,160 
Cost of revenue from services269 116 555 345 
Cost of revenue1,312 856 3,285 2,505 
Gross profit764 524 1,961 1,511 
Selling, general and administrative expenses491 294 1,291 912 
Research and development expenses61 47 172 152 
Restructuring and asset impairment charges21 15 57 22 
Operating income191 168 441 425 
Interest expense14 12 35 37 
U.K. pension settlement expense 140  140 
Other non-operating income, net8 1 19 2 
Gain from sale of business   1 
Income before taxes185 17 425 251 
Income tax expense33 5 82 45 
Net income$152 $12 $343 $206 
Earnings per share:
Basic$0.63 $0.07 $1.64 $1.14 
Diluted$0.63 $0.07 $1.63 $1.14 
Weighted average number of shares:
Basic240.9 180.2 208.9 180.2 
Diluted242.2 180.9 210.1 180.9 
See accompanying notes to condensed consolidated financial statements.

3

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
 
 Three MonthsNine Months
For the periods ended September 30,2023202220232022
Net income$152 $12 $343 $206 
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment(61)(74)(77)(118)
Net change in derivative hedge agreements:
Unrealized gain (loss)(4)(8)(3)(23)
Amount of loss reclassified into net income 8 4 13 
Net change in post-retirement benefit plans:
Amortization of prior service credit(1) (2)(1)
Amortization of actuarial (gain) loss into net income 3 (1)11 
U.K. pension settlement expense 137  137 
Foreign currency translation adjustment1 46  46 
Other comprehensive income (loss), before tax(65)112 (79)65 
Income tax (benefit) expense related to items of other comprehensive income (loss)9 63 (5)93 
Other comprehensive income (loss), net of tax(74)49 (74)(28)
Comprehensive income$78 $61 $269 $178 


See accompanying notes to condensed consolidated financial statements.
4

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
 
September 30,
2023
December 31,
2022
  
ASSETS
Current assets:
Cash and cash equivalents$705 $944 
Receivables, less allowances for discounts, returns and credit losses of $55 and $50 in 2023 and 2022, respectively
1,653 1,096 
Inventories1,080 799 
Prepaid and other current assets213 173 
Total current assets3,651 3,012 
Property, plant and equipment, net1,132 630 
Goodwill7,149 2,719 
Other intangible assets, net3,039 930 
Other non-current assets934 661 
Total assets$15,905 $7,952 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$943 $723 
Accrued and other current liabilities1,160 867 
Short-term borrowings and current maturities of long-term debt17  
Total current liabilities2,120 1,590 
Long-term debt2,253 1,880 
Accrued post-retirement benefits281 286 
Deferred income tax liabilities724 222 
Other non-current accrued liabilities586 471 
Total liabilities5,964 4,449 
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock – par value $0.01 per share:
Authorized 750.0 shares, issued 256.7 shares and 196.0 shares in 2023 and 2022, respectively
3 2 
Capital in excess of par value8,529 2,134 
Retained earnings2,416 2,292 
Treasury stock – at cost 15.9 shares and 15.8 shares in 2023 and 2022, respectively
(718)(708)
Accumulated other comprehensive loss(300)(226)
Total stockholders’ equity9,930 3,494 
Non-controlling interests11 9 
Total equity9,941 3,503 
Total liabilities and stockholders’ equity$15,905 $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 nine months ended September 30,20232022
Operating Activities
Net income$343 $206 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation132 83 
Amortization167 93 
Share-based compensation45 28 
Restructuring and asset impairment charges57 22 
U.K. pension settlement expense 140 
Gain from sale of business (1)
Other, net(20)(9)
Payments for restructuring(12)(7)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables(142)(145)
Changes in inventories(41)(214)
Changes in accounts payable15 47 
Changes in accrued and deferred taxes(77)(12)
Other, net(85)3 
Net Cash – Operating activities382 234 
Investing Activities
Capital expenditures(177)(148)
Acquisitions of businesses, net of cash acquired (476) 
Proceeds from sale of business103 1 
Proceeds from the sale of property, plant and equipment2 3 
Cash received from investments1 5 
Cash paid for investments(1)(9)
Cash paid for equity investments(58)(2)
Cash received from interest rate swaps38  
Cash received from cross-currency swaps25 24 
Other, net4 3 
Net Cash – Investing activities(539)(123)
Financing Activities
Short-term debt issued, net1  
Long-term debt issued, net275  
   Long-term debt repaid(155) 
Repurchase of common stock(10)(52)
Proceeds from exercise of employee stock options45 6 
Dividends paid(219)(163)
Other, net(8)(1)
Net Cash – Financing activities(71)(210)
Effect of exchange rate changes on cash(11)(64)
Net change in cash and cash equivalents(239)(163)
Cash and cash equivalents at beginning of year944 1,349 
Cash and cash equivalents at end of period$705 $1,186 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest$43 $67 
Income taxes (net of refunds received)$159 $57 

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 four segments, Water Infrastructure, Applied Water, Measurement & Control Solutions and Integrated Solutions and Services. See Note 19, "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.
Acquisition of Evoqua
On May 24, 2023, Xylem completed the acquisition of Evoqua Water Technologies Corp. (“Evoqua”). Refer to Note 3, "Acquisitions and Divestitures," for additional information.
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, valuation results associated with purchase accounting, 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.
As a result of the Evoqua acquisition, we assessed our prior definition of service revenue and redefined service revenue for the combined company as revenue resulting from the satisfaction of performance obligations primarily related to outsourced water services, maintenance, repair, preventive and inspection services, software as a service ("SaaS") subscriptions, and spare parts sales related to these service offerings.
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 September 30, 2023, the total outstanding balance under these programs is $174 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 have a material impact on our financial condition or results of operations.

Note 3. Acquisitions and Divestitures
Evoqua Water Technologies Corp.

On May 24, 2023, the Company completed the acquisition of 100% of the issued and outstanding shares of Evoqua, a leader in providing water and wastewater treatment solutions, offering a broad portfolio of products and services to support industrial, municipal, and recreational customers, pursuant to the Agreement and Plan of Merger dated January 22, 2023 (the “Merger Agreement”). The Merger Agreement provided that Fore Merger Sub, Inc., a wholly owned subsidiary of the Company, merge with and into Evoqua, with Evoqua surviving as a wholly owned subsidiary of Xylem (the “Merger”). Under the terms and conditions of the Merger Agreement, each share of Evoqua common stock issued and outstanding immediately prior to the effective time of the Merger (other than certain excluded shares as described in the Merger Agreement) was converted into the right to receive 0.48 (the “Exchange Ratio”) of a share of the common stock of Xylem. Upon the effectiveness of the Merger, legacy Evoqua stockholders owned approximately 25% and legacy Xylem shareholders owned approximately 75% of the combined company. The purchase price for purposes of the Merger consisted of an aggregate of $6,121 million of the Company’s common stock, $160 million in replacement equity awards, and $619 million to repay certain indebtedness of Evoqua (refer to Note 12. Credit Facilities and Debt). Acquisition costs for the three months and nine months ended September 30, 2023, of $1 million and $56 million, respectively, have been recorded within Selling, general and administrative expense in our Consolidated Income Statement.

The acquisition-date fair value of the consideration totaled $6,900 million, which consisted of the following:

8

(in millions)Fair Value of Purchase Consideration
Xylem Common Stock issued to Evoqua stockholders (58,779,096 shares)$6,121 
Estimated replacement equity awards 160 
Payment of certain Evoqua indebtedness 619 
Total $6,900 

The Company has applied the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”) and recognized assets acquired and liabilities assumed at their fair value as of the date of acquisition, with the excess purchase consideration recorded to goodwill. As the Company finalizes the estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments may be recorded during the measurement period (a period not to exceed 12 months from the acquisition date). The following table summarizes the preliminary acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Evoqua:

(in millions)Fair Value
  Cash and cash equivalents$143 
  Receivables(a)
432 
  Inventories266 
  Prepaid and other current assets74 
  Assets held for sale8 
  Property, plant and equipment, net511 
  Goodwill4,442 
  Other intangible assets, net2,245 
  Other non-current assets192 
  Non-current assets held for sale85 
  Accounts payable(210)
  Accrued and other current liabilities(347)
 Short-term borrowings and current maturities of long-term debt(166)
  Liabilities held for sale(1)
  Long-term debt(111)
  Other non-current accrued liabilities(124)
  Deferred income tax liabilities(536)
  Non-current liabilities held for sale(3)
Total$6,900 
(a) Including $322 million of receivables and $110 million of contract assets.

The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. The above fair values of assets acquired and liabilities assumed are preliminary and are based on the information that was available as of the reporting date. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income and cost approaches. In many cases, the determination of the fair values required estimates about discount rates, future expected cash flows and other future events that are judgmental and subject to change. The final determination of the fair value of certain assets and liabilities will be completed as soon as the necessary information becomes available but no later than one year from the acquisition date.

The fair value of receivables acquired is $322 million, with the gross contractual amount being $329 million. The Company expects $7 million to be uncollectible.

9

The amounts of revenue and net loss from continuing operations before income taxes of Evoqua since the acquisition date included in the Consolidated Income Statement are as follows:

(in millions)Three months ended September 30, 2023Nine months ended September 30, 2023
Revenue$540 $718 
Loss before taxes$14 $63 

The $4,442 million of goodwill recognized, which is not deductible for U.S. income tax purposes, is primarily attributable to synergies and economies of scale expected from combining the operations of Evoqua and Xylem as well as the assembled workforce of Evoqua.

Identifiable Intangible Assets Acquired

The following table summarizes key information underlying identifiable intangible assets related to the Evoqua acquisition:

(in millions)Useful Life (in years)
Fair Value
(in millions)
Trademarks6$60 
Proprietary technology and patents
4 - 9
128 
Customer and distributor relationships
7 - 17
1,875 
Backlog
1 - 8
90 
Permits865 
Software
1 - 13
27 
Total$2,245 

The preliminary estimate of the fair value of Evoqua’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement of the fair value hierarchy as defined in ASC 820, Fair Value Measurements (“ASC 820”). Intangible assets consisting of the Evoqua tradename, technology, customer relationships, backlog, and permits were valued using the multi-period excess earnings method (“MEEM”), the relief from royalty (“RFR”) method, or the with and without method, which are all forms of the income approach. Intangible assets related to Evoqua software were valued using the cost approach.

Trademarks and proprietary technology intangible assets were valued using the RFR method. The RFR method of valuation suggests that in lieu of ownership, the acquirer can obtain comparable rights to use the subject asset via a license from a hypothetical third-party owner. The asset’s Fair Value is the present value of license fees avoided by owning it (i.e., the royalty savings).

Customer and distributor relationships and backlog intangible assets were valued using the MEEM method. The MEEM method of valuation is an approach where the net earnings attributable to the asset being measured are isolated from other “contributory assets” over the intangible asset’s remaining economic life.

The Permits intangible asset was valued using the with and without method. The with and without method of valuation is an approach that considers the hypothetical impact to the projected cash flows of the business if the intangible asset was not put in place.

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The Software intangible asset was valued using the cost approach. The cost approach method of valuation is an approach that relies on estimating the replacement or reproduction costs new of assets, along with factors of physical deterioration, based on the principle that an asset would not be purchased for a price higher than the cost to replace it with an asset of comparable utility.

Inventory was estimated using the comparative sales method, which quantifies the fair value of inventory based on the expected sales price of the subject inventory (when complete), reduced for: (i) all costs expected to be incurred in its completion and disposition efforts and (ii) a profit on those value-added completion and disposition costs.

Stock-Based Compensation

In connection with the Merger, each outstanding and issued option, restricted stock unit (“RSU”), performance stock unit (“PSU”) and cash-settled stock appreciation right (“SAR”) was converted into the Xylem equivalent, with outstanding PSUs being converted into Xylem RSUs. As a result, Xylem issued 2 million replacement equity options, 330 thousand PSU awards, and 377 thousand RSU awards, respectively. The portion of the fair value related to pre-combination services of $160 million was included in the purchase price, and $56 million will be recognized over the remaining service periods. As of September 30, 2023, the future unrecognized expense related to the outstanding options, RSUs and PSUs was approximately $2 million, $13 million, and $3 million, respectively. The future unrecognized expense related to options, RSUs, and PSUs will be recognized over a weighted-average service period of 3 years. SARs are immaterial.

Pro Forma Financial Information

The following table summarizes, on an unaudited pro forma basis, the condensed combined results of operations of the Company for the three and nine months ended September 30, 2023 and 2022, assuming the acquisition had occurred on January 1, 2022.

(Unaudited)
Three Months Ended
September 30,
(Unaudited)
Nine Months Ended
September 30,
(in millions)2023202220232022
Revenue$2,076 $1,885 $6,025 $5,387 
Net income $180 $28 $358 $102 

The foregoing unaudited pro forma results are for informational purposes only and are not necessarily indicative of the actual results of operations that might have occurred had the acquisition occurred on January 1, 2022, nor are they necessarily indicative of future results. The unaudited pro-forma information for all periods presented includes the following adjustments, where applicable, for business combination accounting effects resulting from the acquisition: (i) amortization of the fair value step up in inventory, (ii) additional amortization expense related to finite-lived intangible assets acquired, (iii) repayment of Evoqua’s term loan and revolver and the settlement of the related interest rate swap, (iv) additional interest expense related to financing for the acquisition (refer to Note 12. Credit Facilities and Debt), (v) depreciation expense on property, plant and equipment, (vi) additional incremental stock-based compensation expense for the replacement of Evoqua’s outstanding equity awards with Xylem’s replacement equity awards, and (vii) the related tax effects assuming that the business combination occurred on January 1, 2022.

The significant nonrecurring adjustments reflected in the unaudited pro-forma consolidated information above include the reclassification of the transaction costs to the earliest period presented and the reversal of the impacts related to the settlement of the interest rate swap, each net of tax.
Divestitures
During the third quarter ended September 30, 2023, Xylem sold the former Evoqua hemodialysis concentrates business for approximately $12 million.

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On June 15, 2023, Xylem sold the former Evoqua carbon reactivation and slurry operations to Desotec US LLC, a subsidiary of Desotec N.V., for approximately $91 million, a price equal to the fair value less costs to sell the business.

Note 4. Revenue
Disaggregation of Revenue
The following table illustrates the sources of revenue:
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2023202220232022
Revenue from contracts with customers$1,950 $1,319 $4,970 $3,852 
Lease Revenue126 61 276 164 
Total$2,076 $1,380 $5,246 $4,016 

The following table reflects revenue from contracts with customers by application.
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2023202220232022
Water Infrastructure
     Transport$448 $410 $1,350 $1,235 
     Treatment280 103 536 297 
Applied Water
Building Solutions260 253 770 712 
     Industrial Water205 205 626 600 
Measurement & Control Solutions
     Water337 278 994 822 
     Energy103 70 267 186 
Integrated Solutions & Services317  427  
Total$1,950 $1,319 $4,970 $3,852 

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The following table reflects revenue from contracts with customers by geographical region.
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2023202220232022
Water Infrastructure
     United States$263 $155 $658 $467 
Western Europe231 172 641 548 
Emerging Markets (a)166 135 401 356 
Other68 51 186 161 
Applied Water
     United States243 235 735 675 
Western Europe97 90 306 285 
Emerging Markets (a)91 100 250 258 
Other34 33 105 94 
Measurement & Control Solutions
     United States289 221 811 614 
Western Europe70 55 216 183 
Emerging Markets (a)53 48 153 142 
Other28 24 81 69 
Integrated Solutions & Services
United States295  393  
Western Europe5  7  
Emerging Markets (a)3  6  
Other14  21  
Total$1,950 $1,319 $4,970 $3,852 

(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")

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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, 2022$125 $164 
  Additions, net91 110 
  Revenue recognized from opening balance— (94)
  Billings transferred to accounts receivable (71)— 
  Foreign currency and other(8)(12)
Balance at September 30, 2022$137 $168 
Balance at January 1, 2023$151 $183 
  Opening balance from the acquisition of Evoqua110 107 
  Additions, net101 123 
  Revenue recognized from opening balance— (99)
  Billings transferred to accounts receivable(97)— 
  Foreign currency and other(2)(14)
Balance at September 30, 2023$263 $300 
(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 September 30, 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 $964 million, of which $482 million was contributed by the Evoqua acquisition. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

Note 5. Restructuring and Asset Impairment Charges
Restructuring
During the three and nine months ended September 30, 2023 we incurred restructuring costs of $20 million and $54 million, respectively. We incurred these charges primarily as a result of our acquisition of Evoqua. Approximately, $11 million and $25 million of the charges related to stock-based compensation expense due to acceleration clauses in Evoqua's equity compensation agreements for the three and nine months ended September 30, 2023, respectively. Approximately $1 million and $14 million of the charges represented the reduction of headcount related to the integration of Evoqua for the three and nine months ended September 30, 2023, respectively. Additionally, during the three and nine months ended September 30, 2023, we incurred $8 million and $15 million, respectively of charges related to our efforts to reposition our businesses to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. The charges were incurred across all of our segments.

14

During the three and nine months ended September 30, 2022 we incurred restructuring charges of $3 million and $9 million, respectively. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across the Water Infrastructure, Applied Water and Measurement & Control Solutions segments.
The following table presents the components of restructuring expense and asset impairment charges:
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2023202220232022
By component:
Severance and other charges$17 $3 $52 $9 
Asset impairment3  3  
Reversal of restructuring accruals  (1) 
Total restructuring costs$20 $3 $54 $9 
Asset impairment charges1 12 3 13 
Total restructuring and asset impairment charges$21 $15 $57 $22 
By segment:
Water Infrastructure$1 $2 $4 $4 
Applied Water5  6 1 
Measurement & Control Solutions4 13 10 17 
Integrated Solutions & Services  4  
Corporate and other11  33  
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 nine months ended September 30, 2023 and 2022:
(in millions)20232022
Restructuring accruals - January 1$10 $7 
Restructuring costs, net54 9 
Cash payments(12)(7)
Asset impairment(3) 
Stock based compensation expense(25) 
Foreign currency and other3 (1)
Restructuring accruals - September 30$27 $8 
By segment:
Water Infrastructure$3 $1 
Applied Water1  
Measurement & Control Solutions7 3 
Integrated Solutions & Services4  
Regional selling locations (a)3 2 
Corporate and other9 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.
15

The following table presents expected restructuring spend in 2023 and thereafter:
(in millions)Water InfrastructureApplied WaterMeasurement & Control SolutionsIntegrated Solutions & ServicesCorporateTotal
Actions Commenced in 2023:
Total expected costs$5 $7 $10 $7 $33 $62 
Costs incurred during Q1 20231 1 3   5 
Costs incurred during Q2 20232  1 4 22 29 
Costs incurred during Q3 20231 5 3  11 20 
Total expected costs remaining$1 $1 $3 $3 $ $8 
The Water Infrastructure, Applied Water, Measurement & Control Solutions, Integrated Solutions & Services and Corporate actions commenced in 2023 consist primarily of severance charges. The actions are expected to continue through the end of 2024.
Asset Impairment
During the third quarter of 2023, we recognized a $1 million impairment charge for certain fixed assets within our Measurement & Control Solutions segment.
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 9, "Goodwill and Other Intangible Assets," for additional information.
During the third quarter of 2022, we determined that certain assets including software and customer relationships within our Measurement & Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $12 million. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.
Note 6. Income Taxes
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within the periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
The income tax provision for the three months ended September 30, 2023 was $33 million resulting in an effective tax rate of 17.8%, compared to a $5 million expense resulting in an effective tax rate of 27.8% for the same period in 2022. The income tax provision for the nine months ended September 30, 2023 was $82 million resulting in an effective tax rate of 19.3%, compared to a $45 million expense resulting in an effective tax rate of 17.8% for the same period in 2022. The effective tax rate for the three and nine month periods ended September 30, 2023 was lower than the U.S. federal statutory rate primarily due to the favorable impact of earnings mix partially offset by the Global Intangible Low Taxed Income inclusion and nondeductible transaction costs.
16

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 SEK813 million (approximately $75 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. 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 September 30, 2023, we do not have any unrecognized tax benefits related to this uncertain tax position.
Note 7. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
Three Months EndedNine Months Ended
 September 30,September 30,
2023202220232022
Net income (in millions)$152 $12 $343 $206 
Shares (in thousands):
Weighted average common shares outstanding240,840 180,191 208,905 180,173 
Add: Participating securities (a)30 26 30 28 
Weighted average common shares outstanding — Basic240,870 180,217 208,935 180,201 
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options832 523 776 516 
Dilutive effect of restricted stock units and performance share units487 199 372 153 
Weighted average common shares outstanding — Diluted242,189 180,939 210,083 180,870 
Basic earnings per share$0.63 $0.07 $1.64 $1.14 
Diluted earnings per share$0.63 $0.07 $1.63 $1.14 
(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 15, "Share-Based Compensation Plans," to the condensed consolidated financial statements for further detail on the performance share units.
Three Months EndedNine Months Ended
 September 30,September 30,
(in thousands)2023202220232022
Stock options1,722 1,508 1,729 1,496 
Restricted stock units773 413 570 368 
Performance share units256 333 272 279 

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Note 8. Inventories
The components of total inventories are summarized as follows:
(in millions)September 30,
2023
December 31,
2022
Finished goods$378 $286 
Work in process106 58 
Raw materials596 455 
Total inventories$1,080 $799 

Note 9. Goodwill and Other Intangible Assets
Goodwill    
Changes in the carrying value of goodwill by reportable segment for the nine months ended September 30, 2023 are as follows:
(in millions)Water
Infrastructure
Applied WaterMeasurement & Control SolutionsIntegrated Solutions & ServicesTotal
Balance as of January 1, 2023$638 $502 $1,579 $ $2,719 
Activity in 2023
Acquisitions1,588 241 80 2,533 4,442 
Foreign currency and other(4)(1)(7) (12)
Balance as of September 30, 2023$2,222 $742 $1,652 $2,533 $7,149 
The Company has applied the acquisition method of accounting in accordance with ASC 805 and recognized assets acquired and liabilities assumed of Evoqua at their fair value as of the date of acquisition, with the excess purchase consideration recorded to goodwill. We have preliminarily allocated goodwill to segments of the Company that are expected to benefit from the synergies of the acquisition. As the Company finalizes the estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments to the amount of goodwill allocated to each segment may be necessary.
Other Intangible Assets
Information regarding our other intangible assets is as follows:
September 30, 2023December 31, 2022
(in millions)
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor relationships$2,641 $(448)$2,193 $784 $(371)$413 
Proprietary technology and patents296 (131)165 165 (118)47 
Trademarks195 (89)106 137 (80)57 
Software577 (312)265 514 (268)246 
Other161 (15)146 5 (3)2 
Indefinite-lived intangibles164  164 165  165 
Other Intangibles$4,034 $(995)$3,039 $1,770 $(840)$930 
Amortization expense related to finite-lived intangible assets was $84 million and $167 million for the three and nine-month periods ended September 30, 2023, respectively, and $31 million and $93 million for the three and nine-month periods ended September 30, 2022, respectively.
18

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.
During the third quarter of 2022, we determined that certain assets including software and customer relationships within our Measurement & Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $12 million.
Note 10. 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.
As a result of Evoqua terminating their interest rate swaps prior to the Company completing the acquisition, the Company received $38 million in proceeds during the second quarter of 2023 from the termination of the interest rate swaps.
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, Chinese Yuan, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling $195 million and $255 million as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 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 Chinese Yuan, purchase Canadian Dollar and sell U.S. Dollar, purchase Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar, sell Canadian Dollar and purchase Euro, and sell Australian Dollar and purchase Euro. The purchased notional amounts associated with these currency derivatives are $72 million, $47 million, $19 million, $16 million, $9 million, $9 million, $9 million, $8 million and $6 million, respectively. As of December 31, 2022 the purchased notional amounts associated with these currency derivatives were $105 million, $73 million, $29 million, $0 million, $0 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 $1,599 million and $1,616 million as of September 30, 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.
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Previously, the entirety of the outstanding balance of the 2.250% Senior Notes 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.
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. On December 12, 2022, the currency forward agreement matured.
The 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. Items in the table below reflect changes in "Other comprehensive loss" ("OCL") within the Statements of Comprehensive Income:
Three Months EndedNine Months Ended
 September 30,September 30,
(in millions)2023202220232022
Cash Flow Hedges
Foreign Exchange Contracts
Amount of (loss) recognized in OCL$(4)$(6)$(3)$(25)
Amount of loss reclassified from OCL into Revenue 6 2 10 
Amount of loss reclassified from OCL into Cost of revenue  2 1 
Net Investment Hedges
Cross-Currency Swaps
Amount of gain (loss) recognized in OCL$36 $113 $(23)$207 
Amount of income recognized in Interest expense8