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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 June 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 July 28, 2023, there were 240,828,528 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 MonthsSix Months
For the period ended June 30,2023202220232022
Revenue$1,722 $1,364 $3,170 $2,636 
Cost of revenue1,071 844 1,973 1,649 
Gross profit651 520 1,197 987 
Selling, general and administrative expenses446 314 800 618 
Research and development expenses58 53 111 105 
Restructuring and asset impairment charges28 7 36 7 
Operating income119 146 250 257 
Interest expense12 12 21 25 
Other non-operating income, net7 2 11 1 
Gain from sale of business   1 
Income before taxes114 136 240 234 
Income tax expense22 24 49 40 
Net income$92 $112 $191 $194 
Earnings per share:
Basic$0.45 $0.62 $0.99 $1.07 
Diluted$0.45 $0.62 $0.98 $1.07 
Weighted average number of shares:
Basic205.5 180.2 193.0 180.2 
Diluted206.7 180.6 194.0 180.8 
See accompanying notes to condensed consolidated financial statements.

3


XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
 
 Three MonthsSix Months
For the period ended June 30,2023202220232022
Net income$92 $112 $191 $194 
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment(38)(41)(16)(44)
Net change in derivative hedge agreements:
Unrealized gain (loss)(3)(9)1 (15)
Amount of loss reclassified into net income(1)3 4 5 
Net change in post-retirement benefit plans:
Amortization of prior service credit(1)(1)(1)(1)
Amortization of actuarial (gain) loss into net income 4 (1)8 
Foreign currency translation adjustment(1) (1) 
Other comprehensive income (loss), before tax(44)(44)(14)(47)
Income tax (benefit) expense related to items of other comprehensive income (loss)(9)27 (14)30 
Other comprehensive income (loss), net of tax(35)(71) (77)
Comprehensive income$57 $41 $191 $117 


See accompanying notes to condensed consolidated financial statements.
4


XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
 
June 30,
2023
December 31,
2022
  
ASSETS
Current assets:
Cash and cash equivalents$708 $944 
Receivables, less allowances for discounts, returns and credit losses of $45 and $50 in 2023 and 2022, respectively
1,659 1,096 
Inventories1,143 799 
Prepaid and other current assets225 173 
Total current assets3,735 3,012 
Property, plant and equipment, net1,144 630 
Goodwill7,108 2,719 
Other intangible assets, net3,188 930 
Other non-current assets922 661 
Total assets$16,097 $7,952 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$968 $723 
Accrued and other current liabilities1,074 867 
Short-term borrowings and current maturities of long-term debt240  
Total current liabilities2,282 1,590 
Long-term debt2,267 1,880 
Accrued post-retirement benefits293 286 
Deferred income tax liabilities738 222 
Other non-current accrued liabilities607 471 
Total liabilities6,187 4,449 
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock – par value $0.01 per share:
Authorized 750.0 shares, issued 256.6 shares and 196.0 shares in 2023 and 2022, respectively
3 2 
Capital in excess of par value8,495 2,134 
Retained earnings2,344 2,292 
Treasury stock – at cost 15.9 shares and 15.8 shares in 2023 and 2022, respectively
(717)(708)
Accumulated other comprehensive loss(226)(226)
Total stockholders’ equity9,899 3,494 
Non-controlling interests11 9 
Total equity9,910 3,503 
Total liabilities and stockholders’ equity$16,097 $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 six months ended June 30,20232022
Operating Activities
Net income191 194 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation69 56 
Amortization83 62 
Share-based compensation27 18 
Restructuring and asset impairment charges36 7 
Gain from sale of business (1)
Other, net(5)6 
Payments for restructuring(9)(5)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables(122)(119)
Changes in inventories(57)(189)
Changes in accounts payable36 40 
Changes in accrued and deferred taxes(86)(2)
Other, net(154)(35)
Net Cash – Operating activities9 32 
Investing Activities
Capital expenditures(103)(95)
Acquisitions of businesses, net of cash acquired (476) 
Proceeds from sale of business91 1 
Proceeds from the sale of property, plant and equipment 3 
Cash received from investments 4 
Cash paid for investments (7)
Cash paid for equity investments(56)(1)
Cash received from interest rate swaps38  
Cash received from cross-currency swaps14 11 
Other, net3  
Net Cash – Investing activities(489)(84)
Financing Activities
Short-term debt issued, net74  
Long-term debt issued, net275  
   Long-term debt repaid(1) 
Repurchase of common stock(9)(52)
Proceeds from exercise of employee stock options40 3 
Dividends paid(139)(110)
Other, net(5)1 
Net Cash – Financing activities235 (158)
Effect of exchange rate changes on cash9 (26)
Net change in cash and cash equivalents(236)(236)
Cash and cash equivalents at beginning of year944 1,349 
Cash and cash equivalents at end of period$708 $1,113 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest$30 $40 
Income taxes (net of refunds received)$135 $42 

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.

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 June 30, 2023, the total outstanding balance under these programs is $178 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 six months ended June 30, 2023 of $39 million and $55 million, respectively, have been recorded within Selling, general and administrative expense in our Consolidated Income Statement.

8


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

(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 
  Receivables432 
  Inventories288 
  Prepaid and other current assets75 
  Assets held for sale8 
  Property, plant and equipment, net511 
  Goodwill4,364 
  Other intangible assets, net2,307 
  Other non-current assets191 
  Non-current assets held for sale86 
  Accounts payable(207)
  Accrued and other current liabilities(342)
 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(551)
  Non-current liabilities held for sale(3)
Total$6,900 

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 sales and net loss from continuing operations before income taxes of Evoqua since the acquisition date included in the Consolidated Income Statement for the three and six months ended June 30, 2023 are $178 million and $49 million, respectively. The $4,364 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
150 
Customer and distributor relationships
7 - 17
1,960 
Backlog
1 - 8
110 
Software
1 - 3
27 
Total$2,307 

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, and backlog were valued using the multi-period excess earnings method (“MEEM”), or the relief from royalty (“RFR”) method, both are forms of the income 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 relationship 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.

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 June 30, 2023, the future unrecognized expense related to the outstanding Converted Equity Options, RSU Awards and PSU Awards was approximately $5 million, $21 million, and $10 million, respectively. The future unrecognized expense related to Converted Equity Options, RSU Awards, and PSU Awards will be recognized over a weighted-average service period of 3 years. SAR awards are immaterial.

10


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 six months ended June 30, 2023 and 2022, assuming the acquisition had occurred on January 1, 2022.

(Unaudited)
Three Months Ended
June 30,
(Unaudited)
Six Months Ended
June 30,
(in millions)2023202220232022
Revenue$2,025 $1,803 $3,952 $3,502 
Net income $63 $92 $170 $76 

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
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 EndedSix Months Ended
June 30,June 30,
(in millions)2023202220232022
Revenue from contracts with customers$1,637 $1,312 $3,020 $2,534 
Lease Revenue85 52 150 102 
Total$1,722 $1,364 $3,170 $2,636 

11


The following table reflects revenue from contracts with customers by application.
Three Months EndedSix Months Ended
June 30,June 30,
(in millions)2023202220232022
Water Infrastructure
     Transport$466 $432 $902 $825 
     Treatment168 104 256 194 
Applied Water
Building Solutions257 226 510 461 
     Industrial Water221 204 421 394 
Measurement & Control Solutions
     Water323 279 657 544 
     Energy92 67 164 116 
Integrated Solutions & Services110  110  
Total$1,637 $1,312 $3,020 $2,534 

12


The following table reflects revenue from contracts with customers by geographical region.
Three Months EndedSix Months Ended
June 30,June 30,
(in millions)2023202220232022
Water Infrastructure
     United States$219 $165 $395 $312 
Western Europe220 190 410 376 
Emerging Markets (a)130 120 235 221 
Other65 61 118 110 
Applied Water
     United States248 219 492 440 
Western Europe105 101 209 195 
Emerging Markets (a)86 79 159 159 
Other39 31 71 61 
Measurement & Control Solutions
     United States265 212 522 393 
Western Europe69 59 146 128 
Emerging Markets (a)52 50 100 94 
Other29 25 53 45 
Integrated Solutions & Services
United States98  98  
Western Europe2  2  
Emerging Markets (a)3  3  
Other7  7  
Total$1,637 $1,312 $3,020 $2,534 

(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")

13


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, net63 97 
  Revenue recognized from opening balance— (75)
  Billings transferred to accounts receivable (61)— 
  Foreign currency and other(4)(3)
Balance at June 30, 2022$123 $183 
Balance at January 1, 2023$151 $183 
  Opening balance from the acquisition of Evoqua110 107
  Additions, net8594 
  Revenue recognized from opening balance— (80)
  Billings transferred to accounts receivable(73)— 
  Foreign currency and other1 (5)
Balance at June 30, 2023$274 $299 
(a)Excludes receivable balances, which are disclosed on the Condensed Consolidated Balance Sheets

Performance obligations
Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of June 30, 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 $949 million, of which $464 million is 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 six months ended June 30, 2023 we incurred restructuring costs of $28 million and $34 million, respectively. We incurred these charges primarily as a result of our acquisition of Evoqua. Approximately, $14 million of the charges related to stock based compensation expense due to acceleration clauses in equity compensation agreements and approximately $14 million of the charges represented the reduction of headcount. Additionally, we incurred $6 million of charges related to 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 were incurred across all of our segments.

During the three and six months ended June 30, 2022 we incurred restructuring charges of $6 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across the Water Infrastructure, Applied Water and Measurement & Control Solutions segments.
14


The following table presents the components of restructuring expense and asset impairment charges:
Three Months EndedSix Months Ended
June 30,June 30,
(in millions)2023202220232022
By component:
Severance and other charges$29 $6 $35 $6 
Reversal of restructuring accruals(1) (1) 
Total restructuring costs$28 $6 $34 $6 
Asset impairment charges 1 2 1 
Total restructuring and asset impairment charges$28 $7 $36 $7 
By segment:
Water Infrastructure$1 $2 $3 $2 
Applied Water 1 1 1 
Measurement & Control Solutions1 4 6 4 
Integrated Solutions & Services4  4  
Corporate and other22  22  
The following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within "Accrued and other current liabilities" and "Other non-current accrued liabilities", for the six months ended June 30, 2023 and 2022:
(in millions)20232022
Restructuring accruals - January 1$10 $7 
Restructuring costs, net34 6 
Cash payments(9)(5)
Stock based compensation included within AOCL(14) 
Foreign currency and other(1) 
Restructuring accruals - June 30$20 $8 
By segment:
Water Infrastructure$2 $1 
Applied Water  
Measurement & Control Solutions3 4 
Integrated Solutions & Services4  
Regional selling locations (a)2 1 
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$4 $2 $6 $7 $33 $52 
Costs incurred during Q1 20231 1 3   5 
Costs incurred during Q2 20232  1 4 22 29 
Total expected costs remaining$1 $1 $2 $3 $11 $18 
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 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.

Note 6. Income Taxes
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
The income tax provision for the three months ended June 30, 2023 was $22 million resulting in an effective tax rate of 19.1%, compared to a $24 million expense resulting in an effective tax rate of 17.5% for the same period in 2022. The income tax provision for the six months ended June 30, 2023 was $49 million resulting in an effective tax rate of 20.5%, compared to a $40 million expense resulting in an effective tax rate of 17.0% for the same period in 2022. The effective tax rate for the six month period ended June 30, 2023 was lower than the U.S. federal statutory rate primarily due to the favorable impact of earnings mix partially offset by 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 SEK806 million (approximately $74 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 June 30, 2023, we do not have any unrecognized tax benefits related to this uncertain tax position.
16


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 EndedSix Months Ended
 June 30,June 30,
2023202220232022
Net income (in millions)$92 $112 $191 $194 
Shares (in thousands):
Weighted average common shares outstanding205,505 180,123 192,938 180,164 
Add: Participating securities (a)34 33 29 29 
Weighted average common shares outstanding — Basic205,539 180,156 192,967 180,193 
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options872 438 747 513 
Dilutive effect of restricted stock units and performance share units329 56 315 129 
Weighted average common shares outstanding — Diluted206,740 180,650 194,029 180,835 
Basic earnings per share$0.45 $0.62 $0.99 $1.07 
Diluted earnings per share$0.45 $0.62 $0.98 $1.07 
(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 EndedSix Months Ended
 June 30,June 30,
(in thousands)2023202220232022
Stock options2,107 1,647 1,732 1,491 
Restricted stock units606 362 469 346 
Performance share units318 270 279 252 

Note 8. Inventories
The components of total inventories are summarized as follows:
(in millions)June 30,
2023
December 31,
2022
Finished goods$408 $286 
Work in process121 58 
Raw materials614 455 
Total inventories$1,143 $799 

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Note 9. Goodwill and Other Intangible Assets
Goodwill    
Changes in the carrying value of goodwill by reportable segment for the six months ended June 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
Acquisitions1,547 241 80 2,496 4,364 
Foreign currency and other6 5 13 1 25 
Balance as of June 30, 2023$2,191 $748 $1,672 $2,497 $7,108 
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:
June 30, 2023December 31, 2022
(in millions)
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor relationships$2,749 $(410)$2,339 $784 $(371)$413 
Proprietary technology and patents294 (126)168 165 (118)47 
Trademarks198 (87)111 137 (80)57 
Software595 (299)296 514 (268)246 
Other115 (7)108 5 (3)2 
Indefinite-lived intangibles166  166 165  165 
Other Intangibles$4,117 $(929)$3,188 $1,770 $(840)$930 
Amortization expense related to finite-lived intangible assets was $51 million and $83 million for the three and six-month periods ended June 30, 2023, respectively, and $32 million and $62 million for the three and six-month periods ended June 30, 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.

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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 quarter ended June 30, 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, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling $360 million and $255 million as of June 30, 2023 and December 31, 2022, respectively. As of June 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 Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar, sell Canadian Dollar and purchase Euro, purchase Canadian Dollar and Sell U.S. Dollar, and sell Australian Dollar and purchase Euro. The purchased notional amounts associated with these currency derivatives are $144 million, $93 million, $39 million, $18 million, $17 million, $16 million, $16 million and $13 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, $0 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 $1,659 million and $1,616 million as of June 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.
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.
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.
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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.
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 EndedSix Months Ended
 June 30,June 30,
(in millions)2023202220232022
Cash Flow Hedges
Foreign Exchange Contracts
Amount of gain (loss) recognized in OCL$(3)$(13)$1 $(19)
Amount of (gain) loss reclassified from OCL into Revenue(1)2 2 4 
Amount of loss reclassified from OCL into Cost of revenue 1 2 1 
Net Investment Hedges
Cross-Currency Swaps
Amount of gain (loss) recognized in OCL$(37)$93 $(59)$94 
Amount of income recognized in Interest expense8 7 15 13 
Foreign Currency Denominated Debt
Amount of gain recognized in OCL$ $23 $ $31 
Fair Value Hedges
Foreign Exchange Contracts
Amount of gain recognized in OCL$ $4 $ $4 
Amount of (loss) recognized in Selling, general and administrative expenses$ $(11)$ $(11)
Amount recognized in Interest expense$ $(1)$ $(1)
As of June 30, 2023, $1 million of net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.
As of June 30, 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.
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The fair values of our derivative contracts currently included in our hedging program were as follows:
(in millions)June 30,
2023
December 31,
2022
Derivatives designated as hedging instruments
Assets
Cash Flow Hedges
  Prepaid and other current assets$5 $ 
Net Investment Hedges
Other non-current assets$40 $79 
Liabilities
Cash Flow Hedges
  Accrued and other current liabilities$(