Xylem (XYL) 10-K risk factor changes: FY2018 vs FY2017

Should any of these risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially and adversely [removed: affected.*][added: affected.]

Failure to compete successfully in our markets [added: and disruptive technologies] could adversely affect our business.

We believe the principal points of competition in our markets are product [added: and service] performance, [removed: reliability] [added: quality] and [added: reliability,] innovation, [added: speed to market with new or disruptive technologies,] application expertise, brand reputation, energy efficiency, product life cycle cost, timeliness of delivery, proximity of service centers, effectiveness of our distribution channels and price.

Maintaining and improving our competitive position will require successful management of these factors, including continued investment by us in manufacturing, [added: technology and innovation,] research and development, engineering, marketing, customer service and support, and our distribution networks.

Our future growth rate depends upon a number of factors, including our ability to (i) identify emerging technological trends in our target end-markets, (ii) develop and maintain competitive [removed: products] [added: products, services] and [added: business models and] defend our market share against an ever-expanding number of competitors including many new and non-traditional competitors, (iii) enhance our products [added: and services offerings] by adding innovative features [added: or disruptive technologies] that differentiate [removed: our products] [added: them] from those of our competitors and prevent [removed: commoditization of our products,] [added: commoditization,] (iv) develop, manufacture and bring compelling new products [added: and services] to market quickly and cost-effectively, and (v) attract, develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to develop new technologies and introduce new [removed: products.][added: products and services.]

Our competitors or third parties from outside of our industry may develop disruptive technologies or products [added: and services] that are superior to [removed: our products, or] [added: ours,] may develop more efficient or effective methods of providing products and services or may adapt more quickly than we do to new [added: or disruptive] technologies or evolving customer requirements.

The failure of our [removed: technologies or] [added: technologies,] products [added: or services] to maintain and gain market acceptance due to more attractive offerings could significantly reduce our revenues [added: or market share] and adversely affect our competitive standing and prospects.

Pricing pressures also could cause us to adjust the prices of certain products to stay competitive, which could adversely affect our [added: market share and] financial performance.

In [removed: 2017, 46%, 26%] [added: 2018, 47%, 25%] and [removed: 21%] [added: 20%] of our total revenue was from customers located in the United States, western Europe and emerging markets, respectively.

Important factors impacting our businesses include the overall strength of these economies and our customers’ confidence in both local and global macro-economic conditions; industrial and [added: private sector spending,] federal, state, local and municipal governmental fiscal and trade policies; the strength of the residential and commercial real estate markets; interest rates; availability of commercial financing for our customers and end-users; the availability of funding for our public sector customers; and unemployment rates.

In [removed: 2017, 54%] [added: 2018, 53%] of our total revenue was from customers outside the United States, with [removed: 21%] [added: 20%] of total revenue generated in emerging markets.

Both our [removed: sales from] international operations and [removed: export] sales are subject, in varying degrees, to risks inherent [removed: to] [added: in] doing business outside the United States.

| • | changes in trade protection measures, including [removed: tariff] [added: embargoes, tariffs] and [added: other] trade [removed: barriers] [added: barriers,] and import and export [added: regulations and] licensing requirements; |

| • | possibility of unfavorable circumstances arising from host country laws or regulations, including those related to infrastructure and data [removed: transmission] [added: transmission, security] and privacy; |

| • | increased costs and risks [removed: of] [added: in] developing, staffing and simultaneously managing a number of global operations as a result of distance as well as language and cultural differences; and |

| • | [added: outbreak or escalation of] insurrection, armed conflict, terrorism or war. |

[removed: Any] [added: Further, any] payment of distributions, loans or advances to us by our foreign subsidiaries could be subject to restrictions on, or taxation of, dividends on repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate.

In addition to the general risks that we face outside the United States, our operations in emerging markets could involve additional uncertainties for us, including risks that governments may impose [removed: limitations on our ability to repatriate funds; governments may impose] withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase; [removed: an outbreak or escalation of any insurrection or armed conflict may occur;] governments may seek to nationalize our assets; or governments may impose or increase investment barriers or other restrictions affecting our business.

In addition, emerging markets pose other uncertainties, including the difficulty of enforcing agreements, challenges collecting receivables, protection of our intellectual property and other assets, pressure on the pricing of our [removed: products,] [added: products and services,] higher business conduct risks, [removed: less] [added: ability to hire and retain] qualified talent and risks of political instability.

Additionally, as a result of these [removed: plans ,] [added: plans,] we may experience a loss of continuity, loss of accumulated knowledge or inefficiency during transitional periods.

Factors that may impede a successful implementation include the retention of key employees, the impact of regulatory matters [removed: or] [added: including tax,] matters involving certain third [removed: parties] [added: party service providers] selected to assist [removed: us,] [added: us including their compliance with the Company's internal controls over financial reporting,] and adverse economic market conditions.

A material disruption to any of our facilities or [removed: operations] [added: operations, or that of third parties upon which we rely,] may adversely affect our [removed: business.][added: business.]

If our facilities or [removed: operations] [added: operations, or that of third parties upon which we rely in our supply chain and critical business operations,] were to be disrupted as a result of a significant equipment [added: or system] failure, natural disaster, [removed: power] [added: power, water or communications] outage, fire, explosion, [added: critical supply failure,] terrorism, cyber-based attack, [added: political disruption,] labor [removed: disputes,] [added: dispute,] work [removed: stoppages] [added: stoppage] or [removed: slowdowns,] [added: slowdown,] adverse weather conditions or other reason, our financial performance could be adversely [removed: affected as a result of our inability to meet customer demand.][added: affected.]

Any interruption in capability [removed: could] [added: may be lengthy and have lasting effects,] require [added: a significant amount of management and other employees' time and focus, and require] us to make substantial [removed: capital] expenditures to remedy the situation, which could negatively affect our profitability and financial condition.

Our business could be adversely affected by cyber threats or [added: other] interruptions in information technology, communications networks and operations.

Regardless of protection measures, essentially all systems are susceptible to disruption due to [removed: failure, vandalism,] [added: cybersecurity attacks including] denial-of-service, [removed: insider risk,] computer [removed: viruses,] [added: viruses and] security breaches, [added: insider risk, equipment or system failure, vandalism,] natural disasters, power [removed: outages] [added: outages, shutdown, telecommunication or utility failure] and other events.

A successful attack may result in inappropriate access to our or our customers' information or an inability for our products [added: and services] to function properly.

We have adopted measures designed to mitigate potential risks associated with information technology disruptions and cybersecurity threats, however, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the [removed: compromising] [added: compromise] of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of [removed: business or potential liability,] [added: business, liability to others,] regulatory enforcement actions, and/or damage to our [removed: reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.][added: reputation.]

Transport of goods from [removed: suppliers,] [added: suppliers] and to [removed: customers,] [added: customers] could also be hampered for the reasons stated above.

Additionally, to conduct our operations, we regularly move data across national borders, and consequently [added: we] are subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security.

For example, the European Union’s General Data Protection Regulation (“GDPR”), which [added: became effective in May 2018,] greatly increases the jurisdictional reach of European Union law and adds a broad array of requirements for handling personal data, including the public disclosure of significant data [removed: breaches, becomes effective in May 2018.][added: breaches.]

[removed: And other countries have enacted or are] enacting data localization laws that require data to stay within their borders.

All of these evolving compliance and operational requirements impose significant costs [added: of compliance] that are likely to increase over time.

Although we continue to assess these risks, implement [removed: controls,] [added: controls] and perform business continuity and disaster recovery planning, we cannot be sure that interruptions with material adverse effects will not occur.

Our strategy includes acquisitions, and we may not be able to [removed: make] [added: execute] acquisitions of suitable candidates or integrate acquisitions successfully.

As part of our growth strategy, we plan to pursue the acquisition of other companies, [removed: assets] [added: assets, technologies] and product lines that either complement or expand our existing business.

We may not be able to identify suitable [removed: candidates successfully,] [added: candidates,] negotiate appropriate acquisition terms, obtain financing that may be needed to consummate [removed: those] acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into our existing operations or expand into new markets.

In addition, we cannot make assurances that any acquisition, once [removed: successfully] integrated, will perform as planned, be accretive to earnings, or prove to be beneficial to our operations or cash flow.

Acquisitions involve a number of risks and present financial, managerial and operational challenges, including: diversion of management attention from existing businesses and operations; integration of technology, operations personnel, and financial and other systems; potentially insufficient [added: cybersecurity controls or insufficient] internal controls over financial [added: or compliance] activities or financial reporting at an acquired entity that could impact us on a combined basis; the failure to realize expected synergies; the possibility that we become exposed to substantial undisclosed liabilities or new material risks associated with the acquired businesses; and the loss of key employees of the acquired businesses.

Failure to successfully execute our acquisition strategy could adversely affect our [added: competitive position,] business, financial condition or results of operations.

The risks and uncertainties described below are those that we have identified as material but are not the only risks and uncertainties we face and therefore may not be exhaustive.

We operate in a continually changing business, economic and geopolitical environment and as a result new risk factors may emerge from time to time.

We can neither predict with certainty these new risk factors nor assess the extent to which any new factor, or combination of factors, may adversely impact our business or results of operations.*

Many of our manufacturing operations, employees and suppliers are located

outside of the United States.

| • | instability and uncertainties arising from the global geopolitical environment, such as economic nationalism, populism, protectionism and anti-global sentiment; |

| • | changes in tax laws and potential negative consequences from the interpretation, application and enforcement by governmental tax authorities of tax laws and policies; |

Changes in the geopolitical or economic environments in the countries in which we operate could have a material adverse effect on our financial condition, results of operations or cash flows.

For example, changes in U.S. policy regarding international trade, including import and export regulation and international trade agreements, could also negatively impact our business.

In 2018, the U.S. imposed tariffs on certain goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries.

Additional tariffs imposed by the U.S. on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could result in an increase in supply chain costs that we may not be able to offset or may otherwise adversely impact our financial condition and results of operations.

Additionally, we continue to monitor Brexit and its potential impacts on our results of operations and financial condition.

Volatility in foreign currencies is expected to continue as the United Kingdom executes its exit from the European Union.

If the United Kingdom's membership in the European Union terminates without an agreement (referred to as a “hard Brexit”), there could be increased costs from re-imposition of tariffs on trade between the United Kingdom and European Union, increased transportation costs, shipping delays because of the need for customs inspections and procedures and shortages of certain goods.

The United Kingdom will also need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete.

In the case of a “hard Brexit”, our exposure to disruptions to our supply chain, increased costs, the imposition of tariffs and currency devaluation in the United Kingdom could result in a material impact to our consolidated revenue, earnings and cash flow.

Our business operations rely on information technology and communications networks, including those operated by third parties, to process, transmit and store our electronic information or our customers’ electronic information, and manage or support a variety of business processes or activities.

Disruption to any of the information technology and communications networks on which we rely, or an attack on our IoT products and services, could interfere with our operations, disrupt service to our customers, interrupt production and shipments, damage customer relationships and negatively impact our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Interruptions could cause an inability to meet customer demand, increase our costs, reduce our sales, and impact our business processes and activities.

We also have or operate through a concentration of operations on certain sites, such as production and shared services centers, where business interruptions could cause material damage and costs.

Implementing planned restructuring

activities could be delayed resulting in delayed realization of the operational and financial benefits from such actions.

Other countries, such as China, have enacted or are

Any such violation could result in substantial fines, sanctions or civil penalties, damage to our reputation and might materially and adversely affect our business, results of operations or financial condition.

Xylem is regularly examined by various tax authorities throughout the world and the resolutions of these examinations do not typically have a significant impact on our effective tax rates and tax expenses but they could.

Additionally, in December 2017, the United States enacted tax reform legislation (“Tax Act”).

The legislation implements many new U.S. domestic and international tax provisions.

Many aspects of the Tax Act remain unclear, and although additional clarifying guidance is expected to be issued (by the Internal Revenue Service (“IRS”), the U.S. Treasury Department or via a technical correction law change), it may not be clarified for some time.

In addition, many U.S. states have not yet updated their laws to take into account the new federal legislation.

As a result, there may be further impacts of the new law on our results of operations and financial condition.

It is possible that the Tax Act, or interpretations under it, could change and could have an adverse effect on us, and such effect could be material.

| • | create uncertainty and complexity in managing debt that uses LIBOR as a reference rate, including as a result of the planned transition away from LIBOR to the Secured Overnight Financing Rate (“SOFR”); |

indebtedness instead of funding working capital, capital expenditures, acquisitions or other general corporate purposes; and

The carrying value of goodwill represents the fair

Our liquidity, financial position (including shareholders’

| • | fluctuations in foreign currency impacts; |

| | |

| --- | --- |

| | |

| --- | --- |

| • | potential negative consequences from changes to taxation policies; |

Interruptions could increase our costs and reduce our sales.

Our business operations rely on information technology and communications networks, and operations that are vulnerable to damage or disturbance from a variety of sources.

Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.

Although we have liability insurance, we cannot be certain that

For example, compliance with the 2017 United States Tax Cut and Jobs Act (“Tax Act”) may require the collection of information not regularly produced within our Company, the use of provisional estimates in our financial statements, and the exercise of significant judgment in accounting for its provisions.

Many aspects of the Tax Act are unclear and may not be clarified for some time.

As regulations and guidance evolve with respect to the Tax Act, and as we gather more information and perform more analysis, our results may differ from previous estimates and may materially affect our financial position.

Our non-U.S. operations will be subject to alternative tax regimes implemented under the Tax Act.

Any significant increase in our future effective tax rates could reduce net income for future periods.

batteries, aluminum, and plastics.

contingencies recorded as a reserve and require us to make payments in excess of our reserves, which could have an adverse effect on our results of operations and financial condition.

that are beyond our control.

This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended* *December 31, [removed: 2017.][added: 2018.]

We design, manufacture and service highly engineered [added: products and] solutions ranging across a wide variety of critical [removed: applications.][added: applications in utility, industrial, residential and commercial building services settings.]

Our product and service offerings are organized into three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control [removed: Solutions (formerly Sensus & Analytics).][added: Solutions.]

| • | *Water Infrastructure* serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. [added: Additionally, our offerings use monitoring & control, smart and connected technologies to allow for remote monitoring of performance and enable products to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for our customers.] In the Water Infrastructure segment, we provide the majority of our sales directly to customers [added: along] with strong applications expertise, while the remaining amount is through distribution partners. |

| • | *Applied Water* serves the usage applications sector with water pressure boosting systems for heating, ventilation and air [removed: conditioning] [added: conditioning,] and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat [removed: exchangers,] [added: exchangers] and controls provide cooling to power plants and manufacturing facilities, [removed: as well as] circulation for food and beverage [removed: processing. We also provide] [added: processing, as well as] boosting systems for [removed: farming irrigation and pumps for dairy operations.] [added: agricultural irrigation.] In the Applied Water segment, we provide the majority of our sales through long-standing relationships with many of the leading independent distributors in the markets we serve, with the remainder going directly to customers. |

| • | *Measurement & Control Solutions* primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and [removed: services] [added: critical infrastructure technologies] that allow customers to more effectively use their distribution networks for the [removed: delivery] [added: delivery, monitoring and control] of critical resources such as water, electricity and natural gas. [removed: In the Measurement & Control Solutions segment, we] [added: We] also provide analytical instrumentation used to measure water quality, flow and level in [added: clean water,] wastewater, surface water and coastal environments. Additionally, we [removed: sell] [added: offer] software and services including cloud-based analytics, remote monitoring and data management, leak [removed: detection] [added: detection, condition assessment, asset management] and pressure monitoring solutions. We also [removed: sell] [added: offer] smart lighting [removed: products and] solutions that improve efficiency and public safety efforts across communities. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners as well as direct sales depending on the regional availability of distribution channels and the type of product. |

| • | "adjusted [removed: operating income", "adjusted segment operating Income", "adjusted] net income" and [removed: “adjusted EPS”] [added: "adjusted earnings per share"] defined as [removed: operating income, segment operating income,] net income and earnings per share, [added: respectively,] adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs, [removed: gain or loss] [added: special charges, tax-related special items and gains and losses] from [added: the] sale of businesses, [removed: special charges and tax-related special items,] as applicable. A reconciliation of adjusted net income is provided below. |

| (in millions, except per share data) | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Net income attributable to Xylem | | $ | [removed: 331] [added: 549] | | | $ | [removed: 260] [added: 331] | | | $ | [removed: 340] [added: 260] | |

| Restructuring and realignment, net of tax of [removed: $13,] [added: $12,] $13 and [removed: $5,] [added: $13,] respectively | | [removed: 28] [added: 36] | | | | [removed: 34] [added: 28] | | | | [removed: 15] [added: 34] | | |

| Sensus acquisition related costs, net of tax of $8 and $15, respectively | | [removed: 14] [added: —] | | | | [removed: 38] [added: 14] | | | | [removed: —] [added: 38] | | |

| Special charges, net of tax of [removed: $4, $7] [added: $1, $4] and [removed: $0,] [added: $7,] respectively | | [removed: 8] [added: 12] | | | | [removed: 11] [added: 8] | | | | [removed: 5] [added: 11] | | |

| Tax-related special items | | [removed: 40] [added: (75] | | [added: )] | | [removed: 21] [added: 40] | | | | [removed: (15] [added: 21] | | [removed: )] |

| Loss (gain) from sale of businesses, net of tax benefit of $2 [removed: and net of tax of $0, respectively] | | [removed: 12] [added: —] | | | | [removed: —] [added: 12] | | | | [removed: (9] [added: —] | | [removed: )] |

| Adjusted net income | | $ | [removed: 433] [added: 522] | | | $ | [removed: 364] [added: 433] | | | $ | [removed: 336] [added: 364] | |

| Earnings per share - diluted | | $ | [removed: 1.83] [added: 3.03] | | | $ | [removed: 1.45] [added: 1.83] | | | $ | [removed: 1.87] [added: 1.45] | |

| Adjusted earnings per share | | $ | [removed: 2.40] [added: 2.88] | | | $ | [removed: 2.03] [added: 2.40] | | | $ | [removed: 1.85] [added: 2.03] | |

| ▪ | [removed: "operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs] [added: "adjusted operating expenses"] and [removed: special charges"] [added: "adjusted gross profit"] defined as operating [removed: expenses,] [added: expenses and gross profit, respectively,] adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs and special charges. |

costs, costs related to the recognition of the backlog intangible asset amortization [removed: and inventory step-up recoded] [added: recorded] in purchase accounting.

| ▪ | “special charges" defined as costs incurred by the Company, such as [removed: non-cash impairment charges, due diligence costs, initial] acquisition and integration [added: related] costs not [added: included in "Sensus acquisition] related [removed: to Sensus] [added: costs", non-cash impairment charges, due diligence costs] and other special non-operating [removed: items, as well as interest expense related to the early extinguishment of debt and financing costs on the bridge loan entered into for the Sensus acquisition during 2016.] [added: items.] |

| ▪ | "free cash flow" defined as net cash from operating [removed: activities, as reported in the Statement of Cash Flow,] [added: activities] less capital [removed: expenditures as well as adjustments] [added: expenditures. Free cash flow is further adjusted] for other significant items that impact current results which management believes are not related to our ongoing operations and performance. Our definition of free cash flow does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow. |

| (in millions) | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Net cash provided by operating activities | | $ | [removed: 686] [added: 586] | | | $ | [removed: 497] [added: 686] | | | $ | [removed: 464] [added: 497] | |

| Capital expenditures | | [removed: (170] [added: (237] | | ) | | [removed: (124] [added: (170] | | ) | | [removed: (117] [added: (124] | | ) |

| Free cash flow | | $ | [removed: 516] [added: 349] | | | $ | [removed: 373] [added: 516] | | | $ | [removed: 347] [added: 373] | |

| Cash paid for Sensus acquisition related costs | | [removed: 28] [added: 1] | | | | [removed: 13] [added: 28] | | | | [removed: —] [added: 13] | | |

| Free cash flow, excluding Sensus acquisition related costs | | $ | [removed: 544] [added: 350] | | | $ | [removed: 386] [added: 544] | | | $ | [removed: 347] [added: 386] | |

| ▪ | “EBITDA” defined as earnings before interest, taxes, depreciation and amortization [removed: expense. “Adjusted EBITDA”] [added: expense and "Adjusted EBITDA"] reflects [removed: adjustments] [added: the adjustment] to EBITDA to exclude share-based [removed: compensation charges,] [added: compensation,] restructuring and realignment costs, Sensus acquisition related costs, [added: special charges and] gain or loss from sale of [removed: businesses and special charges.] [added: businesses.] |

| Net Income | | $ | [removed: 330] [added: 549] | | | $ | [removed: 260] [added: 330] | | | $ | [removed: 340] [added: 260] | |

| Income tax expense | | [removed: 136] [added: 36] | | | | [removed: 80] [added: 136] | | | | [removed: 63] [added: 80] | | |

| Interest expense (Income), net | | [removed: 79] [added: 78] | | | | [removed: 68] [added: 79] | | | | [removed: 53] [added: 68] | | |

| Depreciation | | [removed: 109] [added: 117] | | | | [removed: 87] [added: 109] | | | | [removed: 88] [added: 87] | | |

| Amortization | | [removed: 125] [added: 144] | | | | [removed: 64] [added: 125] | | | | [removed: 45] [added: 64] | | |

| EBITDA | | $ | [removed: 779] [added: 924] | | | $ | [removed: 559] [added: 779] | | | $ | [removed: 589] [added: 559] | |

| Share-based compensation | | [removed: 21] [added: 30] | | | | [removed: 18] [added: 21] | | | | [removed: 15] [added: 18] | | |

| Restructuring and realignment | | [removed: 41] [added: 47] | | | | [removed: 47] [added: 41] | | | | [removed: 20] [added: 47] | | |

| Sensus acquisition related costs | | [removed: 14] [added: —] | | | | [removed: 46] [added: 14] | | | | [removed: —] [added: 46] | | |

| Special charges | | [removed: 13] [added: 12] | | | | [removed: 5] [added: 13] | | | | 5 | | |

| Loss (gain) from sale of business | | [removed: 10] [added: —] | | | | [removed: —] [added: 10] | | | | [removed: (9] [added: —] | | [removed: )] |

| Adjusted EBITDA | | $ | [removed: 878] [added: 1,013] | | | $ | [removed: 675] [added: 878] | | | $ | [removed: 620] [added: 675] | |

| ▪ | "adjusted operating income" defined as operating income, adjusted to exclude "adjusted operating expenses", and "adjusted operating margin" defined as adjusted operating income divided by total revenue. |

On a constant currency basis, revenue increased by $477 million, or 10.1%, primarily consisting of organic revenue growth of $390 million, or 8.3%, driven by growth in all end markets, as well as across all major geographic regions.

Acquisition revenue of $111 million also contributed to the increase, partially offset by revenue related to divestitures of $24 million.

The increase in operating income and margin included favorable impacts from decreased Sensus acquisition related costs of $22 million, partially offset by an increase in restructuring and realignment costs of $7 million and increased special charges of $1 million.

Excluding the impact of these items, adjusted operating income was $714 million, with an adjusted operating margin of 13.7% in 2018 as compared to adjusted operating income of $626 million with an adjusted operating margin of 13.3% in 2017.

Purchase accounting and currency impacts also negatively affected operating margin.

| • | In residential markets, organic growth was approximately 2% in 2018 primarily driven by strength in western Europe which was partially offset by weakness in Asia Pacific. For 2019, we expect low-single-digit growth primarily driven by continued competition in the U.S. replacement market as the housing market begins to stabilize. We also anticipate stability in Europe and modest growth opportunities in China and other Asia Pacific countries for secondary clean water sources. |

respectively.

We realized approximately $13 million of incremental net savings in 2018 from actions initiated in 2017, and an additional $3 million of net savings from our 2018 actions.

| Gross profit | | 2,026 | | | | 1,847 | | | | 1,462 | | | | 9.7 | % | | 26.3 | % |

| *Gross margin* | | 38.9 | | % | | 39.2 | | % | | 38.8 | | % | | (30 | )bp | | 40 | bp |

| Adjusted gross profit | | 2,031 | | | | 1,858 | | | | 1,491 | | | | 9.3 | % | | 24.6 | % |

| *Adjusted gross margin* | | 39.0 | | % | | 39.5 | | % | | 39.5 | | % | | (50 | )bp | | — | |

| Total operating expenses | | 1,372 | | | | 1,295 | | | | 1,054 | | | | 5.9 | % | | 22.9 | % |

| Sensus acquisition related charges | | — | | | | (14 | | ) | | (27 | | ) | | NM | | | (48.1 | )% |

| Adjusted operating expenses | | 1,317 | | | | 1,232 | | | | 978 | | | | 6.9 | % | | 26.0 | % |

| Operating income | | 654 | | | | 552 | | | | 408 | | | | 18.5 | % | | 35.3 | % |

2018 versus 2017

Revenue generated for 2018 was $5,207 million, an increase of $500 million, or 10.6%, compared to $4,707 million in 2017.

This increase in revenue at constant currency was primarily driven by an increase in organic revenue of $390 million reflecting strong organic growth across all major regions, with the vast majority of growth coming from North America, the emerging markets, particularly in China and Latin America, as well as in western Europe.

Acquisition revenue of $111 million also contributed to the increase, partially offset by a reduction in revenue related to divestitures of $24 million during the period.

| 2017 Revenue | $ | 2,004 | | | | | $ | 1,421 | | | | | $ | 1,282 | | | | | $ | 4,707 | | | |

| Organic Growth | 176 | | | 8.8 | % | | 113 | | | 8.0 | % | | 101 | | | 7.9 | % | | 390 | | | 8.3 | % |

| Acquisitions/(Divestitures) | — | | | — | % | | (10 | | ) | (0.7 | )% | | 97 | | | 7.6 | % | | 87 | | | 1.8 | % |

| Constant Currency | 176 | | | 8.8 | % | | 103 | | | 7.2 | % | | 198 | | | 15.4 | % | | 477 | | | 10.1 | % |

| Total change in revenue | 172 | | | 8.6 | % | | 113 | | | 8.0 | % | | 215 | | | 16.8 | % | | 500 | | | 10.6 | % |

| 2018 Revenue | $ | 2,176 | | | | | $ | 1,534 | | | | | $ | 1,497 | | | | | $ | 5,207 | | | |

Revenue was negatively impacted by $4 million of foreign currency translation, with the change at constant currency coming entirely from organic growth during the year of $176 million, or 8.8%.

Organic growth for the year was driven by strength in the utility end market across all geographic regions, with particularly strong growth coming from the emerging markets, especially China, as well as from the United States.

Organic growth during the year was also driven by strength in the industrial end market, primarily in North America and Europe, while emerging market industrial strength in Latin America was partially offset by declines in Asia Pacific due to the lapping of a large ozone project delivery in China last year.

From an application perspective, organic revenue growth for the year was largely attributable to our transport application.

The transport application grew due to strength across all geographic regions.

Growth in North America was driven by modest share gains and continued focus by utility customers on improving infrastructure, as well as strong dewatering rental sales and oil and gas growth.

Project deliveries in western Europe and product localization in China also contributed to the transport application growth during the period with China having 35.6% organic growth for the year.

Organic revenue from our treatment application also contributed significantly to the segment's growth across all regions, particularly from strong utility project deliveries in China, with 42.1% growth for the year.

Applied Water’s revenue increased $113 million, or 8.0%, in 2018, with revenue benefiting from $10 million of foreign currency translation during the year.

The revenue growth at constant currency was $103 million, or 7.2%, and consisted of organic growth of $113 million, or 8.0%, partially offset by $10 million of reduction in revenue related to divestitures.

Organic growth for the year was driven primarily by strength in the commercial and industrial end markets, primarily in the United States and Asia Pacific, as well as modest growth in the residential end market.

From an application perspective, commercial building services revenue was primarily driven by distributor strength and commercial building construction growth, coupled with price realization, in the United States and project deployments in China and India.

Organic revenue growth in the industrial water application was driven primarily by recovery in large project business and healthy general industrial demand in the United States, as well as strong strength in the emerging markets, particularly China and Latin America.

As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving Xylem’s Analytics business from our Water Infrastructure segment to combine it with our Sensus and Visenti businesses, which were acquired in the fourth quarter of 2016, to form Measurement & Control Solutions.

We believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will lead to operating efficiencies by integrating the supply chain process and moving to a leaner functional structure.

Accordingly, our reportable segments have changed.

Beginning with the second quarter of 2017, the Company now reports the financial position and results of operations of its Analytics, Sensus and Visenti businesses as one new reportable segment, which is called Measurement & Control Solutions.

Our Water Infrastructure reportable segment no longer includes the results of our Analytics business.

The Company has recast certain historical amounts between the Company's Water Infrastructure and Measurement & Control Solutions reportable segments, however this change had no impact on the Company's historical consolidated financial position or results of operations.

The recast financial information does not represent a restatement of previously issued financial statements.

Our Applied Water reportable segment remains unchanged.

| Weighted average number of shares diluted | | 180.9 | | | | 180.0 | | | | 181.7 | | |

Revenue increased 23.9% on a constant currency basis mostly due to $790 million of revenue related to acquisitions and organic revenue growth of $122 million driven by growth in all end markets.

The non-cash Sensus purchase accounting impact on adjusted operating margin for the year was 50 basis points, which if excluded would bring the adjusted operating margin to 13.9%, a 30 basis point increase over the prior year.

We anticipate total revenue growth in the range of 8% to 10% in 2018, with the recently announced acquisition of Pure Technologies contributing approximately 2% of that growth.

| • | In residential markets, organic growth increased by about 12% in 2017 primarily driven by strength in Asia Pacific and the United States. For 2018, we expect mid-single-digit growth primarily driven by solid mid-single-digit growth in the U.S. market. Market share gains from an increased selling focus in Europe, along with an increased demand in China and other Asia Pacific countries for a secondary clean water source, are also expected to contribute to this growth. |

We expect additional incremental savings to be realized in 2019 and beyond as we complete these actions.

| Gross profit | | 1,851 | | | | 1,461 | | | | 1,404 | | | | 26.7 | % | | 4.1 | % |

| *Gross margin* | | 39.3 | | % | | 38.7 | | % | | 38.4 | | % | | 60 | bp | | 30 | bp |

| Total operating expenses | | 1,295 | | | | 1,055 | | | | 955 | | | | 22.7 | % | | 10.5 | % |

| Operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and special charges | | 1,221 | | | | 950 | | | | 930 | | | | 28.5 | % | | 2.2 | % |

| Operating income | | 556 | | | | 406 | | | | 449 | | | | 36.9 | % | | (9.6 | )% |

| *Operating margin* | | 11.8 | | % | | 10.8 | | % | | 12.3 | | % | | 100 | bp | | (150 | )bp |

| *SG&A as a % of revenue* | 23.2 | | % | | 24.3 | | % | | (110 | )bp |

These charges were incurred primarily in an effort to realign our organizational structure in Europe and North America to optimize our cost structure.

The charges relate to the reduction in structural costs, including a decrease in headcount and consolidation of facilities.

full year in 2017.

Excluding these costs, adjusted operating income was $630 million (adjusted operating margin of 13.4%) for 2017 as compared to $511 million (adjusted operating margin of 13.6%) for 2016.

| Adjusted operating income | $ | 324 | | | $ | 309 | | | 4.9 | | % |

| Operating income | $ | 556 | | | $ | 406 | | | 36.9 | | % |

| Adjusted operating income | $ | 630 | | | $ | 511 | | | 23.3 | | % |

The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated foreign earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional tax expense of $46 million as a discrete item.

This net income tax expense primarily consists of a tax benefit for the corporate tax rate reduction of $107 million related to the remeasurement of deferred tax assets and liabilities and a tax expense for the repatriation transition tax of $153 million.

As permitted under SAB 118, we have not completed our accounting for the income tax effects of certain elements of the Tax Act, and have recorded provisional estimates related to these items.

For certain items, a provisional estimate could not be determined, and therefore, we have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act.

2016 versus 2015

Revenue generated for 2016 was $3,771 million, an increase of $118 million, or 3.2%, compared to $3,653 million in 2015.

This increase in revenue was primarily driven by additional revenue of $163 million from acquisitions.

Additionally, we had strong organic growth, driven by strength within the public utility, industrial and commercial end markets in western Europe, particularly in the United Kingdom, as well as large project deliveries in emerging markets, including India and Asia.

Partially offsetting this growth were declines in the United States primarily due to ongoing weakness in the industrial end market.

| 2015 Revenue | $ | 1,940 | | | | | $ | 1,422 | | | | | $ | 291 | | | | | $ | 3,653 | | | |

| Organic Growth | 44 | | | 2.3 | % | | (9 | | ) | (0.6 | )% | | (6 | | ) | (2.1 | )% | | 29 | | | 0.8 | % |

We conduct approximately [removed: 54%] [added: 53%] of our business in various locations outside the United States.

The translation risk is primarily concentrated in the exchange rate between the U.S. Dollar and the Euro, [removed: British Pound,] Chinese Yuan, [added: British Pound,] Canadian Dollar, Swedish Krona and Australian Dollar.

[removed: We] [added: Accordingly, we] estimate that a [removed: hypothetical] 10% movement of the U.S. Dollar to [removed: the] various foreign currency exchange rates we translate from, in [removed: the aggregate, could] [added: aggregate would not] have [removed: approximately] a [removed: 5% and 6%] [added: material economic] impact on [removed: Xylem's consolidated revenue] [added: our financial position] and [removed: income, respectively, as reported in U.S. Dollars.][added: results of operations.]

We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when it is cost effective to do so, though we continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities and reassess whether there is a need [added: to] repatriate funds held internationally to support our U.S. operations.

As of December 31, [removed: 2017,] [added: 2018,] our [removed: long term] [added: long-term] debt portfolio is primarily comprised of four series of fixed-rate senior notes that total $2.1 billion.

The senior notes are not exposed to interest rate risk as the bonds are at a [removed: fixed-rate] [added: fixed rate] until maturity.

Based on current interest rate market we do not anticipate material risk associated with our debt refinancing within the target [removed: time-frame] [added: time frame] of completion.

We also hedge our investment in certain foreign subsidiaries via the use of cross currency swaps and the designation of our 2.25% Senior Notes of €500 million aggregate principal amount due March 2023 as a net investment hedge.

Effective July 1, 2018, Argentina was determined to be a highly inflationary economy, and as such we evaluated the impact of revaluing our monetary assets and liabilities under the applicable guidance and do not expect it to have a material impact.

For a discussion of risks relating to commodity prices, refer to “Item 1A.

Risk Factors.”

Accordingly, we do not expect translation risk to have a material economic impact on our financial position and results of operations.

Portions of our business are exposed to volatility in the prices of certain commodities, such as copper, nickel and aluminum, among others.

Our primary exposure to this volatility resides with the use of these materials in purchased component parts.

We generally maintain long-term fixed price contracts on raw materials and component parts; however, we are prone to exposure as these contracts expire.

We estimate that a hypothetical 10% adverse movement in prices for raw metal commodities would not be material to our financial position and results of operations.

Xylem, with [removed: 2017] [added: 2018] revenue of [removed: $4.7] [added: $5.2] billion and approximately [removed: 16,200] [added: 17,000] employees, is a leading global water technology company.

We design, manufacture and service highly engineered [added: products and] solutions ranging across a wide variety of critical applications primarily in the water sector, but also in electric and gas.

Our broad portfolio of [added: products, services and] solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test and treatment of wastewater to the return of water to the environment.

We have differentiated market positions in core application areas including transport, treatment, test, smart metering, smart infrastructure analytics, [added: digital solutions,] condition assessment and leak detection, building services and industrial processing.

Setting us apart is a unique set of global assets [removed: which] [added: that] include:

| • | Far-reaching global distribution networks consisting of direct sales forces and independent channel [added: partners that collectively serve a diverse customer base in approximately 150 countries] |

Key pillars of our long-term strategy [removed: include] [added: include:] (1) accelerate profitable growth; (2) increase profitability by driving continuous improvement initiatives; (3) leadership and talent development; [removed: and] (4) focus on execution and [removed: accountability.][added: accountability; and (5) create social value in everything we do.]

On October 31, 2011 (the "Distribution Date"), ITT [added: Corporation ("ITT")] completed the Spin-off (the “Spin-off”) of Xylem, formerly ITT’s water equipment and services businesses.

The Spin-off was completed pursuant to a Distribution Agreement, dated as of October 25, 2011 (the “Distribution Agreement”), among ITT (now ITT LLC), Exelis Inc., acquired by Harris Inc. on May 29, [removed: 2015, (“Exelis”)] [added: 2015 (“Exelis”),] and Xylem.

Even in developed countries with sufficient clean water supply, existing [removed: infrastructure for] water supply [added: infrastructure] is aging and inadequately funded.

Our customers often face all three of these challenges, ranging from inefficient and aging water distribution networks (which require [removed: increases] [added: improvements] in “water productivity”); energy-intensive or unreliable wastewater management systems (which require [removed: increases] [added: improvements] in “water quality”); or exposure to natural disasters such as floods or droughts (which require [removed: increases] [added: improvements] in “resilience”).

Additionally, through the [removed: 2016] acquisition of Sensus, we also provide solutions to enhance [added: communications and] efficiency, improve safety and conserve resources to customers in the [added: water,] electric, gas, and lighting sectors.

We estimate our total served market size to be approximately [removed: $54] [added: $57] billion.

This customer base includes [added: water and wastewater] utilities that supply [added: and treat clean] water [added: or transport and treat wastewater or storm water] through an infrastructure network, and engineering, procurement and construction or (EPC) firms, which work with utilities to design and build water and wastewater infrastructure networks, as depicted below.

Utilities and EPC customers [removed: are looking for] [added: require products, solutions, services,] technology and application expertise from their Equipment and Services providers to address trends such as rising pollution, stricter regulations, [added: increasing operational costs] and the increased outsourcing of process knowledge.

[removed: ][added: ]

| • | Accelerate Profitable Growth. To accelerate growth, we [removed: are focusing] [added: continue to focus] on several priorities: |

| ▪ | Innovation & Technology \- We seek to enhance our innovation efforts with increased focus on [removed: smart] [added: smart, digitally enabled] technologies and innovation that can significantly improve customers’ productivity, quality and resilience. |

[added: See Note 21, “Segment and] Geographic Data,” in our consolidated financial statements for financial information about segments and geographic areas.

| | | Market Applications | | [removed: 2017] [added: 2018] Revenue (in millions) | | | | % Revenue | | | Major Products | | Primary Brands |

| Water Infrastructure | | Transport | | $ | [removed: 1,660] [added: 1,779] | | | [removed: 83] [added: 82] | % | | • Water and wastewater pumps • Filtration, disinfection and biological treatment equipment [added: • Mobile dewatering equipment] | | • Flygt • Godwin • [removed: Wedeco] [added: Leopold] • Sanitaire • [removed: Leopold] [added: Wedeco] |

| Applied Water | | Industrial Water | | $ | [removed: 593] [added: 706] | | | [removed: 42] [added: 46] | % | | • Pumps • Valves • Heat exchangers • Controls • Dispensing equipment systems | | • [removed: Goulds Water Technology] [added: A-C Fire Pump] • Bell & Gossett • [removed: A-C Fire Pump • Standard Xchange] [added: Flojet] • [removed: Lowara] [added: Goulds Water Technology] • Jabsco • [removed: Flojet] [added: Lowara • Standard Xchange] |

| | Commercial Building Services | | [removed: 568] [added: 596] | | | | [removed: 40] [added: 39] | % | | | | | |

| | Residential Building Services | | [removed: 260] [added: 232] | | | | [removed: 18] [added: 15] | % | | | | | |

| Measurement & Control Solutions | | Water | | $ | [removed: 573] [added: 692] | | | [removed: 45] [added: 46] | % | | • Smart meters • Networked communication devices • Data analytics • Test equipment • Controls • Sensor [removed: Devices] [added: devices] • Software & managed services [added: • Critical infrastructure services] | | • [added: EmNet • Pure •] Sensus • Smith Blair • [removed: WTW] [added: Valor Water] • Visenti • [added: WTW •] YSI |

| | | Software as a Service/Other | | [removed: 118] [added: 123] | | | | [removed: 9] [added: 8] | % | | | | |

The *Transport* application also includes sales and rental of specialty dewatering pumps and related equipment and services, which provide the safe removal or draining of groundwater and surface water from [removed: a riverbed,] [added: riverbeds and] construction [added: sites] or other industrial sites and bypass pumping for the repair of aging [removed: public] utility infrastructure, as well as emergency water [added: transport and] removal during severe weather events.

The customer base consists of two primary end markets: [removed: water] utility and industrial.

The [removed: water] utility market includes public, private and public-private entities that support [removed: water and] [added: water,] wastewater [added: and storm water] networks.

Both [removed: water] utility and industrial facility customers increasingly require our teams’ global but locally proficient expertise to use our equipment in their specific applications.

[removed: Several trends are increasing demand for this application expertise: (i) the increase in both the type and amount of contaminants] found in the water supply, (ii) increasing environmental regulations, (iii) the need to increase system efficiencies to optimize energy [added: and other operational] costs, (iv) the retirement of a largely aging water industry workforce that has not been systematically replaced at utilities and other end-user customers, and (v) the build-out of water infrastructure in the emerging markets.

[added: We differentiate ourselves in the market by focusing on product] and [added: service performance, quality and reliability,] innovation, [added: speed to market with new or disruptive technologies,] application expertise, brand reputation, energy efficiency, product life-cycle cost, timeliness of delivery, proximity of service centers, effectiveness of our distribution channels and price.

Our key competitors within the Water Infrastructure segment include KSB Inc., Sulzer Ltd., Evoqua Water Technologies, United [removed: Rentals and] [added: Rentals,] Danaher [removed: Corporation.][added: Corporation and Grundfos.]

Applied Water encompasses the uses of water and serves a diverse set of end markets including: residential, [removed: commercial,] [added: commercial] and industrial.

The industrial market includes OEMs, exploration and production firms, and developers and managers of industrial facilities, such as electrical power generators, chemical manufacturers, machine shops, clothing manufacturers, beverage dispensing and food processing [removed: firms,] [added: firms] and car washes.

We have long-standing relationships with many of the leading independent distributors in the markets we [removed: serve,] [added: serve] and we provide incentives to distributors, such as specialized loyalty and training programs.

Competition in the Applied Water segment focuses on brand equity, application expertise, product delivery and [removed: performance, quality,] [added: performance] and [added: energy efficiency, quality and] price.

Our key competitors within the Applied Water segment include Grundfos, Wilo SE, Pentair [removed: Ltd.] [added: plc] and Franklin Electric Co., Inc.

The segment delivers communications, smart metering, measurement and control technologies and [removed: services] [added: critical infrastructure technologies] that allow customers to more effectively use their distribution networks for the [removed: delivery] [added: delivery, monitoring and control] of critical resources such as water, electricity and natural gas.

We also provide analytical instrumentation used to measure water quality, flow and level in [added: clean water,] wastewater, surface water and coastal environments.

| | |

| --- | --- |

| • | Create social value in everything we do. We seek to have a positive impact on communities through the combination of corporate social responsibility and employee, customer, and stakeholder engagement. |

| | Treatment | | 397 | | | | 18 | % | | | | | |

| | | | | $ | 2,176 | | | 100 | % | | | | |

| | | | | $ | 1,534 | | | 100 | % | | | | |

| | Test | | 344 | | | | 23 | % | | | | | |

| | Gas | | 195 | | | | 13 | % | | | | | |

| | | Electric | | 143 | | | | 10 | % | | | | |

| | | | | $ | 1,497 | | | 100 | % | | | | |

Several trends are increasing demand for this application expertise: (i) the increase in both the type and amount of contaminants

We also offer smart lighting solutions that improve efficiency and public safety efforts across communities.

changing and unsafe conditions.

Our advanced infrastructure analytics complement these offerings with intelligent solutions that help utility decision-makers manage their networks more effectively in real time.

Pure Technologies’ equipment and services are also well positioned in the leak detection sector which is attracting considerable attention as aging infrastructure and increased regulatory scrutiny exert pressure on operating budgets.

In addition to investments made in software development, which were capitalized, we incurred $189 million, $181 million, and $110 million as a result of R&D investment spending in 2018, 2017 and 2016, respectively.

As part of expanding our bandwidth and to increase our access to technology, we have built innovation eco-system partnerships with academic institutions, start-up accelerators and venture capitalist organizations.

While we own, control or license a significant number of patents, trade secrets, proprietary information, trademarks, trade names,

Our global operations are subject to various laws and regulations governing the environment, including the discharge of pollutants and the management and disposal of hazardous substances.

We continue to be dedicated to environmental and sustainability programs to minimize the use of natural resources, and reduce the utilization and generation of hazardous materials from our processes and to remediate identified environmental concerns.

As to the latter, we are currently engaged in site investigations and remediation activities to address environmental cleanup from past operations at current and former manufacturing facilities.

Environmental Sustainability

Technology is playing an increasingly important role in helping the world solve water issues.

Our approach to climate-related issues is informed by Xylem’s Climate Change Policy, which defines our climate change approach across product development, operations, employees and external engagement.

For example, in the past two years, we have completed several acquisitions to build out our Measurement & Control Solutions portfolio around systems intelligence, bringing best-in-class advanced metering infrastructure, advanced data analytics and software development capabilities to our portfolio.

These technologies have enhanced our ability to help customers facing water scarcity, storm water overflows and other climate-related issues.

We are also focused on increasing our capabilities in the areas of advanced industrial water treatment and industrial water services.

We are committed to sustainability through our own operations as well, as we are reducing our environmental footprint by decreasing our water intensity, greenhouse gas emissions and waste sent to landfills.

partners that collectively serve a diverse customer base in approximately 150 countries

On October 31, 2016, Xylem Inc. completed the acquisition of all of the direct and indirect subsidiaries of Sensus Worldwide Limited (other than Sensus Industries) (“Sensus”), pursuant to the terms of the Share Purchase Agreement dated as of August 15, 2016, and the first Amendment to the Share Purchase Agreement dated as of October 31, 2016 (together, the “Purchase Agreement”).

The aggregate consideration paid for the acquisition was approximately $$1,766 million ($1,710 million net of cash acquired).

See Note 20, “Segment and

| | Treatment | | 344 | | | | 17 | % | | | | | |

| | | | | $ | 2,004 | | | 100 | % | | | | |

| | | | | $ | 1,421 | | | 100 | % | | | | |

| | Test | | 325 | | | | 25 | % | | | | | |

| | Gas | | 134 | | | | 11 | % | | | | | |

| | | Electric | | 132 | | | | 10 | % | | | | |

| | | | | $ | 1,282 | | | 100 | % | | | | |

We differentiate ourselves in the market by focusing on product performance, reliability

more developed markets.

| | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | $ Amount | | | | % of Total | | | $ Amount | | | | % of Total | | | $ Amount | | | | % of Total | |

The table below illustrates the property, plant & equipment and percentage of property, plant & equipment by geographic area for each of the three years ended December 31.

| | Property, Plant & Equipment | | | | | | | | | | | | | | | | | | | |

| United States | $ | 258 | | | 40 | % | | $ | 255 | | | 41 | % | | $ | 168 | | | 38 | % |

| Europe | 259 | | | | 40 | % | | 237 | | | | 39 | % | | 189 | | | | 43 | % |

| Asia Pacific | 85 | | | | 13 | % | | 87 | | | | 14 | % | | 56 | | | | 13 | % |

| Other | 41 | | | | 7 | % | | 37 | | | | 6 | % | | 26 | | | | 6 | % |

| Total | $ | 643 | | | | | | $ | 616 | | | | | | $ | 439 | | | | |

The December 31, 2016 backlog balance has been revised to include contractual agreements that Sensus has with customers that do not have minimum commitments but which we believe will be executed upon over the terms of the contracts.

We continue to increase our R&D investments as a percentage of revenue year over year, with 3.8% in 2017 when compared to 2.9% in 2016 and 2.6% in 2015.

As the portfolio of our patents, patent applications, and license

Our manufacturing operations worldwide are subject to many requirements under environmental laws.

In the United States, the Environmental Protection Agency and similar state agencies administer laws and regulations concerning air emissions, water discharges, waste disposal, environmental remediation, and other aspects of environmental protection.

Such environmental laws and regulations in the United States include, for example, the federal Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act.

Environmental requirements significantly affect our operations.

We have established an internal program to address compliance with applicable environmental requirements and, as a result, management believes that we are in substantial compliance with current environmental regulations.

Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies.

It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors.

Our accrued liabilities for these environmental matters represent the best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees based upon the facts and circumstances as currently known to us.

These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances.

Liabilities for these environmental expenditures are recorded on an undiscounted basis.

Commitment to Sustainability

We believe that technology is a key link in how the world can solve water.

The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

These reports and other information are also available, free of charge, at *www.sec.gov.*

From time to time we are involved in legal [added: and regulatory] proceedings that are incidental to the operation of our [removed: businesses.][added: businesses (or the business operations of previously owned entities).]

These proceedings may seek remedies relating to environmental matters, [added: tax,] intellectual property matters, acquisitions or divestitures, [added: product liability and] personal injury claims, [removed: employment] [added: privacy, employment, labor] and pension matters, government contract issues and commercial or contractual disputes.

See Note [removed: 18,] [added: 19,] "Commitments and Contingencies", of the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding certain legal [added: and regulatory] proceedings we are involved in.

| | | For the fiscal year ended December 31, [removed: 2017] [added: 2018] | | |

Indicate by check mark whether the registrant has submitted [removed: electronically and posted on its corporate Website,] [added: electronically,] if any, every Interactive Data File required to be submitted [removed: and posted] 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 and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, [removed: or] a smaller reporting [added: company, or an emerging growth] company.

Large Accelerated Filer þ Accelerated Filer ¨ Non-Accelerated Filer ¨ [removed: (do not check if a smaller reporting company)] Smaller reporting company ¨ Emerging growth company ¨

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of June 30, [removed: 2017] [added: 2018] was approximately [removed: $10.0] [added: $12.0] billion.

As of February [removed: 16, 2018,] [added: 15, 2019,] there were [removed: 179,893,045] [added: 179,552,698] outstanding shares of the registrant’s common stock, par value $0.01 per share.

Portions of the registrant’s definitive proxy statement for its [removed: 2018] [added: 2019] Annual Meeting of Shareowners, to be held in May [removed: 2018,] [added: 2019,] are incorporated by reference into Part II and Part III of this Report.

For the fiscal year ended December 31, [removed: 2017][added: 2018]

| 1A. | [Risk [removed: Factors](#s03D2BEEC89375B67A777C9E893AD3497)] [added: Factors](#sC41415D3FF455F4DAB27509B6528A886)] | [removed: [11](#s03D2BEEC89375B67A777C9E893AD3497)] [added: [11](#sC41415D3FF455F4DAB27509B6528A886)] |

| 1B. | [Unresolved Staff [removed: Comments](#s96B817B7C9285ABC91B872DE6AF77ED6)] [added: Comments](#s754049474C855B34ABFB7B4B1EC0AEF6)] | [removed: [20](#s96B817B7C9285ABC91B872DE6AF77ED6)] [added: [21](#s754049474C855B34ABFB7B4B1EC0AEF6)] |

| 3 | [Legal [removed: Proceedings](#s7E38699C46105EA3A8980D5436D6189A)] [added: Proceedings](#sE0A46A0C3AEA531EB39B2658378E98F2)] | [removed: [21](#s7E38699C46105EA3A8980D5436D6189A)] [added: [22](#sE0A46A0C3AEA531EB39B2658378E98F2)] |

| 4 | [Mine Safety [removed: Disclosures](#s204F85F9CB7557059EAD1872B39F39C7)] [added: Disclosures](#s6B4B3B2F3CD7552689B4DE1FCB40BA8D)] | [removed: [22](#s204F85F9CB7557059EAD1872B39F39C7)] [added: [23](#s6B4B3B2F3CD7552689B4DE1FCB40BA8D)] |

| * | [Executive Officers of the [removed: Registrant](#sDD94CE9C3C8B55C8B79D2CAED54E08E1)] [added: Registrant](#sD50F845A576153D5AC409AFFA08E36BD)] | [removed: [23](#sDD94CE9C3C8B55C8B79D2CAED54E08E1)] [added: [23](#sD50F845A576153D5AC409AFFA08E36BD)] |

| | [Board of [removed: Directors](#sB10BE791357C5FE190C98FD490924536)] [added: Directors](#s35A458C957095A059AB128C2BFC6DB8B)] | [removed: [24](#sB10BE791357C5FE190C98FD490924536)] [added: [24](#s35A458C957095A059AB128C2BFC6DB8B)] |

| 5 | [Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#s5CF0D00AAB345800AEA1EA5859BEF988)] [added: Securities](#s352A9E1926855588B9DB78590233B4BD)] | [removed: [25](#s5CF0D00AAB345800AEA1EA5859BEF988)] [added: [25](#s352A9E1926855588B9DB78590233B4BD)] |

| 6 | [Selected Financial [removed: Data](#s75FDD25274065C458FB85A01731E0138)] [added: Data](#s16CA40CCCDDD5B2185E950C218AF3477)] | [removed: [28](#s75FDD25274065C458FB85A01731E0138)] [added: [27](#s16CA40CCCDDD5B2185E950C218AF3477)] |

| 7 | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#s53F407B0998158EAA1AC1E8F78C833B2)] [added: Operations](#sD35F8CF82ADC596D91480A402EB85DA9)] | [removed: [29](#s53F407B0998158EAA1AC1E8F78C833B2)] [added: [28](#sD35F8CF82ADC596D91480A402EB85DA9)] |

| 7A. | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#sEA53E459622B551598C657231DC26925)] [added: Risk](#s9F41B5998B79563AA185C2AF7ED981C6)] | [removed: [53](#sEA53E459622B551598C657231DC26925)] [added: [55](#s9F41B5998B79563AA185C2AF7ED981C6)] |

| 8 | [Financial Statements and Supplementary [removed: Data](#s9AEEE843F8CF599D90B7E5E46AFB4AF9)] [added: Data](#s915E1C0E08BE5A07ABBB7F40BECB5050)] | [removed: [54](#s9AEEE843F8CF599D90B7E5E46AFB4AF9)] [added: [56](#s915E1C0E08BE5A07ABBB7F40BECB5050)] |

| 9 | [Changes In and Disagreements With Accountants on Accounting and Financial [removed: Disclosure](#s992BFD20DF4B5E42BB829B8B5ED3EE3E)] [added: Disclosure](#s0026F8397EFC51E2947B1D0A195F9C70)] | [removed: [106](#s992BFD20DF4B5E42BB829B8B5ED3EE3E)] [added: [110](#s0026F8397EFC51E2947B1D0A195F9C70)] |

| 9A. | [Controls and [removed: Procedures](#sCF537948538F589C84DE1CF112A780EF)] [added: Procedures](#sA672435FBAF253DBA16D4E50945B7AA5)] | [removed: [106](#sCF537948538F589C84DE1CF112A780EF)] [added: [110](#sA672435FBAF253DBA16D4E50945B7AA5)] |

| 9B. | [Other [removed: Information](#sE260BBC8C66B5B998E7819698C16930A)] [added: Information](#s6EC9F8FBE2C558C6894F9A17034CFC37)] | [removed: [106](#sE260BBC8C66B5B998E7819698C16930A)] [added: [111](#s6EC9F8FBE2C558C6894F9A17034CFC37)] |

| 10 | [Directors, Executive Officers and Corporate [removed: Governance](#s54AFF5E1086A5991922E372FC2F31D24)] [added: Governance](#s36B873CEEE3E5573BE43004F95D705D4)] | [removed: [108](#s54AFF5E1086A5991922E372FC2F31D24)] [added: [114](#s36B873CEEE3E5573BE43004F95D705D4)] |

| 12 | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#s669BEFF421EA5BF8AD4C87B5A12C2BAF)] [added: Matters](#sE552EAD23FE75E379DAC3909B5020F1E)] | [removed: [108](#s669BEFF421EA5BF8AD4C87B5A12C2BAF)] [added: [114](#sE552EAD23FE75E379DAC3909B5020F1E)] |

| 13 | [Certain Relationships and Related Transactions, and Director [removed: Independence](#s0447ECBAFC5056ADBFCB5E41624062D3)] [added: Independence](#sA4441FA7158A54C3814061B25394D7C3)] | [removed: [108](#s0447ECBAFC5056ADBFCB5E41624062D3)] [added: [114](#sA4441FA7158A54C3814061B25394D7C3)] |

| 14 | [Principal Accounting Fees and [removed: Services](#s1CD3F401D7525081BF23A2D51F7B4740)] [added: Services](#s72DC3340DE4D548FA01630378306212F)] | [removed: [108](#s1CD3F401D7525081BF23A2D51F7B4740)] [added: [114](#s72DC3340DE4D548FA01630378306212F)] |

| 15 | [Exhibits, Financial Statement [removed: Schedules](#s92A82F47A32256EA9479BEE0BCB4B907)] [added: Schedules](#sAFA65ABB26DD533BBA1E132826FB02A1)] | [removed: [109](#s92A82F47A32256EA9479BEE0BCB4B907)] [added: [115](#sAFA65ABB26DD533BBA1E132826FB02A1)] |

*The following discussion should be read in conjunction with the consolidated financial statements, including the [removed: notes thereto,] [added: notes,] included [added: elsewhere] in this Annual Report on Form 10-K (this "Report").

Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” “believe,” “target,” “will,” “could,” “would,” “should” and similar expressions identify forward-looking [removed: statements, which generally are not historical in nature.][added: statements.]

These forward-looking statements include [added: any] statements [added: that are not historical in nature, including any statements] about the capitalization of the Company, the Company’s restructuring and realignment, future strategic plans and other statements that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals.

All statements that address operating or financial performance, events or developments that we expect or anticipate will occur in the future - including statements relating to orders, [removed: revenue,] [added: revenues,] operating margins and earnings per share growth, and statements expressing general views about future operating results - are forward-looking statements.

Factors that could cause results to differ materially from those anticipated include: overall economic and business conditions, political and other risks associated with our international operations, including military actions, economic sanctions or trade [added: barriers including tariffs and] embargoes that could affect customer markets, and non-compliance with laws, including foreign corrupt practice laws, export and import laws and competition laws; potential for unexpected cancellations or delays of customer orders in our reported backlog; our exposure to fluctuations in foreign currency exchange rates; competition and pricing pressures in the markets we serve; the strength of housing and related markets; weather conditions; ability to retain and attract [added: talent and] key members of management; our relationship with and the performance of our channel partners; our ability to successfully identify, complete and integrate acquisitions; our ability to borrow or to refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; changes in the value of goodwill or intangible assets; risks relating to product defects, product liability and recalls; [added: claims or investigations by] governmental [removed: investigations;] [added: or regulatory bodies;] security breaches or other disruptions of our information technology systems; litigation and contingent liabilities; and other factors set forth [removed: below] under “Item 1A.

Risk Factors” and [removed: those described from time to time] in subsequent [removed: reports filed] [added: filings we make] with the Securities and Exchange Commission (“SEC”).

All forward-looking statements made [removed: in this Report] [added: herein] are based on information [added: currently] available to the Company as of the date of this Report.

| 1 | [Business](#sBE4FD9A51E5F57F2BDF131AE162A2C2B) | [3](#sBE4FD9A51E5F57F2BDF131AE162A2C2B) |

| 2 | [Properties](#s26CBB48B5D02525EA30D4DF8E4050D69) | [22](#s26CBB48B5D02525EA30D4DF8E4050D69) |

| 11 | [Executive Compensation](#s3364FA3D996B5B8C8198441E034E1297) | [114](#s3364FA3D996B5B8C8198441E034E1297) |

| 16 | [Form 10-K Summary](#sF8C6DF4564FD5B7296C0FA75DC1EEF86) | [119](#s66C1F5AAD44A51009D8C2CDC5E0060FB) |

| | [Signatures](#s66C1F5AAD44A51009D8C2CDC5E0060FB) | [119](#s66C1F5AAD44A51009D8C2CDC5E0060FB) |

| 1 | [Business](#sF0A99F1F45625CDF91F60D34863B5823) | [3](#sF0A99F1F45625CDF91F60D34863B5823) |

| 2 | [Properties](#sCBD15BB37FBD5F24A48D6C2728618107) | [21](#sCBD15BB37FBD5F24A48D6C2728618107) |

| 11 | [Executive Compensation](#s945A4B1C74E9556CB7EA223000BC236E) | [108](#s945A4B1C74E9556CB7EA223000BC236E) |

| 16 | [Form 10-K Summary](#sAC0C8A600C1D5AC3BB4CBD795CB87E07) | [114](#sf3df5b8d625347209288b53f89b694d2) |

| | [Signatures](#s4DA93DDE96285249A786C66728000D97) | [114](#s4DA93DDE96285249A786C66728000D97) |

Xylem Inc. was incorporated in Indiana on May 4, 2011.

We have approximately [removed: 355] [added: 385] locations in more than [removed: 51] [added: 52] countries.

These properties total approximately [removed: 12.2] [added: 12.3] million square feet, of which more than [removed: 315] [added: 345] locations, or approximately [removed: 6.1] [added: 6.6] million square feet, are leased.

| Stockholm | | Sweden | | Administration and Research & Development | | [removed: 172,000] [added: 182,000] | | | Leased |

| Durham | | NC | | Administration and Research & Development | | 154,000 | | | Leased |

| Jiangdu City | | China | | Manufacturing | | 316,000 | | | Owned |

The following information is provided regarding the executive officers of Xylem as of [removed: February 1, 2018:][added: January 31, 2019:]

| Patrick K. Decker | | [removed: 53] [added: 54] | | President and Chief Executive Officer (2014) | | • President and Chief Executive Officer, Harsco Corp. (diversified, worldwide industrial company) (2012) |

| E. Mark Rajkowski | | [removed: 59] [added: 60] | | Senior VP and Chief Financial [removed: Office] [added: Officer] (2016) | | • Senior VP and Chief Financial Officer, MeadWestvaco Corp. (worldwide packaging company) (2004) |

| Tomas Brannemo | | [removed: 46] [added: 47] | | Senior VP and President, Transport and Treatment (2017) | | • Senior VP and President, Transport (2014) • VP, Transport (2013) |

| David Flinton | | [removed: 47] [added: 48] | | Senior VP and President, Dewatering (2015) | | • VP, Engineering and Marketing, Applied Water Systems (2013) |

| Pak Steven Leung | | [removed: 61] [added: 62] | | Senior VP and President, Emerging Markets (2015) | | • VP, Global Sales, Valves and Controls, Pentair Plc (diversified, worldwide industrial manufacturing company) (2013) |

| Kenneth Napolitano | | [removed: 55] [added: 56] | | Senior VP and President, Applied Water Systems and Americas Commercial Team (2017) | | • Senior VP and President, Applied Water Systems (2012) |

| Colin R. Sabol | | [removed: 50] [added: 51] | | Senior VP and President, Measurement & Control Solutions (2017) | | • Senior VP and President, Analytics and Treatment (2015) • Senior VP and President, Dewatering (2013) |

| Kairus Tarapore | | [removed: 56] [added: 57] | | Senior VP and Chief Human Resources Officer (2015) | | • Senior VP and Chief Administrative Officer, Babcock & Wilcox Company (energy and environmental technologies and services) (2013) |

| Claudia S. Toussaint | | [removed: 54] [added: 55] | | Senior VP, General Counsel and Corporate Secretary (2014) | | • Senior VP, General Counsel and Secretary, Barnes Group Inc. (international industrial and aerospace manufacturing) (2012) |

The following information is provided regarding the Board of Directors of Xylem as of [removed: February 1, 2018:][added: January 31, 2019:]

| Jeanne Beliveau-Dunn | | [added: Former] Vice President and General Manager, Cisco Systems, Inc. |

| Victoria D. Harker | | Chief Financial Officer, [removed: TEGNA] [added: TEGNA,] Inc. |

| Paul A. Stellato | | 44 | | VP, Controller and Chief Accounting Officer (2017) | | • VP, Financial Planning and Analysis (2014) • Director, Financial Planning and Analysis (2011) |

| | | | | | | |

| --- | --- | --- | --- | --- | --- | --- |

| NAME | | AGE | | CURRENT TITLE | | OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS |

[removed: *2017* *and* *2016*] *Market Price and Dividends*

As of January 31, [removed: 2018,] [added: 2019,] there were [removed: 11,681] [added: 10,898] holders of record of our common stock.

Dividends are declared and paid on the common stock at the discretion of our Board of Directors and depend on our profitability, financial condition, capital needs, future [removed: prospects,] [added: prospects] and other factors deemed relevant by our Board.

In the first quarter of [removed: 2018,] [added: 2019,] we declared a dividend of [removed: $0.21] [added: $0.24] per share to be paid on March [removed: 15, 2018] [added: 14, 2019] for shareholders of record on February [removed: 15, 2018.][added: 14, 2019.]

There were no unregistered offerings of our common stock during [removed: 2017.][added: 2018.]

*Fourth Quarter* [removed: *2017*] [added: *2018*] *Share Repurchase Activity*

The following table summarizes our purchases of our common stock for the quarter ended December 31, [removed: 2017:][added: 2018:]

| (b) | On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. There were no shares repurchased under this program during the three months ended December 31, [removed: 2017.] [added: 2018.] There are up to [removed: $413] [added: $363] million in shares that may still be purchased under this plan as of December 31, [removed: 2017.] [added: 2018.] |

This graph covers the period from December 31, [removed: 2012] [added: 2013] through December 31, [removed: 2017] [added: 2018] and assumes that $100 was invested on December 31, [removed: 2012] [added: 2013] in our common stock, the S&P 500 and the S&P 500 Industrials with the reinvestment of any dividends.

[removed: ][added: ]

| December 31, [removed: 2012] [added: 2013] | 100 | | | 100 | | | 100 | |

| 10/1/18 - 10/31/18 | | — | | — | | — | | $363 |

| 11/1/18 - 11/30/18 | | — | | — | | — | | $363 |

| 12/1/18 - 12/31/18 | | — | | — | | — | | $363 |

| December 31, 2014 | 112 | | | 114 | | | 110 | |

| December 31, 2015 | 109 | | | 115 | | | 107 | |

| December 31, 2016 | 150 | | | 129 | | | 127 | |

| December 31, 2017 | 209 | | | 157 | | | 153 | |

| December 31, 2018 | 206 | | | 150 | | | 132 | |

The following table shows the high and low prices per share of our common stock as reported by the New York Stock Exchange and the dividends declared per share for the periods indicated.

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | High | | | | Low | | | | Dividend | | |

| Fiscal Year ended December 31, 2017 | | | | | | | | | | | |

| First Quarter | $ | 50.66 | | | $ | 46.67 | | | $ | 0.1800 | |

| Second Quarter | 55.68 | | | | 48.81 | | | | 0.1800 | | |

| Third Quarter | 64.80 | | | | 54.08 | | | | 0.1800 | | |

| Fourth Quarter | 69.88 | | | | 62.24 | | | | 0.1800 | | |

| Fiscal Year ended December 31, 2016 | | | | | | | | | | | |

| First Quarter | $ | 41.33 | | | $ | 31.67 | | | $ | 0.1549 | |

| Second Quarter | 46.67 | | | | 40.54 | | | | 0.1549 | | |

| Third Quarter | 52.71 | | | | 44.44 | | | | 0.1549 | | |

| Fourth Quarter | 54.99 | | | | 45.60 | | | | 0.1549 | | |

The closing price of our common stock on the NYSE on January 31, 2018 was $72.26 per share.

| 10/1/17 - 10/31/17 | | — | | — | | — | | $413 |

| 11/1/17 - 11/30/17 | | — | | — | | — | | $413 |

| 12/1/17 - 12/31/17 | | — | | — | | — | | $413 |

| December 31, 2013 | 130 | | | 132 | | | 141 | |

| December 31, 2014 | 145 | | | 150 | | | 154 | |

| December 31, 2015 | 141 | | | 153 | | | 150 | |

| December 31, 2016 | 194 | | | 171 | | | 179 | |

| December 31, 2017 | 271 | | | 208 | | | 215 | |

The following table sets forth selected consolidated financial data for the five years ended December 31, [removed: 2017.][added: 2018.]

| (in millions, except per share data) | [removed: 2017 (a)] [added: 2018 (a)] | | | | [removed: 2016 (a)] [added: 2017 (b) (c)] | | | | [removed: 2015] [added: 2016 (b) (c)] | | | | [removed: 2014] [added: 2015 (c)] | | | | [removed: 2013] [added: 2014 (c)] | | |

| Revenue | $ | [removed: 4,707] [added: 5,207] | | | $ | [removed: 3,771] [added: 4,707] | | | $ | [removed: 3,653] [added: 3,771] | | | $ | [removed: 3,916] [added: 3,653] | | | $ | [removed: 3,837] [added: 3,916] | |

| Net income attributable to Xylem | [removed: 331] [added: 549] | | | | [removed: 260] [added: 331] | | | | [removed: 340] [added: 260] | | | | [removed: 337] [added: 340] | | | | [removed: 228] [added: 337] | | |

| Basic | $ | [removed: 1.84] [added: 3.05] | | | $ | [removed: 1.45] [added: 1.84] | | | $ | [removed: 1.88] [added: 1.45] | | | $ | [removed: 1.84] [added: 1.88] | | | $ | [removed: 1.23] [added: 1.84] | |

| Diluted | [removed: 1.83] [added: 3.03] | | | | [removed: 1.45] [added: 1.83] | | | | [removed: 1.87] [added: 1.45] | | | | [removed: 1.83] [added: 1.87] | | | | [removed: 1.22] [added: 1.83] | | |

| Basic shares outstanding | [removed: 179.6] [added: 179.8] | | | | [removed: 179.1] [added: 179.6] | | | | [removed: 180.9] [added: 179.1] | | | | [removed: 183.1] [added: 180.9] | | | | [removed: 185.2] [added: 183.1] | | |

| Diluted shares outstanding | [removed: 180.9] [added: 181.1] | | | | [removed: 180.0] [added: 180.9] | | | | [removed: 181.7] [added: 180.0] | | | | [removed: 184.2] [added: 181.7] | | | | [removed: 186.0] [added: 184.2] | | |

| Cash dividends per share | $ | [removed: 0.7200] [added: 0.8400] | | | $ | [removed: 0.6196] [added: 0.7200] | | | $ | [removed: 0.5632] [added: 0.6196] | | | $ | [removed: 0.5120] [added: 0.5632] | | | $ | [removed: 0.4656] [added: 0.5120] | |

| Cash and cash equivalents | $ | [removed: 414] [added: 296] | | | $ | [removed: 308] [added: 414] | | | $ | [removed: 680] [added: 308] | | | $ | [removed: 663] [added: 680] | | | $ | [removed: 533] [added: 663] | |

| Working capital* | [removed: 873] [added: 988] | | | | [removed: 878] [added: 873] | | | | [removed: 810] [added: 878] | | | | [removed: 882] [added: 810] | | | | [removed: 930] [added: 882] | | |

| Total assets | [removed: 6,860] [added: 7,222] | | | | [removed: 6,474] [added: 6,860] | | | | [removed: 4,657] [added: 6,474] | | | | [removed: 4,833] [added: 4,657] | | | | [removed: 4,857] [added: 4,833] | | |

| Total debt | [removed: 2,200] [added: 2,308] | | | | [removed: 2,368] [added: 2,200] | | | | [removed: 1,274] [added: 2,368] | | | | [removed: 1,284] [added: 1,274] | | | | [removed: 1,235] [added: 1,284] | | |

| [removed: (a)] [added: (b)] | The amounts for the years ended December 31, 2017 and December 31, 2016 reflect the acquisition of Sensus. Refer to [removed: Notes] [added: Note] 3 [removed: and 20] to [added: the] Consolidated Financial Statements for further information regarding [removed: Sensus.] [added: acquisitions.] |

| Gross profit | 2,026 | | | | 1,847 | | | | 1,462 | | | | 1,407 | | | | 1,517 | | |

| *Gross margin* | 38.9 | | % | | *39.2* | | *%* | | *38.8* | | *%* | | *38.5* | | *%* | | *38.7* | | *%* |

| Operating income | 654 | | | | 552 | | | | 408 | | | | 454 | | | | 469 | | |

| *Operating margin* | 12.6 | | % | | *11.7* | | *%* | | *10.8* | | *%* | | *12.4* | | *%* | | *12.0* | | *%* |

| (a) | The amounts for the year ended December 31, 2018 reflects the acquisitions of both Pure and Sensus. Refer to Note 3 to the Consolidated Financial Statements for further information regarding acquisitions. |

| | |

| --- | --- |

| | |

| --- | --- |

| (c) | The amounts for the years ended December 31, 2017, December 31, 2016, December 31, 2015 and December 31, 2014 reflect a re-classification related to prior year pension and post retirement accounting. Refer to Note 2 to the Consolidated Financial Statements for further information regarding this prior year re-classification. |

| Gross profit | 1,851 | | | | 1,461 | | | | 1,404 | | | | 1,513 | | | | 1,499 | | |

| *Gross margin* | 39.3 | | % | | *38.7* | | *%* | | *38.4* | | *%* | | *38.6* | | *%* | | *39.1* | | *%* |

| Operating income | 556 | | | | 406 | | | | 449 | | | | 463 | | | | 363 | | |

| *Operating margin* | 11.8 | | % | | *10.8* | | *%* | | *12.3* | | *%* | | *11.8* | | *%* | | *9.5* | | *%* |

| [Report of Independent Registered Public Accounting [removed: Firm](#sD5BE97A9961550C2BDA1C57E6DEB26F9)] [added: Firm](#s9E0A288F8F6852D7B4B655C548E0AC28)] | [removed: [55](#sD5BE97A9961550C2BDA1C57E6DEB26F9)] [added: [57](#s9E0A288F8F6852D7B4B655C548E0AC28)] |

| [Consolidated Income Statements for the Years Ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#sA4D02D3884DC5E8AA454589646E2BB36)] [added: 2016](#s87CC51822A415B08A7880E082B4EE3BF)] | [removed: [56](#sA4D02D3884DC5E8AA454589646E2BB36)] [added: [58](#s87CC51822A415B08A7880E082B4EE3BF)] |

| [Consolidated Statements of Comprehensive Income for the Years Ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#sB84EF03E059D593288E603E5E42DACC5)] [added: 2016](#s71093898B8A25F41BC0C45360DBD311A)] | [removed: [57](#sB84EF03E059D593288E603E5E42DACC5)] [added: [59](#s71093898B8A25F41BC0C45360DBD311A)] |

| [Consolidated Balance Sheets as of December 31, [removed: 2017] [added: 2018] and [removed: 2016](#sBC5FE5F6349B59D687FE145A4CF530A2)] [added: 2017](#sA7FE6D37CA1E588D825AD0F57E968BD6)] | [removed: [58](#sBC5FE5F6349B59D687FE145A4CF530A2)] [added: [60](#sA7FE6D37CA1E588D825AD0F57E968BD6)] |

| [Consolidated Statements of Cash Flows for the Years Ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#s1FBA40F2BF8B5EE791E0CB9E5AE05CA1)] [added: 2016](#sE027447FC158563B9B4405C378CE8E3F)] | [removed: [59](#s1FBA40F2BF8B5EE791E0CB9E5AE05CA1)] [added: [61](#sE027447FC158563B9B4405C378CE8E3F)] |

| [Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#sD5EF6D6603805B7B9CDFF943CD8BD394)] [added: 2016](#sB21983A617FE5906AAE5F5194D49B92C)] | [removed: [60](#sD5EF6D6603805B7B9CDFF943CD8BD394)] [added: [62](#sB21983A617FE5906AAE5F5194D49B92C)] |

| [Note 1 Summary of Significant Accounting [removed: Policies](#sF01D79EE16385C7281C06120DA7381F5)] [added: Policies](#s42D6099DC5D75CB79564DAFAECBBB633)] | [removed: [61](#sF01D79EE16385C7281C06120DA7381F5)] [added: [63](#s42D6099DC5D75CB79564DAFAECBBB633)] |

| [Note 2 Recently Issued Accounting [removed: Pronouncements](#sA16F80E71DC1513498CCAED88512854C)] [added: Pronouncements](#s83CD9A19C3C15D158B5331B027014742)] | [removed: [67](#sA16F80E71DC1513498CCAED88512854C)] [added: [71](#s83CD9A19C3C15D158B5331B027014742)] |

| [Note 3 Acquisitions and [removed: Divestitures](#s958EF5B737095BD284096D18C439C4DA)] [added: Divestitures](#s83896C5196F758658DB32102679142E3)] | [removed: [70](#s958EF5B737095BD284096D18C439C4DA)] [added: [73](#s83896C5196F758658DB32102679142E3)] |

| [Note [removed: 4] [added: 5] Restructuring and Asset Impairment [removed: Charges](#sF122F52A3C265A3084C928A9652FA31C)] [added: Charges](#sBAA50FD81FFC551A907C450E6AB1EF89)] | [removed: [73](#sF122F52A3C265A3084C928A9652FA31C)] [added: [80](#sBAA50FD81FFC551A907C450E6AB1EF89)] |

| [Note [removed: 5] [added: 6] Other Non-Operating Income, [removed: Net](#s4F62C4DEDBD45DA19A6B5E12FB8FFC2A)] [added: Net](#sAD16B04300F950B7BC61F8BD2170B491)] | [removed: [75](#s4F62C4DEDBD45DA19A6B5E12FB8FFC2A)] [added: [82](#sAD16B04300F950B7BC61F8BD2170B491)] |

| [Note [removed: 6] [added: 7] Income [removed: Taxes](#s56741BFAB8245CC58B643DA1B2E4307E)] [added: Taxes](#s40B51794BB84540686D85E6B003C430C)] | [removed: [75](#s56741BFAB8245CC58B643DA1B2E4307E)] [added: [82](#s40B51794BB84540686D85E6B003C430C)] |

| [Note [removed: 7] [added: 8] Earnings Per [removed: Share](#s98DB4F2A053A52F4BC793BE252BFB91E)] [added: Share](#sF9FEC1ADC0FA551BBEB32173CE491C1C)] | [removed: [80](#s98DB4F2A053A52F4BC793BE252BFB91E)] [added: [85](#sF9FEC1ADC0FA551BBEB32173CE491C1C)] |

| [Note [removed: 8 Inventories](#s5F9411F8E30B52D39466FBFDE325EFBA)] [added: 9 Inventories](#sA960C4F5E41A5A21AE6865B7E6AFD292)] | [removed: [80](#s5F9411F8E30B52D39466FBFDE325EFBA)] [added: [86](#sA960C4F5E41A5A21AE6865B7E6AFD292)] |

| [Note [removed: 9] [added: 10] Property, Plant and [removed: Equipment](#s8F6AE80956C75C6B88E4F2977B089418)] [added: Equipment](#sE6D80498DDBA5548815AA98E126F3CE0)] | [removed: [81](#s8F6AE80956C75C6B88E4F2977B089418)] [added: [86](#sE6D80498DDBA5548815AA98E126F3CE0)] |

| [Note [removed: 10] [added: 11] Goodwill and Other Intangible [removed: Assets](#s3D6C071F73055757801BEED43B3F37CF)] [added: Assets](#s6D3C4CDA06BF5C799B0110AB29CC08CB)] | [removed: [81](#s3D6C071F73055757801BEED43B3F37CF)] [added: [86](#s6D3C4CDA06BF5C799B0110AB29CC08CB)] |

| [Note [removed: 11] [added: 12] Derivative Financial [removed: Instruments](#s765A13E9D60254D6B7C475ACB7AD0E9B)] [added: Instruments](#s8DC6318C9CC85A64B47C342A017EC8F8)] | [removed: [82](#s765A13E9D60254D6B7C475ACB7AD0E9B)] [added: [87](#s8DC6318C9CC85A64B47C342A017EC8F8)] |

| [Note [removed: 12] [added: 13] Accrued and Other Current [removed: Liabilities](#s52C41E5C5C73501481785B0004F89153)] [added: Liabilities](#s0A2CDB17B8B65C34B313A69120277D9F)] | [removed: [85](#s52C41E5C5C73501481785B0004F89153)] [added: [90](#s0A2CDB17B8B65C34B313A69120277D9F)] |

| [Note [removed: 13] [added: 14] Credit Facilities and Long-Term [removed: Debt](#sBE26C4F0F41D55C49C20BF85E774EBA8)] [added: Debt](#s8B10F92D6E32576B9F97E647A138AFF1)] | [removed: [85](#sBE26C4F0F41D55C49C20BF85E774EBA8)] [added: [90](#s8B10F92D6E32576B9F97E647A138AFF1)] |

| [Note [removed: 14] [added: 15] Postretirement Benefit [removed: Plans](#s3C64903031A858DEBF53EA4E9194DBDE)] [added: Plans](#s6E627C8F2C4853478F18EDECA2BF8236)] | [removed: [87](#s3C64903031A858DEBF53EA4E9194DBDE)] [added: [92](#s6E627C8F2C4853478F18EDECA2BF8236)] |

| [Note [removed: 15] [added: 16] Stock-Based Compensation [removed: Plans](#sB90ABF74CAE95BCAA5851414CDEF9CF2)] [added: Plans](#s1C5F1FC729D25633B4FFF077ED4856C3)] | [removed: [95](#sB90ABF74CAE95BCAA5851414CDEF9CF2)] [added: [100](#s1C5F1FC729D25633B4FFF077ED4856C3)] |

| [Note [removed: 16] [added: 17] Capital [removed: Stock](#sC51AC9178DD55DE3B9497F6802FF2ED9)] [added: Stock](#sFA22C096DBE053CC897B7D78B423A4A3)] | [removed: [97](#sC51AC9178DD55DE3B9497F6802FF2ED9)] [added: [102](#sFA22C096DBE053CC897B7D78B423A4A3)] |

| [Note [removed: 17] [added: 18] Accumulated Other Comprehensive Income [removed: (Loss)](#s2E17BFFD08FB522ABCF4D0C49C825142)] [added: (Loss)](#s71C2F4BB7EA75D9C945B266BA9682331)] | [removed: [99](#s2E17BFFD08FB522ABCF4D0C49C825142)] [added: [104](#s71C2F4BB7EA75D9C945B266BA9682331)] |

| [removed: [Note 18] Commitment and [removed: Contingencies](#s0B66B044751F5E91AD2305ADED48BC8E)] [added: Contingencies (Note 19)] | [removed: [100](#s0B66B044751F5E91AD2305ADED48BC8E)] | [added: | | | | | |]

| [Note [removed: 19] [added: 20] Related Party [removed: Transactions](#s02EDDAC6B62C5CAA8FE41D5BCD471728)] [added: Transactions](#s5CB5463694D15A999443F0579B261BD0)] | [removed: [102](#s02EDDAC6B62C5CAA8FE41D5BCD471728)] [added: [107](#s5CB5463694D15A999443F0579B261BD0)] |

| [Note [removed: 20] [added: 21] Segment and Geographic [removed: Data](#sFAEBC5CF3D645963B3122BD84BFCD05A)] [added: Data](#sEF355A765AAC5CD898C851BBC49DFECF)] | [removed: [103](#sFAEBC5CF3D645963B3122BD84BFCD05A)] [added: [108](#sEF355A765AAC5CD898C851BBC49DFECF)] |

| [Note [removed: 21] [added: 22] Valuation and Qualifying [removed: Accounts](#s5B99217E6EDD5D159C23B361BC12F66C)] [added: Accounts](#s14D08982C004501888C16A51F999CF39)] | [removed: [105](#s5B99217E6EDD5D159C23B361BC12F66C)] [added: [110](#s14D08982C004501888C16A51F999CF39)] |

| [Note [removed: 22] [added: 23] Quarterly Financial [removed: Data](#sE0834642E95C50C7A8C4AFE1CA015FFF)] [added: Data](#s2956F43632AC523693BA1EF92302B2FF)] | [removed: [105](#sE0834642E95C50C7A8C4AFE1CA015FFF)] [added: [110](#s2956F43632AC523693BA1EF92302B2FF)] |

To the [added: Stockholders and] Board of Directors [removed: and Stockholders] of

We have audited the accompanying consolidated balance sheets of Xylem Inc. and subsidiaries (the "Company") as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] the related consolidated statements of income, comprehensive income, [removed: stockholders'] [added: stockholders’] equity, and cash flows, for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] and the related notes (collectively referred to as the [removed: “financial statements”).][added: "financial statements").]

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the results of [removed: their] [added: its] operations and [removed: their] [added: its] cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on [removed: the] criteria established in *Internal Control - Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February [removed: 23, 2018,] [added: 22, 2019,] expressed an unqualified opinion on the Company's internal control over financial reporting.

| Year Ended December 31, | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Revenue | $ | [removed: 4,707] [added: 5,207] | | | $ | [removed: 3,771] [added: 4,707] | | | $ | [removed: 3,653] [added: 3,771] | |

| Selling, general and administrative expenses | [removed: 1,090] [added: 1,161] | | | | [removed: 915] [added: 1,089] | | | | [removed: 854] [added: 914] | | |

| Research and development expenses | [removed: 180] [added: 189] | | | | [removed: 110] [added: 181] | | | | [removed: 95] [added: 110] | | |

| Restructuring and asset impairment charges | [removed: 25] [added: 22] | | | | [removed: 30] [added: 25] | | | | [removed: 6] [added: 30] | | |

| Interest expense | 82 | | | | [removed: 70] [added: 82] | | | | [removed: 55] [added: 70] | | |

| Other non-operating income, net | [removed: 2] [added: 13] | | | | [removed: 4] [added: 6] | | | | [removed: —] [added: 2] | | |

| (Loss)/gain on sale of businesses | [removed: (10] [added: —] | | [removed: )] | | [removed: —] [added: (10] | | [added: )] | | [removed: 9] [added: —] | | |

| [Note 4 Revenue](#s83896C5196F758658DB32102679142E3) | [78](#s4f7cd850810f46739f95475c54fdc044) |

| Gross profit | 2,026 | | | | 1,847 | | | | 1,462 | | |

| Operating income | 654 | | | | 552 | | | | 408 | | |

| Less: comprehensive loss attributable to noncontrolling interests | (2 | | ) | | — | | | | — | | |

| Comprehensive income attributable to Xylem | $ | 440 | | | $ | 438 | | | $ | 180 | |

| December 31, | 2018 | | | | 2017 | | |

| Year Ended December 31, | 2018 | | | | 2017 | | | | 2016 | | |

| Net income | $ | 549 | | | $ | 330 | | | $ | 260 | |

| Restructuring and asset impairment charges | 22 | | | | 25 | | | | 30 | | |

| Cumulative effect of change in accounting principle | | | | | | | | | 14 | | | | (17 | | ) | | | | | | | | | | (3 | | ) |

| Balance at December 31, 2018 | $ | 2 | | | $ | 1,950 | | | $ | 1,639 | | | $ | (336 | ) | | $ | (487 | ) | | $ | 14 | | | $ | 2,782 | |

As discussed in Note 2, "Recently Issued Accounting Pronouncements", Xylem adopted the new guidance on recognizing revenue from contracts with customers as of January 1, 2018.

In accordance with this new guidance Xylem recognizes revenue in a manner that depicts the transfer of promised goods and services to customers in an amount that reflects the consideration to which it expects to be entitled to for providing those goods and services.

For each arrangement with a customer, we identify the contract, the associated performance obligations within the contract, determine the transaction price of that contract, allocate the transaction price to each performance obligation and recognize revenue as each performance obligation is satisfied.

The satisfaction of performance obligations in a contract is based upon when the customer obtains control over the asset.

Depending on the nature of the performance obligation, control transfers either at a particular point in time, or over time which determines the recognition pattern of revenue.

For product sales, other than long-term construction-type contracts, we recognize revenue once control has passed at a point in time, which is generally when products are shipped.

In instances where contractual terms include a provision for customer acceptance, revenue is recognized when either (i) we have previously demonstrated that the product meets the specified criteria based on either seller or customer specified objective criteria or (ii) upon formal acceptance received from the customer where the product has not been previously demonstrated to meet customer specified objective criteria.

We recognize revenue on product sales to channel partners, including resellers, distributors or value-added solution providers at the point in time when control is transferred which is determined based on when the risks and rewards, possession, and title have transferred to the customer, which usually occurs at the point of delivery.

Revenue from performance obligations related to services is recognized over time, as the performance obligations are satisfied.

In these instances, the customer consumes the benefit of the service as Xylem performs.

Certain businesses also enter into long-term construction-type sales contracts where revenue is recognized over time.

In these instances, revenue is recognized using a measure of progress that applies an input method based on costs incurred in relation to total estimated costs.

We also recognize revenue for certain of these arrangements using the output method and measure progress based on shipments of product where control has transferred to the customer.

If shipping and handling activities are performed after a customer obtains control of a good, we account for the shipping and handling activities as activities to fulfill a promise to transfer a good.

Shipping and handling related costs are accrued as revenue is recognized.

For all contracts with customers, we determine the transaction price in the arrangement and allocate the transaction price to each performance obligation identified in the contract.

Judgment is required to determine the appropriate unit of account, and we separate out the performance obligations if they are capable of being distinct and if they are distinct within the context of the contract.

We base our allocation of the transaction price to the performance obligations on the relative standalone selling prices for the goods or services contained in a particular performance obligation.

The standalone selling prices are determined first by reference to observable prices.

In the event observable prices are not available, we estimate the stand-alone selling price by maximizing observable inputs and apply an adjusted market assessment approach, expected cost plus margin approach, or a residual approach in limited situations.

Revenue in these instances is recognized on individual performance obligations within the same contract as they are satisfied.

The transaction price is adjusted for our estimate of variable consideration which may include a right of return, discounts, rebates, penalties and retainage.

To estimate variable consideration, we apply the expected value or the most likely amount method, based on whichever method most appropriately predicts the amount of consideration we expect to receive.

The method applied is typically based on historical experience and known trends.

We constrain the amounts of variable consideration that are included in the transaction price, to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when uncertainties around the variable consideration are resolved.

We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transaction and collected from a customer, for example sales, use, value added and some excise taxes.

For all contracts with customers, payment received for our products and services may not necessarily follow the same pattern of revenue recognition to which it relates and are dictated by the terms and conditions of our contracts with customers.

Payments received for product sales typically occur following delivery and the satisfaction of the performance obligation based upon the terms outlined in the contracts.

Payments received for services typically occur following the services being rendered.

| | |

| --- | --- |

| [Note 23 Subsequent Events](#s5277FDEEC7AA5EB480A4B489350439F9) | [105](#sE0834642E95C50C7A8C4AFE1CA015FFF) |

February 23, 2018

| Cost of revenue | 2,856 | | | | 2,310 | | | | 2,249 | | |

| Gross profit | 1,851 | | | | 1,461 | | | | 1,404 | | |

| Operating income | 556 | | | | 406 | | | | 449 | | |

| Excess tax benefit from share based compensation | — | | | | — | | | | 2 | | |

| Balance at December 31, 2014 | $ | 2 | | | $ | 1,796 | | | $ | 648 | | | $ | (99 | ) | | $ | (220 | ) | | $ | — | | | $ | 2,127 | |

As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving Xylem’s Analytics business from our Water Infrastructure segment to combine it with our Sensus and Visenti businesses, which were acquired in the fourth quarter of 2016, to form Measurement & Control Solutions.

We believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will lead to operating efficiencies by integrating the supply chain process and moving to a leaner functional structure.

Accordingly, our reportable segments have changed.

Beginning with the second quarter of 2017, the Company now reports the financial position and results of operations of its Analytics, Sensus and Visenti businesses as one new reportable segment, which is called Measurement & Control Solutions.

Our Water Infrastructure reportable segment no longer includes the results of our Analytics business.

The Company has recast certain historical amounts between the Company's Water Infrastructure and Measurement & Control Solutions reportable segments, however this change had no impact on the Company's historical consolidated financial position or results of operations.

The recast financial information does not represent a restatement of previously issued financial statements.

Our Applied Water reportable segment remains unchanged.

The Company intends to distribute a portion of the earnings taxed under the Tax Cuts and Jobs Act (the "Tax Act").

The liability

brands and trademarks, patents, software and other intangible assets.

The guidance also requires certain disclosures related to stranded tax effects.

The adoption of this guidance is expected to impact the presentation between operating income and other non operating income within Xylem's Consolidated Income Statement but is not expected to have a material impact on our consolidated financial condition or results of operations.

The adoption of this guidance did not have a material impact on our financial condition or results of operations.

We elected to early adopt

The adoption of this guidance did not impact our financial condition or results of operations.

In March 2016, the FASB issued an update on accounting for share-based payments.

The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the Consolidated Statements of Cash Flows.

The Company elected to early adopt this standard in the quarter ended June 30, 2016 retroactively to January 1, 2016.

The impact of the early adoption resulted in the following:

| • | The Company recorded tax benefits of $3 million within income tax expense for the year ended December 31, 2016 related to the excess tax benefit on share-based awards. Prior to adoption this amount would have been recorded as an increase of capital in excess of par value. This change could create volatility in the Company's effective tax rate. |

| • | The Company no longer reflects the cash received from the excess tax benefit within cash flows from financing activities but instead now reflects this benefit within cash flows from operating activities in the Consolidated Statements of Cash Flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted. |

| • | The Company elected not to change its policy on accounting for forfeitures and continues to estimate the total number of awards for which the requisite service period will not be rendered. |

| • | At this time, the Company has not changed its policy on statutory withholding requirements and will continue to allow the employee to withhold up to the Company's minimum statutory withholding requirements. |

| • | The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the year ended December 31, 2016. This increased diluted weighted average common shares outstanding by less than 300,000 shares for the aforementioned period. |

In March 2016, the FASB amended the guidance regarding the use of the equity method to record certain investments.

Under current guidance, if an investor increases its level of ownership interest in a company and consequently qualifies for the equity method, the investor must retroactively adjust its investment, results of operations and retained earnings to reflect balances that would have arisen if the equity method had been in effect during all previous periods that the investment was held.

The amended guidance eliminates the need to retroactively adjust balances and instead allows for the prospective application of the equity method.

This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2016.

We elected to early adopt this guidance effective January 2016.

In March 2016, in response to inconsistency in practice, the FASB issued guidance regarding the ability to maintain hedge accounting for a derivative instruments when one party to the instrument has been replaced by a new party (“a novation”).

Our management, with the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the Company, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year ended December 31, [removed: 2017] [added: 2018] pursuant to Rule 13a-15(b) and 15d-15(e) of the Securities Exchange Act of 1934 (“the Exchange Act”).

Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures as of the year ended December 31, [removed: 2017] [added: 2018] were effective, in all material respects, and designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

The Company's management, including the CEO and CFO, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, [removed: 2017] [added: 2018] based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (2013).

Based on our assessment, the Company's management has concluded that our internal control over financial reporting was effective as of December 31, [removed: 2017.][added: 2018.]

The effectiveness of the Company's internal control over financial reporting as of December 31, [removed: 2017] [added: 2018] has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears following Item 9B of this Annual Report on Form 10-K.

There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, [removed: 2017] [added: 2018] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2018 excluded Pure Technologies Ltd. ("Pure"), which was acquired by the Company on January 31, 2018.

Pure is a wholly-owned subsidiary of the Company whose total assets and total net sales represented less than 6% of consolidated total assets and less than 2% of consolidated net sales, respectively, of the Company as of and for the year ended December 31, 2018.

As permitted by guidelines established by the Securities and Exchange Commission, companies are allowed to exclude certain acquisitions from their assessments of internal control over financial reporting during the first year of an acquisition while integrating the acquired companies.

To the [added: Stockholders and the] Board of Directors [removed: and Stockholders] of

December 31, [removed: 2017,] [added: 2018,] based on criteria established in *Internal Control - Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on criteria established in *Internal Control - Integrated Framework (2013)* issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, [removed: 2017,] [added: 2018,] and the related notes (collectively referred to as the “financial statements”), of the Company and our report dated February [removed: 23, 2018,] [added: 22, 2019,] expressed an unqualified opinion on those financial statements.

As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Pure Technologies (“Pure”), which was acquired on January 31, 2018 and whose financial statements constitute less than 6% and 2% of total assets and total revenue, respectively, of the consolidated financial statement amounts as of and for the year ended December 31, 2018.

Accordingly, our audit did not include the internal control over financial reporting at Pure.

February 22, 2019

February 23, 2018

The information required by this Item is incorporated herein by reference to the information in our Definitive Proxy Statement to be filed with the SEC in connection with our [removed: 2018] [added: 2019] Annual Meeting of Shareholders (the [removed: “2018] [added: “2019] Proxy Statement”) under the captions “Proposal 1 - Election of Directors,” "Identifying and Evaluating Director Nominees," "Board Committees - Audit Committee" and “Section 16(a) Beneficial Ownership Reporting Compliance.”

We have also adopted a written code of conduct which is applicable to all [added: of] our directors, officers and employees, including the Company’s Chief Executive Officer and Chief Financial Officer and other executive officers identified pursuant to this Item 10.

In accordance with the SEC’s rules and regulations, a copy of the Code of Conduct has been posted to our website and it is also available to any shareholder who requests a copy from [removed: our] [added: the Company's] Corporate Secretary.

We intend to disclose any changes in our Code of Conduct and waivers of the Code of Conduct on our website at [removed: *www.xyleminc.com*] [added: *www.xylem.com*] within four business days following the date of the amendment or waiver.

The information required by this Item is incorporated herein by reference to the information in our [removed: 2018] [added: 2019] Proxy Statement set forth under captions “Executive Compensation," "Director Compensation", "Board Committees - Leadership Development and Compensation Committee" and “Leadership Development and Compensation Committee Report.”

The information required by this Item is incorporated herein by reference to the information in our [removed: 2018] [added: 2019] Proxy Statement set forth under the captions “Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners” and "Equity Compensation Plan Information."

The information required by this Item is incorporated herein by reference to the information in our [removed: 2018] [added: 2019] Proxy Statement set forth under the captions "Governance - Director Independence" and “Governance - Related Party Transactions.”

The information required by this Item is incorporated herein by reference to the information in our [removed: 2018] [added: 2019] Proxy Statement set forth under the captions “Fees of Audit and Other Services Fees” and "Pre-Approval of Audit and Non-Audit Services."

| [2.3](http://www.sec.gov/Archives/edgar/data/1524472/000119312516754536/d284307dex22.htm) | | First Amendment to Share Purchase Agreement, dated as of October 31, 2016, by and among Xylem Inc., Xylem Luxembourg S.à r.l., Sensus Worldwide Limited, Sensus Industries Limited, and Sensus USA Inc. | Incorporated by reference to Exhibit 2.2 to Xylem Inc.’s Current Report on Form 8-K filed on [removed: October 31,] [added: November 1,] 2016 (CIK No. 1524472, File No. 1-35229). |

| [removed: [2.4](http://www.sec.gov/Archives/edgar/data/1524472/000119312517365590/d61615dex21.htm)] [added: [10.31](http://www.sec.gov/Archives/edgar/data/1524472/000152447218000006/xyl12312017ex1031.htm)] | [added: #] | [removed: Arrangement Agreement, dated as] [added: Form] of [removed: December 8, 2017, by and between] Xylem [removed: Inc. and Pure Technologies Ltd.] [added: Restricted Stock Unit Agreement (Amended as of February 21, 2018).] | Incorporated by reference to Exhibit [removed: 2.1 to] [added: 10.31 of] Xylem Inc.'s [removed: Current Report on] Form [removed: 8-K] [added: 10-K] filed on [removed: December 11, 2017] [added: February 23, 2018] (CIK No. 1524472, File No. [removed: 1-35229)] [added: 1-35229] |

| [4.3](http://www.sec.gov/Archives/edgar/data/1524472/000119312516501188/d161514dex41.htm) | | First Supplemental Indenture, dated March 11, 2016, by and between the Company and Deutsche Bank Trust Company Americas, as trustee. | Incorporated by reference to Exhibit [removed: 4.1] [added: 4.2] of Xylem Inc.’s Form 8-K filed on March 11, 2016 (CIK No. 1524472, File No. 1-35229) |

| [4.4](http://www.sec.gov/Archives/edgar/data/1524472/000119312516501188/d161514dex41.htm) | | Second Supplemental Indenture, dated March 11, 2016, by and between the Company and Deutsche Bank Trust Company Americas, as trustee. | Incorporated by reference to Exhibit [removed: 4.1] [added: 4.3] of Xylem Inc.’s Form 8-K filed on March 11, 2016 (CIK No. 1524472, File No. 1-35229). |

| [removed: [10.23](http://www.sec.gov/Archives/edgar/data/1524472/000119312514108281/d696342dex101.htm)] [added: [10.32](http://www.sec.gov/Archives/edgar/data/1524472/000152447218000006/xyl12312017ex1032.htm)] | # | [removed: Restricted Stock] [added: Form of Xylem Performance Share] Unit [removed: Grant] Agreement [removed: between Xylem Inc. and Patrick K. Decker.] [added: (Amended as of February 21, 2018).] | Incorporated by reference to Exhibit [removed: 10.1] [added: 10.32] of Xylem Inc.'s Form [removed: 8-K Current Report] [added: 10-K] filed on [removed: March 20, 2014] [added: February 23, 2018] (CIK No. 1524472, File No. [removed: 1-35229).] [added: 1-35229] |

| [removed: [10.29](http://www.sec.gov/Archives/edgar/data/1524472/000119312516750666/d271934dex101.htm)] [added: [10.30](http://www.sec.gov/Archives/edgar/data/1524472/000152447218000006/xyl12312017ex1030.htm)] | | Term Loan Agreement, dated as of [removed: October 24, 2016] [added: January 26, 2018] among Xylem Europe GmbH, as borrower, Xylem Inc., as parent guarantor and ING Bank, as lender (including Form of Parent Guarantee). | Incorporated by reference to Exhibit [removed: 10.1] [added: 10.30] of Xylem [removed: Inc.’s] [added: Inc.'s] Form [removed: 8-K] [added: 10-K] filed on [removed: October 28, 2016] [added: February 23, 2018] (CIK No. 1524472, File No. [removed: 1-35229).] [added: 1-35229] |

| [removed: [10.30](https://www.sec.gov/Archives/edgar/data/1524472/000152447218000006/xyl12312017ex1030.htm)] [added: [10.33](https://www.sec.gov/Archives/edgar/data/1524472/000152447219000009/xyl12312018ex1033.htm)] | | [added: Amendment to] Term Loan Agreement, dated as of January 26, 2018 among Xylem Europe GmbH, as borrower, Xylem Inc., as parent guarantor and ING Bank, as lender (including Form of Parent Guarantee). | Filed herewith. |

| [removed: [12.0](https://www.sec.gov/Archives/edgar/data/1524472/000152447218000006/xyl12312017ex12.htm)] [added: [21.0](https://www.sec.gov/Archives/edgar/data/1524472/000152447219000009/xyl12312018ex21.htm)] | | [removed: Statements re computation] [added: Subsidiaries] of [removed: ratios.] [added: the Registrant.] | Filed herewith. |