Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

			Page No.
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)			61
Consolidated Income Statements for the Years Ended December 31, 2022, 2021 and 2020			63
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020			64
Consolidated Balance Sheets as of December 31, 2022 and 2021			65
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020			66
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020			67
Notes to Consolidated Financial Statements:
Note 1 Summary of Significant Accounting Policies			68
Note 2 Recently Issued Accounting Pronouncements			75
Note 3 Revenue			76
Note 4 Restructuring and Asset Impairment Charges			78
Note 5 Other Non-Operating Income, Net			81
Note 6 Income Taxes			81
Note 7 Earnings Per Share			86
Note 8 Inventories			86
Note 9 Property, Plant and Equipment			87
Note 10 Leases			87
Note 11 Goodwill and Other Intangible Assets			89
Note 12 Derivative Financial Instruments			90
Note 13 Accrued and Other Current Liabilities			93
Note 14 Credit Facilities and Debt			93
Note 15 Post-retirement Benefit Plans			95
Note 16 Share-Based Compensation Plans			102
Note 17 Capital Stock			105
Note 18 Accumulated Other Comprehensive Income (Loss)			107
Note 19 Commitment and Contingencies			108
Note 20 Related Party Transactions			109
Note 21 Segment and Geographic Data			110
Note 22 Valuation and Qualifying Accounts			113
Note 23 Subsequent Events			113

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Xylem Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Xylem Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill - M&CS Reporting Units - Refer to Note 11 to the financial statements

Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The goodwill balance was $2.7 billion as of December 31, 2022, of which $1.6 billion is allocated to the M&CS Reporting Units. The fair value of the M&CS reporting units exceeded its carrying value as of the 2022 measurement date and, therefore, no impairment was recognized.

To determine the fair value of the M&CS reporting units, the Company used the income approach. Under the income approach, the fair value of the M&CS reporting units was based on the discounted value of the estimated cash flows that the reporting unit is expected to generate. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate was based on the weighted average cost of capital appropriate for the M&CS reporting units.

Given the significant judgments made by management to estimate the fair value of the M&CS reporting units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate and forecasts of future revenue required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to forecasts of future revenue and selection of the discount rate for the M&CS reporting units included the following, among others:

• We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the M&CS reporting units, such as controls related to management’s forecasts of future revenue and the selection of the discount rate.

• We evaluated the reasonableness of management’s revenue forecasts by comparing the forecasts to:

–Historical revenues

–Internal communications to management and the Board of Directors.

–Information included in industry reports and certain peer company data.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) discount rate, and (3) long-term revenue growth rate, including testing the source information underlying the determination of the discount rate and long-term revenue growth rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management.

• Our fair value specialists also assisted in evaluating the reasonableness of the M&CS reporting units fair value by considering comparable EBITDA multiples of peer companies.

/s/ Deloitte & Touche LLP

Stamford, Connecticut

February 24, 2023

We have served as the Company's auditor since 2010.

XYLEM INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(In Millions, except per share data)

Year Ended December 31,			2022						2021						2020
Revenue			$	5,522					$	5,195					$	4,876
Cost of revenue			3,438						3,220						3,046
Gross profit			2,084						1,975						1,830
Selling, general and administrative expenses			1,227						1,179						1,143
Research and development expenses			206						204						187
Restructuring and asset impairment charges			29						7						75
Goodwill impairment charge			—						—						58
Operating income			622						585						367
Interest expense			50						76						77
U.K. pension settlement expense			140						—						—
Other non-operating income (expense), net			7						—						(5)
Gain on sale of businesses			1						2						—
Income before taxes			440						511						285
Income tax expense			85						84						31
Net income			$	355					$	427					$	254
Earnings per share:
Basic			$	1.97					$	2.37					$	1.41
Diluted			$	1.96					$	2.35					$	1.40
Weighted average number of shares:
Basic			180.2						180.2						180.1
Diluted			181.0						181.5						181.1

See accompanying notes to consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Millions)

Year Ended December 31,			2022						2021						2020
Net income			$	355					$	427					$	254
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment			(53)						20						(23)
Net change in derivative hedge agreements:
Unrealized gain (loss)			(24)						(10)						9
Amount of (gain) loss reclassified into net income			21						4						(3)
Net change in post-retirement benefit plans:
Net gain (loss)			101						51						(78)
Prior service credit			—						—						5
Amortization of prior service credit cost			(2)						(3)						(3)
Amortization of net actuarial loss into net income			12						23						19
U.K. pension settlement			137						—						—
Foreign currency translation adjustment			39						11						(19)
Other comprehensive income (loss), before tax			231						96						(93)
Income tax (benefit) expense related to other comprehensive loss			86						54						(54)
Other comprehensive income (loss), net of tax			145						42						(39)
Comprehensive income			$	500					$	469					$	215
Less: comprehensive (loss) gain attributable to noncontrolling interests			—						—						(1)
Comprehensive income attributable to Xylem			$	500					$	469					$	216

See accompanying notes to consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Millions, except per share amounts)

December 31,			2022						2021
ASSETS
Current assets:
Cash and cash equivalents			$	944					$	1,349
Receivables, less allowances for discounts, returns and credit losses of $50 and $44 in 2022 and 2021, respectively			1,096						953
Inventories			799						700
Prepaid and other current assets			173						158
Total current assets			3,012						3,160
Property, plant and equipment, net			630						644
Goodwill			2,719						2,792
Other intangible assets, net			930						1,016
Other non-current assets			661						664
Total assets			$	7,952					$	8,276
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	723					$	639
Accrued and other current liabilities			867						752
Total current liabilities			1,590						1,391
Long-term debt, net			1,880						2,440
Accrued post-retirement benefit obligations			286						438
Deferred income tax liabilities			222						287
Other non-current accrued liabilities			471						494
Total liabilities			4,449						5,050
Commitment and Contingencies (Note 19)
Stockholders’ equity:
Common stock — par value $0.01 per share:
Authorized 750.0 shares, issued 196.0 and 195.6 shares in 2022 and 2021, respectively			2						2
Capital in excess of par value			2,134						2,089
Retained earnings			2,292						2,154
Treasury stock – at cost 15.8 shares and 15.2 shares in 2022 and 2021, respectively			(708)						(656)
Accumulated other comprehensive loss			(226)						(371)
Total stockholders’ equity			3,494						3,218
Non-controlling interest			9						8
Total equity			3,503						3,226
Total liabilities and stockholders’ equity			$	7,952					$	8,276

See accompanying notes to consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions)

Year Ended December 31,			2022						2021						2020
Operating Activities
Net income			$	355					$	427					$	254
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			111						118						117
Amortization			125						127						134
Deferred income taxes			(64)						10						(31)
Share-based compensation			37						33						26
Restructuring and asset impairment charges			29						7						75
Goodwill impairment charge			—						—						58
U.K. pension settlement expense			140						—						—
Gain from sale of businesses			(1)						(2)						—
Other, net			(4)						8						46
Payments for restructuring			(11)						(25)						(36)
Contributions to post-retirement benefit plans			(19)						(29)						(27)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables			(192)						(70)						109
Changes in inventories			(147)						(167)						(5)
Changes in accounts payable			117						81						(39)
Changes in accrued liabilities			57						7						101
Changes in accrued taxes			57						(9)						20
Net changes in other assets and liabilities			6						22						22
Net Cash — Operating activities			596						538						824
Investing Activities
Capital expenditures			(208)						(208)						(183)
Proceeds from sale of businesses			1						10						—
Cash received from investments			8						3						200
Cash paid for investments			(11)						—						(200)
Cash received from cross-currency swaps			28						14						12
Settlement of currency forward agreement			(10)						—						—
Other, net			1						(2)						2
Net Cash — Investing activities			(191)						(183)						(169)
Financing Activities
Short-term debt issued, net			—						—						359
Short-term debt repaid, net			—						—						(640)
Long-term debt issued, net			—						—						985
Long-term debt repaid, net			(527)						(600)						—
Repurchase of common stock			(52)						(68)						(61)
Proceeds from exercise of employee stock options			8						19						20
Dividends paid			(217)						(203)						(188)
Other, net			(2)						(3)						(2)
Net Cash — Financing activities			(790)						(855)						473
Effect of exchange rate changes on cash			(20)						(26)						23
Net change in cash and cash equivalents			(405)						(526)						1,151
Cash and cash equivalents at beginning of year			1,349						1,875						724
Cash and cash equivalents at end of year			$	944					$	1,349					$	1,875
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest			$	76					$	99					$	77
Income taxes (net of refunds received)			$	91					$	83					$	41

See accompanying notes to consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Millions, except per share amounts)

			Common Stock						Capital in Excess of Par Value						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Treasury Stock						Non-Controlling Interest						Total
Balance at December 31, 2019			$	2					$	1,991					$	1,866					$	(375)					$	(527)					$	10					$	2,967
Cumulative effect of change in accounting principle															(2)																								(2)
Net income															254																								254
Other comprehensive loss, net																					(38)												(1)						(39)
Distribution to minority shareholders																																	(1)						(1)
Dividends declared ($1.04 per share)															(188)																								(188)
Stock incentive plan activity									46																		(11)												35
Repurchase of common stock																											(50)												(50)
Acquisition activity																																							—
Balance at December 31, 2020			$	2					$	2,037					$	1,930					$	(413)					$	(588)					$	8					$	2,976
Net Income															427																								427
Other comprehensive income, net																					42																		42
Dividends declared ($1.12 per share)															(203)																								(203)
Stock incentive plan activity									52																		(8)												44
Repurchase of common stock																											(60)												(60)
Balance at December 31, 2021			$	2					$	2,089					$	2,154					$	(371)					$	(656)					$	8					$	3,226
Net income															355																								355
Other comprehensive income, net																					145												—						145
Other activity																																	1						1
Dividends declared ($1.20 per share)															(217)																								(217)
Stock incentive plan activity									45																		(6)												39
Repurchase of common stock																											(46)												(46)
Balance at December 31, 2022			$	2					$	2,134					$	2,292					$	(226)					$	(708)					$	9					$	3,503

See accompanying notes to consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Xylem Inc. (“Xylem” or the “Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment.

Xylem operates in three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note 21, "Segment and Geographic Data," for further segment background information.

Hereinafter, except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and “the Company” refer to Xylem Inc. and its subsidiaries.

Basis of Presentation

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

Use of Estimates

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

Consolidation Principles

We consolidate companies in which we have a controlling financial interest or when Xylem is considered the primary beneficiary of a variable interest entity. We account for investments under the equity method in companies over which we have the ability to exercise significant influence but do not hold a controlling financial interest, and we record our proportionate share of income or losses in the Consolidated Income Statements. Equity method investments are reviewed for impairment when events or circumstances indicate the investment may be other than temporarily impaired. This requires significant judgment, including an assessment of the investee’s financial condition, the possibility of subsequent rounds of financing, and the investee’s historical and projected results of operations. If the actual results of operations for the investee are significantly different from projections, we may incur future charges for the impairment of these investments.

Foreign Currency Translation

The national currencies of our foreign companies are generally the functional currencies. Balance sheet accounts are translated at the exchange rate in effect at the end of each period; income statement accounts are translated at the average rates of exchange prevailing during the period. Gains and losses on foreign currency translations are reflected in the cumulative translation adjustments component of stockholders’ equity. Net gains or losses from foreign currency transactions are reported currently in selling, general and administrative expenses.

Revenue Recognition

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 for providing those goods and services. For each arrangement with a customer, we identify the contract and 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 primarily 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 are distinct within the context of the contract. We base our allocation of the transaction price to the performance obligations on the relative stand-alone selling prices for the goods or services contained in a particular performance obligation. The stand-alone 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 applying 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 a 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 obligations based upon the terms outlined in the contracts. Payments received for services typically occur following the services being rendered. For long-term construction-type projects, payments are typically made throughout the contract as progress is made.

In limited situations, contracts with customers include financing components where payment terms exceed one year; however, we believe that the financing effects are not significant to Xylem. In addition, we apply a practical expedient and do not adjust the promised amount of consideration in a contract for the effects of significant financing components when we expect payment terms to be one year or less from the time the goods or services are transferred until ultimate payment.

We offer standard warranties for our products to ensure that our products comply with agreed-upon specifications in our contracts. Standard warranties do not give rise to performance obligations and represent assurance-type warranties. In certain instances, product warranty terms are adjusted to account for the specific nature of the contract. In these instances, we assess the warranties to determine whether they represent service-type warranties, and should be accounted for as a separate performance obligation in the contract.

Costs to obtain a contract include incremental costs that the Company has incurred that it expects to recover. Incremental costs only include costs that the Company would not have incurred had the contract not been obtained. Costs that would have been incurred regardless of whether or not the contract was obtained are expensed as incurred, unless they are explicitly chargeable to the customer whether or not the contract is obtained.

Costs to obtain contracts are capitalized when incurred, and are then amortized in a manner that is consistent with the pattern of transfer of the related goods or services provided in the contract. The Company elects to apply the practical expedient to expense costs to obtain contracts when the associated amortization period of those costs would be one year or less.

Shipping and Handling Costs

Shipping and handling costs are recorded as a component of cost of revenue.

Share-Based Compensation

Share-based awards issued to employees include non-qualified stock options, restricted stock unit awards and performance share unit awards. Share-based awards issued to members of the Board of Directors include restricted stock unit awards. Compensation costs resulting from share-based payment transactions are recognized primarily within selling, general and administrative expenses, at fair value over the requisite service period (typically three years) on a straight-line basis. The calculated compensation cost is adjusted based on an estimate of awards ultimately expected to vest. The fair value of a non-qualified stock option is determined on the date of grant using a binomial lattice pricing model incorporating multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The fair value of restricted stock unit awards is determined using the closing price of our common stock on date of grant. The fair value of Return on Invested Capital ("ROIC") and Revenue performance share units at 100% target is determined using the closing price of our common stock on date of grant.The calculated compensation cost is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the probable outcome of the performance condition. The fair value of Total Shareholder Return ("TSR") performance share units is calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.

Research and Development

We conduct research and development activities, which consist primarily of the development of new products, product applications, and manufacturing processes. To the extent these activities are related to developing software that is sold to our customers, we capitalize the applicable development costs. All other research and development costs are charged to expense as incurred.

Exit and Disposal Costs

We periodically initiate management-approved restructuring activities to achieve cost savings through reduced operational redundancies and to position ourselves strategically in the market in response to prevailing economic conditions and associated customer demand. Costs associated with restructuring actions can include severance, infrastructure charges to vacate facilities or consolidate operations, contract termination costs and other related charges. For involuntary separation plans, a liability is recognized when it is probable and reasonably estimable. For voluntary separation plans, a liability is recognized when the employee irrevocably accepts the voluntary termination. For one-time termination benefits, such as additional severance pay or benefit payouts and other exit costs, the liability is measured and recognized initially at fair value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of change.

Deferred Financing Costs

Deferred financing costs represent costs incurred in conjunction with our debt financing activities and are capitalized in long-term debt and amortized over the life of the related financing arrangements. If the debt is retired early, the related unamortized deferred financing costs are recorded within the results of operations under the caption “interest expense” in the period the debt is retired.

Income Taxes

Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse.

We maintain valuation allowances when it is more likely than not that all or a portion of a deferred asset will not be realized. In determining whether a valuation allowance is warranted, we consider all positive and negative evidence and all sources of taxable income such as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies to estimate if sufficient future taxable income will be generated to realize the deferred tax asset. The assessment of the adequacy of our valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates, or we adjust these estimates in future periods for current trends or expected changes in our estimating assumptions, we may need to modify the level of valuation allowance that could materially impact our business, financial condition and results of operations.

We have recorded net foreign withholding taxes and state income taxes on earnings that are expected to be repatriated to the U.S. parent. We have not recorded any deferred taxes on the amounts that the Company currently does not intend to repatriate. The determination of deferred taxes on this amount is not practicable.

Tax benefits are recognized for an uncertain tax position when, based on the technical merits of the position it is more likely than not that the position will be sustained upon examination by a taxing authority or upon completion of the litigation process. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is adequate. We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income, net and tax penalties as a component of income tax expense in our Consolidated Income Statements.

Earnings Per Share

We present two calculations of earnings per share (“EPS”). “Basic” EPS equals net income divided by weighted average shares outstanding during the period. “Diluted” EPS equals net income divided by the sum of weighted average common shares outstanding during the period plus potentially dilutive shares. Potentially dilutive common shares that are anti-dilutive are excluded from diluted EPS.

Cash Equivalents

We consider all liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Receivables and Allowance for Credit Losses and Discounts

Receivables are primarily comprised of uncollected amounts owed to us from transactions with customers and are presented net of allowances for credit losses, returns and early payment discounts.

We determine our allowance for credit losses using a combination of factors to reduce our trade receivable balances to the net amount expected to be collected. We maintain an allowance for credit losses based on a variety of factors, including the length of time receivables were past due, macro-economic trends and conditions, significant one-time events, historical experience, and current and future expectations of economic conditions. In addition, we record an allowance for individual accounts when we become aware of specific customer circumstances, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable. If circumstances

related to the specific customer change, we adjust estimates of the recoverability of receivables as appropriate. We determine our allowance for early payment discounts primarily based on historical experience with customers.

Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and their dispersion across many different geographical regions. We evaluate the financial condition of our third-party distributors, resellers and other customers and require collateral, such as letters of credit and bank guarantees, in certain circumstances. As of December 31, 2022 and 2021 we do not believe we have any significant concentrations of credit risk.

Inventories

Inventories, which include the costs of material, labor and overhead, are stated at the lower of cost or net realizable value. Estimated losses from obsolete and slow-moving inventories are recorded to reduce inventory values to their estimated net realizable value. Our manufacturing operations recognize costs of sales using standard costs with full overhead absorption, which generally approximates actual cost.

Property, Plant and Equipment

These assets are recorded at historical cost and are depreciated using the straight-line method of depreciation over the estimated useful lives as follows:

			Estimated Life
Buildings and improvements			5 to 40 years
Machinery and equipment			2 to 10 years
Furniture and fixtures			3 to 7 years
Equipment held for lease or rental			2 to 10 years

Leasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease. Costs related to maintenance and repairs that do not prolong the assets' useful lives are expensed as incurred.

Leases

We determine if an arrangement is a lease at inception. We have recorded right of use (“ROU”) assets and liabilities for lease arrangements that are reasonably certain to extend beyond 12 months. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The implicit rate within our leases is generally not determinable, and we use our incremental borrowing rate at the lease commencement date to determine the net present value of lease payments. The determination of the appropriate incremental borrowing rate requires judgment. We determine the appropriate incremental borrowing rate for each lease using our current borrowing rate, adjusted for various factors including geographic region, level of collateralization and term, to align with the term of the underlying lease.

Lease expense for lease payments is recognized on a straight-line basis over the lease term. Many of our leases are subject to payment adjustments to reflect annual changes in price indexes, such as the Consumer Price Index. While associated lease liabilities are not re-measured as a result of changes in the applicable price indexes, changes to required lease payments are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.

Leases with a lease term of 12 months or less, including renewal options that are reasonably certain to be exercised, that also do not include an option to purchase the underlying asset that is reasonably certain of exercise, are not recorded on the balance sheet. Instead, lease payments for these leases are recognized as a lease cost on a straight-line basis over the lease term.

We elected the package of practical expedients, which among other things, does not require reassessment of lease classification. Additionally, we have made an accounting policy election whereby we chose not to separate non-lease components from lease components in agreements in all leases which we are the lessee.

Goodwill and Intangible Assets

Goodwill represents purchase consideration paid in a business combination that exceeds the values assigned to the net assets of acquired businesses. Intangible assets include customer relationships, proprietary technology, brands and trademarks, patents, software and other intangible assets. Intangible assets with a finite life are amortized on a straight-line basis over an estimated economic useful life which ranges from 1 to 25 years and is included in cost of revenue or selling, general and administrative expenses. Certain of our intangible assets, namely certain brands and trademarks, as well as FCC licenses, have an indefinite life and are not amortized.

Long-Lived Asset Impairment

Long-lived assets, including intangible assets with finite lives, are amortized and tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. We assess the recoverability of long-lived assets based on the undiscounted future cash flow the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When an impairment is identified, we reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.

Goodwill and indefinite-lived intangible assets are not amortized, but rather are tested for impairment annually (or more frequently if impairment indicators arise, such as changes to the reporting unit structure, significant adverse changes in the business or business climate or an adverse action or assessment by a regulator). We conduct our annual impairment testing as of the beginning of the fourth quarter. For goodwill, the estimated fair value of each reporting unit is compared to the carrying value of the net assets assigned to that reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of the reporting unit exceeds its estimated fair value, then an impairment charge is recognized for that excess up to the amount of recorded goodwill. We estimate the fair value of our reporting units using an income approach. We estimate the fair value of our intangible assets with indefinite lives using either the income approach or the market approach. Under the income approach, we calculate fair value based on the present value of estimated future cash flows. Under the market approach, we calculate fair value based on recent sales and selling prices of similar assets.

Product Warranties

For assurance-type warranties, we accrue for the estimated cost of product warranties at the time revenue is recognized and record it as a component of cost of revenue. Our product warranty liability reflects our best estimate of probable liability under the terms and conditions of our product warranties offered to customers. We estimate the liability based on our standard warranty terms, the historical frequency of claims and the cost to replace or repair our products under warranty. Factors that impact our warranty liability include the number of units sold, the length of warranty term, historical and anticipated rates of warranty claims and cost per claim. We also record a warranty liability for specific matters. We assess the adequacy of our recorded warranty liabilities quarterly and adjust amounts as necessary.

For service-type warranties (i.e. non-standard warranties) costs incurred to fulfill the extended or service warranty are recognized/recorded as the costs are incurred.

Post-retirement Benefit Plans

The determination of defined benefit pension and post-retirement plan obligations and their associated costs requires the use of actuarial computations to estimate participant plan benefits to which the employees will be entitled. The significant assumptions primarily relate to discount rates, expected long-term rates of return on plan assets, rate of future compensation increases, mortality, years of service and other factors. We develop each assumption using relevant company experience in conjunction with market-related data for each individual country in which such plans exist. All actuarial assumptions are reviewed annually with third-party consultants and adjusted as necessary. For the recognition of net periodic post-retirement cost, the calculation of the expected return on plan assets is generally derived by applying the expected long-term rate of return on the market-related value of plan assets. The market-related value of plan assets is based on average asset values at the measurement date over the last five years. Actual results that differ from our assumptions are accumulated and amortized on a straight-line basis only to the extent they exceed 10% of the higher of the market-related value or the projected benefit obligation, over the average remaining service period of active participants, or for plans with all or substantially all inactive participants, over the average remaining life expectancy. The fair value of plan assets is determined based on market prices or estimated fair value at the measurement date.

We consider changes to a plan’s benefit formula that eliminate the accrual for future service but continue to allow for future salary increases (i.e. “soft freeze”) to be a curtailment.

Business Combinations

We allocate the purchase price of acquisitions to the tangible and intangible assets acquired, liabilities assumed, and non-controlling interests in the acquiree based on their estimated fair value at the acquisition date. The excess of the acquisition price over those estimated fair values is recorded as goodwill. Changes to the acquisition date provisional fair values prior to the expiration of the measurement period, a period not to exceed 12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Acquisition-related expenses and restructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.

Derivative Financial Instruments

We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, including forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to hedge certain risks economically, even though hedge accounting does not apply or we elect not to apply hedge accounting.

Changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk are recorded in Other Comprehensive Income (Loss) ("OCI/L") and are subsequently reclassified into either revenue or cost of revenue (hedge of sales classified into revenue and hedge of purchases classified into cost of revenue) in the period that the hedged forecasted transaction affects earnings. Our policy is to de-designate cash flow hedges at the time forecasted transactions are recognized as assets or liabilities on a business unit’s balance sheet and report subsequent changes in fair value through selling, general and administrative expenses where the gain or loss due to movements in currency rates on the underlying asset or liability is revalued. If it becomes probable that the originally forecasted transaction will not occur, the gain or loss related to the hedge recorded within Accumulated Other Comprehensive Loss ("AOCL") is immediately recognized into net income.

Effectiveness of derivatives designated as net investment hedges is assessed using the spot method. The changes in the fair value of these derivatives due to movements in spot exchange rates are recorded in OCI/L. Amounts in AOCL are reclassified into earnings at the time the hedged net investment is sold or substantially liquidated. Furthermore, we recognize interest income based on the interest rate differential embedded in the derivative instrument.

Commitments and Contingencies

We record accruals for commitments and loss contingencies for those which are both probable and for which the amount can be reasonably estimated. In addition, legal fees are accrued for cases where a loss is probable and the related fees can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount of loss. We review these accruals quarterly and adjust the accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other current information.

Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Our estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. These accruals are reviewed quarterly and are adjusted as assessment and remediation efforts progress or as additional technical or legal information becomes available. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Accruals for environmental liabilities are primarily included in other non-current liabilities at undiscounted amounts.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, derivative contracts and accounts receivable from trade customers. We maintain cash and cash equivalents and derivative contracts with various financial institutions. These financial institutions are located in many different geographical regions, and our policy is designed to limit exposure with any one institution. As part of our cash and risk management processes, we perform periodic evaluations of the relative credit standing of the financial institutions. We have not sustained any material credit losses during the previous three years from instruments held at financial institutions. We may utilize forward contracts to protect against the effects of foreign currency fluctuations. Such contracts involve the risk of non-performance by the counterparty. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographic regions. We perform ongoing credit evaluations of the financial condition of our third-party distributors, resellers and other customers and require collateral, such as letters of credit and bank guarantees, in certain circumstances.

Substantially all of the cash and cash equivalents, including foreign cash balances, at December 31, 2022 and 2021 were uninsured. Foreign cash balances at December 31, 2022 and 2021 were $813 million and $596 million, respectively.

Fair Value Measurements

We determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use a hierarchical structure to prioritize the inputs to valuation techniques used to measure fair value into three broad levels defined as follows:

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

• Level 3 inputs are unobservable inputs for the assets or liabilities.

The fair value hierarchy is based on maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Classification within the fair value hierarchy is based on the lowest level input that is significant to the fair value measurement.

Certain investments which measure fair value using the net asset value (“NAV”) per share practical expedient are not classified within the fair value hierarchy and are separately disclosed.

Note 2. Recently Issued Accounting Pronouncements

Pronouncements Not Yet Adopted

In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2022-04, "Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations." This guidance requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The new standard does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. The ASU becomes effective January 1, 2023, except for the rollforward requirement, which becomes effective January 1, 2024. Early adoption is permitted. We will reflect the impact of these disclosure updates in our Form 10-Q for the quarterly period ended March 31, 2023.

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This guidance requires an acquirer to apply the guidance in ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities in a business combination, rather than using fair value. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the impact of the guidance on our financial condition and results of operations in light of the proposed acquisition of Evoqua.

Note 3. Revenue

Disaggregation of Revenue

The following table illustrates the sources of revenue:

			Year Ended December 31,
(in millions)			2022						2021						2020
Revenue from contracts with customers			$	5,294					$	4,998					$	4,681
Lease Revenue			228						197						195
Total			$	5,522					$	5,195					$	4,876

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

			Year Ended December 31,
(in millions)			2022						2021						2020
Water Infrastructure
Transport			$	1,715					$	1,619					$	1,484
Treatment			421						431						400
Applied Water
Commercial Building Services			659						609						558
Residential Building Services			306						268						238
Industrial Water			802						736						638
Measurement and Control Solutions
Water			1,126						1,055						1,039
Energy			265						280						324
Total			$	5,294					$	4,998					$	4,681

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

			Year Ended December 31,
(in millions)			2022						2021						2020
Water Infrastructure
United States			$	664					$	556					$	558
Western Europe			757						753						675
Emerging Markets (a)			495						537						468
Other			220						204						183
Applied Water
United States			914						804						754
Western Europe			380						370						316
Emerging Markets (a)			349						324						260
Other			124						115						104
Measurement and Control Solutions
United States			857						796						856
Western Europe			240						256						234
Emerging Markets (a)			198						189						177
Other			96						94						96
Total			$	5,294					$	4,998					$	4,681

(a) Emerging Markets includes results from the following regions: Eastern Europe, the Middle East and Africa, Latin America and Asia Pacific (excluding Japan, Australia and New Zealand, which are presented in "Other")

Contract Balances

We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Changes in contract assets and liabilities are due to our performance under the contract.

The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:

(in millions)			Contract Assets (a)			Contract Liabilities
Balance at 1/1/2021			$	117		$	166
Additions, net			112			117
Revenue recognized from opening balance			—			(117)
Billings transferred to accounts receivable			(103)			—
Other			(1)			(2)
Balance at 1/1/2022			$	125		$	164
Additions, net			115			137
Revenue recognized from opening balance			—			(109)
Billings transferred to accounts receivable			(82)			—
Other			(7)			(9)
Balance at 12/31/2022			$	151		$	183

(a) Excludes receivable balances which are disclosed on the balance sheet

Performance obligations

Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of December 31, 2022, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $424 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

Note 4. Restructuring and Asset Impairment Charges

From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position itself. During 2022 we incurred these charges primarily as a continuation of our efforts to reposition our business to optimize our cost structure and improve our operational efficiency and effectiveness. The charges primarily included the reduction of headcount across all segments.

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, on June 2, 2020 management committed to a restructuring plan that includes actions across our businesses and functions globally. The plan was designed to support our long-term financial resilience and simplify our operations, strengthen our competitive positioning and better serve our customers.

As a result of this action, during 2021, we recognized restructuring charges of $4 million and $2 million in our Water Infrastructure and Applied Water segments, respectively. These charges included reduction of headcount across both segments. Other, less significant, restructuring actions taken in 2021 resulted in $3 million of charges during 2021 and are included in the information presented below.

During 2020, we recognized restructuring costs of $19 million, $4 million and $30 million in our Water Infrastructure, Applied Water and Measurement & Control Solutions segments, respectively. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment. Immaterial restructuring charges from other actions incurred during the first quarter of 2020 are included in the 2020 plan information presented below.

The following table presents the components of restructuring expense and asset impairment charges incurred during each of the previous three years:

						Year Ended December 31,
(in millions)						2022						2021						2020
By component:
Severance and other charges						$	15					$	10					$	36
Asset impairment						—						1						18
Other restructuring charges						—						1						1
Reversal of restructuring accruals						—						(6)						(1)
Total restructuring costs						15						6						54
Asset impairment charges						14						1						21
Total restructuring and asset impairment charges						$	29					$	7					$	75
By segment:
Water Infrastructure						$	6					$	8					$	20
Applied Water						4						2						4
Measurement & Control Solutions						19						(3)						51

Restructuring

The following table displays a roll-forward of the restructuring accruals, presented on our Consolidated Balance Sheets within "accrued and other current liabilities" and "other non-current accrued liabilities," for the years ended December 31, 2022 and 2021:

(in millions)						2022						2021
Restructuring accruals - January 1						$	7					$	29
Restructuring costs						15						6
Cash payments						(11)						(25)
Asset impairment						—						(1)
Foreign currency and other						(1)						(2)
Restructuring accruals - December 31						$	10					$	7
By segment:
Water Infrastructure						$	1					$	1
Applied Water						—						1
Measurement & Control Solutions						3						4
Regional selling locations (a)						4						1
Corporate and other						2						—

(a) Regional selling locations consist primarily of selling and marketing organizations that incurred restructuring expense which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.

The following table presents the total costs expected to be incurred, the amount incurred in the period, and the cumulative costs incurred to date for our 2020, 2021 and 2022 restructuring actions:

(in millions)						Water Infrastructure						Applied Water						Measurement & Control Solutions						Corporate						Total
Actions Commenced in 2022:
Total expected costs						$	6					$	4					$	4					$	—					$	14
Costs incurred during 2022						6						4						4						—						14
Total expected costs remaining						$	—					$	—					$	—					$	—					$	—
Actions Commenced in 2021:
Total expected costs						$	3					$	—					$	—					$	—					$	3
Costs incurred during 2021						3						—						—						—						3
Costs incurred during 2022						—						—						—						—						—
Total expected costs remaining						$	—					$	—					$	—					$	—					$	—
Actions Commenced in 2020:
Total expected costs						$	23					$	6					$	30					$	—					$	59
Costs incurred during 2020						19						4						30						—						53
Costs incurred during 2021						4						2						—						—						6
Costs incurred during 2022						—						—						—						—						—
Total expected costs remaining						$	—					$	—					$	—					$	—					$	—

During 2022, we also incurred charges of $1 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2020. During 2021, we recorded a reduction of $3 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2020.

The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2022 consist primarily of severance charges. The actions commenced in 2022 are complete.

The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. The actions commenced in 2021 are complete.

Asset Impairment

During 2022, we determined that certain assets including primarily software and customer relationships within our Measurement & Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $14 million. Refer to Note 11,"Goodwill and Other Intangible Assets," for additional information.

During the third quarter of 2020, we determined that certain assets including software and proprietary technology within our Measurement & Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $11 million. Refer to Note 11, "Goodwill and Other Intangible Assets," for additional information.

During the second quarter of 2020, we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments. Accordingly, we recognized an impairment charge of $10 million. Refer to Note 11, "Goodwill and Other Intangible Assets," for additional information.

Note 5. Other Non-Operating (Expense) Income, Net

The components of other non-operating income, net are as follows:

			Year Ended December 31,
(in millions)			2022						2021						2020
Interest income			$	16					$	7					$	7
Income from equity method investments			—						9						2
Other (expense) – net			(9)						(16)						(14)
Total other non-operating (expense) income, net			$	7					$	—					$	(5)

Note 6. Income Taxes

The source of pre-tax income and the components of income tax expense are as follows:

			Year Ended December 31,
(in millions)			2022						2021						2020
Income (loss) components:
Domestic			$	90					$	45					$	(33)
Foreign			350						466						318
Total pre-tax income			$	440					$	511					$	285
Income tax expense components:
Current:
Domestic – federal			$	77					$	16					$	24
Domestic – state and local			16						5						5
Foreign			56						53						33
Total Current			149						74						62
Deferred:
Domestic – federal			$	(43)					$	(2)					$	(21)
Domestic – state and local			(12)						—						(8)
Foreign			(9)						12						(2)
Total Deferred			(64)						10						(31)
Total income tax provision			$	85					$	84					$	31
Effective income tax rate			19.2		%				16.3		%				10.9		%

Reconciliations between taxes at the U.S. federal income tax rate and taxes at our effective income tax rate on earnings before income taxes are as follows:

			Year Ended December 31,
			2022						2021						2020
Tax provision at U.S. statutory rate			21.0		%				21.0		%				21.0		%
Increase (decrease) in tax rate resulting from:
State income taxes			1.2						0.8						0.7
Uncertain tax positions			(1.2)						(0.1)						(3.9)
U.S. foreign derived intangible income tax benefit			(1.3)						(0.6)						(1.0)
Net interest deductions			(1.8)						(2.4)						(4.5)
Tax on Distribution of Foreign Earnings			1.4						(0.2)						(0.2)
U.S. tax on foreign earnings			2.7						2.2						5.3
Tax incentives			(4.4)						(5.5)						(7.4)
Rate change			(0.6)						0.9						(1.3)
Goodwill impairment			—						—						2.9
Federal R&D tax credit			(0.7)						(0.7)						(1.3)
Stock compensation			0.1						(0.6)						(2.4)
Other—net			2.8						1.5						3.0
Effective income tax rate			19.2		%				16.3		%				10.9		%

Items in the prior year table of rate reconciliation above have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported Consolidated Balance Sheets, Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity, or Cash Flow.

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse.

The following is a summary of the components of the net deferred tax assets and liabilities recognized in the Consolidated Balance Sheets:

			December 31,
(in millions)			2022						2021
Deferred tax assets:
Employee benefits			$	58					$	111
Accrued expenses			36						35
Loss and other tax credit carryforwards			245						250
R&D capitalization			32						—
Inventory			5						6
Lease Liabilities			68						70
Other			7						8
			451						480
Valuation allowance			(204)						(201)
Net deferred tax asset			$	247					$	279
Deferred tax liabilities:
Intangibles			$	155					$	155
Investment in foreign subsidiaries			5						4
Property, plant and equipment			65						77
Lease right-of-use assets			67						69
Hedging Instruments			20						—
Other			11						35
Total deferred tax liabilities			$	323					$	340

Management assesses all available positive and negative evidence, including prudent and feasible tax planning strategies, and estimates if sufficient future taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $204 million has been established to reduce the deferred income tax asset related to certain U.S. and foreign net operating losses and U.S. and foreign capital loss carryforwards.

A reconciliation of the change in valuation allowance on deferred tax assets is as follows:

(in millions)			2022						2021						2020
Valuation allowance — January 1			$	201					$	217					$	191
Change in assessment (a)			1						—						1
Current year operations			3						4						4
Other comprehensive income			—						(4)						3
Foreign currency and other (b)			(1)						(16)						18
Valuation allowance — December 31			$	204					$	201					$	217

(a) Increase in assessment in 2022 is primarily attributable to loss positions in various jurisdictions.

(b) Decrease in assessment in 2021 is primarily attributable to foreign exchange movement impacting foreign balances. Increase in assessment in 2020 is primarily attributable to loss positions in various jurisdictions and foreign exchange movement impacting foreign balances.

Deferred taxes are classified in the Consolidated Balance Sheets as follows:

			December 31,
(in millions)			2022						2021
Non-current assets			$	146					$	226
Non-current liabilities			(222)						(287)
Total net deferred tax liabilities			$	(76)					$	(61)

Tax attributes available to reduce future taxable income begin to expire as follows:

(in millions)			December 31, 2022						First Year of Expiration
U.S. net operating loss			$	5					December 31, 2025
State net operating loss			97						December 31, 2024
State excess interest expense			19						Indefinite
State tax credits			1						Indefinite
Foreign net operating loss			992						December 31, 2023
Foreign tax credits			4						December 31, 2030

As of December 31, 2022, the Company has provided a deferred tax liability of $5 million for net foreign withholding taxes and state income taxes on $467 million of foreign earnings expected to be repatriated to the U.S. parent. The Company currently does not intend to repatriate approximately $1.5 billion of foreign earnings. It is not practicable to estimate the amount of deferred taxes that would be recorded if such foreign earnings were repatriated by the U.S. parent.

Unrecognized Tax Benefits

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities or upon the completion of the litigation process, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(in millions)			2022						2021						2020
Unrecognized tax benefits — January 1			$	111					$	114					$	129
Gross Increases - Current year tax positions			—						—						—
Gross Increases - Prior year tax positions			3						—						—
Gross Decreases - Prior year tax positions			(8)						(1)						(3)
Settlements			(1)						—						(12)
Lapse of Statute of Limitations			(2)						(1)						—
Currency Translation Adjustment			(1)						(1)						—
Unrecognized tax benefits — December 31			$	102					$	111					$	114

The amount of unrecognized tax benefits at December 31, 2022 which, if ultimately recognized, will reduce our effective tax rate is $102 million. Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our unrecognized tax benefits. The timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax controversies in one or more jurisdictions. These assessments or settlements could result in changes to our unrecognized tax benefits related to positions on prior years’ tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.

We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income, net and tax penalties as a component of income tax expense in our Consolidated Income Statements. The amount of accrued interest relating to unrecognized tax benefits was $9 million for both December 31, 2022 and 2021.

During 2019, Xylem’s Swedish subsidiary received a tax assessment for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. Xylem filed an appeal with the Administrative Court of Vaxjo, which rendered a decision adverse to Xylem in June 2022 for SEK794 million (approximately $76 million USD), consisting of the full tax assessment amount plus penalties and interest. Xylem has appealed this decision with the intermediate appellate court, the Administrative Court of Appeal (the “Court”). At this time, management, in consultation with external legal advisors, continues to believe it is more likely than not that Xylem will prevail on the proposed assessment and will continue to vigorously defend our position through the appellate process. The appeal to the Court is expected to take approximately one year; however, there can be no assurance as to the timing of the Court’s decision. Both parties will have the ability to seek appeal of the Court’s decision to the Supreme Administrative Court of Sweden. There can be no assurance that the final determination by the authorities will not be materially different than our position. As of December 31, 2022, we have not recorded any unrecognized tax benefits related to this uncertain tax position.

The following table summarizes our earliest open tax years by major jurisdiction:

Jurisdiction						Earliest Open Year
Italy						2016
Luxembourg						2017
Sweden						2013
Germany						2016
United Kingdom						2015
United States						2017
Switzerland						2019

Note 7. Earnings Per Share

The following is a reconciliation of the shares used in calculating basic and diluted EPS:

			Year Ended December 31,
			2022						2021						2020
Net income (in millions)			$	355					$	427					$	254
Shares (in thousands):
Weighted average common shares outstanding			180,189						180,225						180,094
Add: Participating securities (a)			28						22						22
Weighted average common shares outstanding — Basic			180,217						180,247						180,116
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options			549						871						671
Dilutive effect of restricted stock units and performance share units			213						408						312
Weighted average common shares outstanding — Diluted			180,979						181,526						181,099
Basic earnings per share			$	1.97					$	2.37					$	1.41
Diluted earnings per share			$	1.96					$	2.35					$	1.40

(a)Restricted stock units containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing EPS.

(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units are included in the treasury stock calculation of diluted earnings per share based upon achievement of underlying performance and market conditions at the end of the reporting period, as applicable. See Note 16, "Share-Based Compensation Plans" for further detail on the performance share units.

			Year Ended December 31,
(in thousands)			2022						2021						2020
Stock options			1,453						1,132						1,545
Restricted stock units			353						271						362
Performance share units			284						330						305

Note 8. Inventories

The components of total inventories are summarized as follows:

			December 31,
(in millions)			2022						2021
Finished goods			$	286					$	236
Work in process			58						58
Raw materials			455						406
Total inventories			$	799					$	700

Note 9. Property, Plant and Equipment

The components of total property, plant and equipment, net are as follows:

			December 31,
(in millions)			2022						2021
Land, buildings and improvements			$	360					$	370
Machinery and equipment			896						933
Equipment held for lease or rental			263						250
Furniture and fixtures			124						127
Construction work in progress			106						115
Other			38						31
Total property, plant and equipment, gross			1,787						1,826
Less accumulated depreciation			1,157						1,182
Total property, plant and equipment, net			$	630					$	644

Depreciation expense was $111 million, $118 million, and $117 million for 2022, 2021, and 2020, respectively.

Note 10. Leases

Leasing Arrangements

We lease certain offices, manufacturing buildings, transportation equipment, machinery, computers and other equipment. Our most significant lease liabilities relate to real estate leases. These leases include renewal, termination or purchase options, and we have assessed these to determine whether it is reasonably certain for us to exercise any of the previously mentioned options. All periods relating to options that are reasonably certain to be exercised have been included in the lease term of the respective leases.

We did not identify any events or conditions during the 12 month period ended December 31, 2022 to indicate that a reassessment or re-measurement of our existing leases was required. There also were no impairment indicators identified during the 12 month period ended December 31, 2022 that required an impairment test for the Company’s ROU assets.

Our current lease liabilities of $69 million for both December 31, 2022 and 2021 are included in "Accrued and other current liabilities." Our non-current lease liabilities of $249 million and $243 million are included in "Other non-current accrued liabilities" as of December 31, 2022 and 2021, respectively. Our ROU asset balances are included in "Other non-current assets." The net balance of our ROU assets as of December 31, 2022 and 2021 was $310 million and $304 million, respectively. These balances include an immaterial amount related to finance leases.

The components of our lease cost were as follows:

			Year Ended December 31,
(in millions)			2022			2021			2020
Lease cost
Operating lease cost			$	83		$	84		$	77
Short-term lease cost			2			2			2
Variable lease cost			21			23			22
Total lease cost			$	106		$	109		$	101

The supplemental cash flow information related to leases are as follows:

			Year Ended December 31,
(in millions)			2022			2021			2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	82		$	83		$	75
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			$	94		$	109		$	64

Information relating to the lease term and discount rate are as follows:

			Year Ended December 31,
			2022			2021
Weighted-average remaining lease term (years)
Operating leases			7 Years			7 Years
Weighted-average discount rate
Operating leases			2.3%			2.2%

As of December 31, 2022, the maturities of operating lease liabilities were as follows:

(in millions)
2023			$	71
2024			58
2025			45
2026			35
2027			28
Thereafter			78
Total lease payments			315
Less: Imputed interest			(22)
Total			$	293

Lessor arrangements

In addition to manufacturing and selling equipment, we also lease equipment to customers in exchange for consideration. These arrangements are generally short term in nature and predominantly involve the rental of pumps and accessories within the Water Infrastructure segment. Rental arrangements generally do not provide the customer the right to purchase the equipment as Xylem’s strategy is to rent these items over their useful lives. Customers may be billed based on daily, weekly or monthly rates depending on the expected rental period. We assessed that these arrangements constitute a lease under ASC 842, and have recognized them as operating leases. In situations where arrangements contain both the sale of products and a leasing component, contract consideration is allocated based on relative standalone selling price.

Total revenue from lease arrangements was $228 million, $197 million and $195 million for the 12-month period ended December 31, 2022, 2021 and 2020, respectively. Our gross assets available for rent were $263 million and $251 million as of December 31, 2022 and 2021, respectively. The accumulated amortization related to our gross assets was $161 million and $158 million as of December 31, 2022 and 2021, respectively. Depreciation expense for these assets was $27 million, $24 million and $25 million for the 12 month period ended December 31, 2022, 2021 and 2020, respectively.

Note 11. Goodwill and Other Intangible Assets

Changes in the carrying value of goodwill by reportable segment during the years ended December 31, 2022 and 2021 are as follows:

(in millions)			Water Infrastructure						Applied Water						Measurement & Control Solutions						Total
Balance as of December 31, 2020			$	668					$	529					$	1,657					$	2,854
Activity in 2021
Foreign currency and other			(12)						(14)						(36)						(62)
Balance as of December 31, 2021			$	656					$	515					$	1,621					$	2,792
Activity in 2022
Foreign currency and other			(18)						(13)						(42)						(73)
Balance as of December 31, 2022			$	638					$	502					$	1,579					$	2,719

As of December 31, 2022 and 2021, goodwill included accumulated impairment losses of $206 million, within the Measurement & Control Solutions segment.

During the fourth quarter of 2022, we performed our annual impairment assessment and determined that the estimated fair values of our goodwill reporting units were in excess of each of their carrying values. However, future goodwill impairment tests could result in a charge to earnings. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances indicate there may be a potential impairment.

During the third quarter of 2020, the Company recorded a goodwill impairment charge of $58 million related to a reporting unit within our Measurement & Control Solutions segment.

Other Intangible Assets

Information regarding our other intangible assets is as follows:

			December 31, 2022																		December 31, 2021
(in millions)			Carrying Amount						Accumulated Amortization						Net Intangibles						Carrying Amount						Accumulated Amortization						Net Intangibles
Customer and distributor relationships			$	784					$	(371)					$	413					$	929					$	(456)					$	473
Proprietary technology and patents			165						(118)						47						201						(142)						59
Trademarks			137						(80)						57						141						(72)						69
Software			514						(268)						246						548						(303)						245
Other			5						(3)						2						21						(18)						3
Indefinite-lived intangibles			165						—						165						167						—						167
Other intangibles			$	1,770					$	(840)					$	930					$	2,007					$	(991)					$	1,016

We determined that no material impairment of the indefinite-lived intangibles existed as of the measurement date of our impairment assessment in 2022. Future impairment tests could result in a charge to earnings. We will continue to evaluate the indefinite-lived intangible assets on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances indicate there may be a potential impairment.

During 2022, the Company assessed whether the carrying amounts of long-lived assets in the Measurement & Control Solutions segment may not be recoverable based on the updated forecast of future cash flows, and therefore impaired. Our assessment resulted in an impairment charge of $14 million, primarily related to software and customer relationships. The charge was calculated using an income approach, which is considered a Level 3 input for fair value measurement, and is reflected in “Restructuring and asset impairment charges” in our Consolidated Income Statements.

During the third quarter of 2020, the Company assessed whether the carrying amounts of long-lived assets in the Measurement & Control Solutions segment may not be recoverable based on the updated forecast of future cash flows, and therefore impaired. Our assessment resulted in an impairment charge of $11 million, primarily related to software and proprietary technology. The charge was calculated using an income approach, which is considered a Level 3 input for fair value measurement, and is reflected in “Restructuring and asset impairment charges” in our Consolidated Income Statements.

During the second quarter of 2020, we recognized impairment charges of $16 million primarily related to customer relationships and trademarks due to discontinuance of a product line within our Measurement & Control Solutions segment. We also determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and recognized an impairment charge of $10 million.

Customer and distributor relationships, proprietary technology and patents, trademarks, software and other are amortized over weighted average lives of approximately 16 years, 15 years, 13 years, 10 years and 5 years, respectively.

Total amortization expense for intangible assets was $125 million, $127 million, and $134 million for 2022, 2021 and 2020, respectively.

Estimated amortization expense for each of the five succeeding years is as follows:

(in millions)
2023			$	127
2024			121
2025			116
2026			102
2027			90

Note 12. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Foreign Exchange Risk

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

Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Australian Dollar and Polish Zloty. We had foreign exchange contracts with purchase notional amounts totaling $255 million and $301 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase U.S. Dollar and sell Canadian Dollar, purchase Polish Zloty and sell Euro, sell Canadian Dollar and purchase Euro and to sell Australian Dollar and purchase Euro. The purchased notional amounts associated with these currency derivatives are $105 million, $73 million, $29 million, $13 million, $13 million, $13 million and $9 million, respectively. As of December 31, 2021 the purchased notional amounts associated with these currency derivatives were $130 million,$88 million, $31 million, $14 million, $11 million, $14 million and $13 million, respectively.

Hedges of Net Investments in Foreign Operations

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

Cross-Currency Swaps

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

Foreign Currency Denominated Debt

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023.

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

Fair Value Hedges of Foreign Exchange Risk

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

On June 2, 2022, we entered into a currency forward agreement with a total notional amount of €500 million, designating the agreement as a fair value hedge of our Euro denominated notes. On December 12, 2022 the currency forward agreement matured.

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

The table below presents the effect of our derivative financial instruments on the Consolidated Income Statements and Consolidated Statements of Comprehensive Income:

						Year Ended December 31,
(in millions)						2022						2021						2020
Derivatives in Cash Flow Hedges
Foreign Exchange Contracts
Amount of gain (loss) recognized in OCI/L						$	(24)					$	(10)					$	9
Amount of (gain) loss reclassified from OCI/L into revenue						19						4						(4)
Amount of loss reclassified from OCI/L into cost of revenue						2						—						1
Derivatives in Net Investment Hedges
Cross-Currency Swaps
Amount of (loss) gain recognized in OCI/L						$	94					$	94					$	(103)
Amount of income recognized in Interest Expense						29						21						19
Foreign Currency Denominated Debt
Amount of (loss) gain recognized in OCI/L						$	31					$	48					$	(55)
Fair Value Hedges
Foreign Exchange Contracts
Amount of (loss) recognized in Selling, general and administrative expenses						$	(7)					$	—					$	—
Amount recognized in Interest expense						(3)						—						—

As of December 31, 2022, $6 million of the net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.

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

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

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

			December 31,
(in millions)			2022						2021
Derivatives designated as hedging instruments
Assets
Net Investment Hedges
Other non-current assets			79						8
Liabilities
Cash Flow Hedges
Other current liabilities			—						(1)
Net Investment Hedges
Other non-current liabilities			(6)						(26)

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

Note 13. Accrued and Other Current Liabilities

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

			December 31,
(in millions)			2022						2021
Compensation and other employee-benefits			$	285					$	273
Customer-related liabilities			210						186
Accrued taxes			186						86
Lease liabilities			69						69
Accrued warranty costs			37						40
Other accrued liabilities			80						98
Total accrued and other current liabilities			$	867					$	752

Note 14. Credit Facilities and Debt

Total debt outstanding is summarized as follows:

			December 31,
(in millions)			2022						2021
2.250% Senior Notes due 2023 (a)			—						564
3.250% Senior Notes due 2026 (a)			500						500
1.950% Senior Notes due 2028 (a)			500						500
2.250% Senior Notes due 2031 (a)			500						500
4.375% Senior Notes due 2046 (a)			400						400
Debt issuance costs and unamortized discount (b)			(20)						(24)
Total debt			$	1,880					$	2,440
Less: short-term borrowings and current maturities of long-term debt			—						—
Total long-term debt			$	1,880					$	2,440

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

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

Senior Notes

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

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

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

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

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023 (the "Senior Notes due 2023"). On October 11, 2016, we issued 3.250% Senior Notes of $500 million aggregate principal amount due October 2026 (the “Senior Notes due 2026”) and 4.375% Senior Notes of $400 million aggregate principal amount due October 2046 (the “Senior Notes due 2046” and, together with the Senior Notes due 2021, the Senior Notes due 2023 and the Senior Notes due 2026, the “Senior Notes”).

The Senior Notes include covenants that restrict our ability, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may also redeem the Senior Notes in certain other circumstances, as set forth in the applicable Senior Notes indenture.

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

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

On December 12th, 2022 our Senior Notes due 2023 were settled with cash on hand for a total of $527 million.

Credit Facilities

2019 Five-Year Revolving Credit Facility

On March 5, 2019, Xylem entered into a Five-Year Revolving Credit Facility (the “2019 Credit Facility”) with Citibank, N.A., as Administrative Agent, and a syndicate of lenders. The 2019 Credit Facility provides for an aggregate principal amount of up to $800 million (available in U.S. Dollars and in Euros), with increases of up to $200 million for a maximum aggregate principal amount of $1 billion at the request of Xylem and with the consent of the institutions providing such increased commitments.

Interest on all loans under the 2019 Credit Facility is payable either quarterly or at the expiration of any LIBOR or EURIBOR interest period applicable thereto. Borrowings accrue interest at a rate equal to, at Xylem's election, a base rate or an adjusted LIBOR or EURIBOR rate plus an applicable margin. The 2019 Credit Facility includes customary provisions for implementation of replacement rates for LIBOR-based and EURIBOR-based loans. The 2019 Credit Facility also includes a pricing grid that determines the applicable margin based on Xylem's credit rating, with a further adjustment depending on Xylem's annual Sustainalytics Environmental, Social and Governance ("ESG") score, determined based on the methodology in effect as of March 5, 2019. Xylem will also pay quarterly fees to each lender for such lender’s commitment to lend accruing on such commitment at a rate based on our credit rating, whether such commitment is used or unused, as well as a quarterly letter of credit fee accruing on the letter of credit exposure of such lender during the preceding quarter at a rate based on the credit rating of Xylem (as adjusted for the ESG score).

The 2019 Credit Facility requires that Xylem maintain a consolidated total debt to consolidated EBITDA ratio (or maximum leverage ratio), which will be based on the last four fiscal quarters; and in addition contains a number of customary covenants, including limitations on the incurrence of secured debt and debt of subsidiaries, liens, sale and lease-back transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. The 2019 Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the 2019 Credit Facility, subject to certain requirements and conditions set forth in the 2019 Credit Facility. As of December 31, 2022, the 2019 Credit Facility was undrawn and we are in compliance with all covenants.

Commercial Paper

U.S. Dollar Commercial Paper Program

Our U.S. Dollar commercial paper program generally serves as a means of short-term funding with a $600 million maximum issuing balance and a combined limit of $800 million inclusive of the 2019 Credit Facility. As of December 31, 2022 and 2021, none of the Company's $600 million U.S. Dollar commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.

Euro Commercial Paper Program

On June 3, 2019, Xylem entered into a Euro commercial paper program with ING Bank N.V., as administrative

agent, and a syndicate of dealers. The Euro commercial paper program provides for a maximum issuing balance of up to €500 million (approximately $532 million) which may be denominated in a variety of currencies. The

maximum issuing balance may be increased in accordance with the Dealer Agreement. As of December 31, 2022 and 2021, none of the Company's Euro commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.

Note 15. Post-retirement Benefit Plans

Defined contribution plans – Xylem and certain of our subsidiaries maintain various defined contribution savings plans, which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. Several of the plans require us to match a percentage of the employee contributions up to certain limits, generally between 3.0% – 7.0% of employee eligible pay. Matching obligations, the majority of which were funded in cash in connection with the plans, and other company contributions are as follows:

(in millions)			Defined Contribution
2022			$	53
2021			60
2020			56

The Xylem Stock Fund, an investment option under the defined contribution plan in which Company employees participate is considered an Employee Stock Ownership Plan. As a result, participants in the Xylem Stock Fund may receive dividends in cash or may reinvest such dividends into the Xylem Stock Fund. Company employees held approximately 245 thousand and 256 thousand shares of Xylem Inc. common stock in the Xylem Stock Fund at December 31, 2022 and 2021, respectively.

Defined benefit pension plans and other post-retirement plans – We historically have maintained qualified and non-qualified defined benefit retirement plans covering certain current and former employees, including hourly and union plans as well as salaried plans, which generally require up to 5 years of service to be vested and for which the benefits are determined based on years of credited service and either specified rates, final pay, or final average pay. The other post-retirement benefit plans are all unfunded plans in the U.S. and Canada.

During 2022 and 2021, we made several amendments to plans that had no material impact to the Company's financial statements.

The Company initiated the process for a full buy-out of its largest defined benefit plan in the U.K. in 2019. During the first quarter of 2020, the Company purchased a bulk annuity policy as a plan asset to facilitate the termination and buy-out of the plan. The buyout was completed in September 2022, at which point the remaining benefit obligations were transferred to the insurer and we were relieved of any further obligation. As a result, we recorded a pension settlement charge of £123 million (approximately $140 million), primarily consisting of unrecognized actuarial losses.

Amounts recognized in the Consolidated Balance Sheets for pension and other employee-related benefit plans (collectively, "Post-retirement Plans") reflect the funded status of the post-retirement benefit plans. The following table provides a summary of the funded status of our Post-retirement Plans, the presentation of such balances and a summary of amounts recorded within AOCL:

(in millions)			December 31, 2022																		December 31, 2021
			Pension						Other						Total						Pension						Other						Total
Fair value of plan assets			$	246					$	—					$	246					$	679					$	—					$	679
Projected benefit obligation			(482)						(31)						(513)						(1,043)						(42)						(1,085)
Funded status			$	(236)					$	(31)					$	(267)					$	(364)					$	(42)					$	(406)
Amounts recognized in the balance sheet
Other non-current assets			$	34					$	—					$	34					$	48					$	—					$	48
Accrued and other current liabilities			(12)						(3)						(15)						(13)						(3)						(16)
Accrued post-retirement benefit obligations			(258)						(28)						(286)						(399)						(39)						(438)
Net amount recognized			$	(236)					$	(31)					$	(267)					$	(364)					$	(42)					$	(406)
Accumulated other comprehensive loss:
Net actuarial losses			$	(50)					$	(6)					$	(56)					$	(326)					$	(17)					$	(343)
Prior service credit			(1)						4						3						(4)						7						3
Total			$	(51)					$	(2)					$	(53)					$	(330)					$	(10)					$	(340)

The unrecognized amounts recorded in AOCL will be subsequently recognized as expense on a straight-line basis only to the extent they exceed 10% of the higher of the market-related value or the projected benefit obligation, over the average remaining service period of active participants, or for plans with all or substantially all inactive participants, over the average remaining life expectancy. Actuarial gains and losses incurred in future periods and not recognized as expense in those periods will be recognized as increases or decreases in other comprehensive income, net of tax.

The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated financial statements for our defined benefit domestic and international pension plans were:

			Domestic Plans												International Plans
			December 31,												December 31,
(in millions)			2022						2021						2022						2021
Change in benefit obligation:
Benefit obligation at beginning of year			$	117					$	123					$	926					$	1,032
Service cost			3						3						12						14
Interest cost			3						3						13						11
Benefits paid			(7)						(7)						(29)						(34)
Actuarial loss (gain) (a)			(24)						(5)						(241)						(56)
Plan amendments, settlements and curtailments (b)			—						—						(202)						(3)
Foreign currency translation and other			—						—						(89)						(38)
Benefit obligation at end of year			$	92					$	117					$	390					$	926
Change in plan assets:
Fair value of plan assets at beginning of year			$	108					113						$	571					$	578
Employer contributions									—						16						26
Actual return on plan assets			(21)						2						(133)						9
Benefits paid			(7)						(7)						(29)						(34)
Plan amendments, settlements and curtailments (b)			—						—						(202)						(3)
Foreign currency translation and other			—						—						(57)						(5)
Fair value of plan assets at end of year			$	80					$	108					$	166					$	571
Unfunded status of the plans			$	(12)					$	(9)					$	(224)					$	(355)

(a) Actuarial gains for our qualified defined benefit pension plans in 2022 primarily reflect an increase in the discount rate in 2022 as compared to 2021, which decreased benefit obligations.

(b) Qualified defined benefit pension plan settlements in 2022 predominantly related to the transfer of gross benefit obligations and related plan assets to an insurance company upon completion of the U.K. pension buy-out as described above.

The following table provides a roll-forward of the projected benefit obligation for the other post-retirement employee benefit plans:

(in millions)			2022						2021
Change in benefit obligation:
Benefit obligation at beginning of year			$	42					$	44
Interest cost			1						1
Benefits paid			(3)						(3)
Actuarial gain			(9)						—
Benefit obligation at the end of year			$	31					$	42

The accumulated benefit obligation (“ABO”) for all the defined benefit pension plans was $460 million and $1,009 million at December 31, 2022 and 2021, respectively.

For defined benefit pension plans in which the ABO was in excess of the fair value of the plans’ assets, the projected benefit obligation, ABO and fair value of the plans’ assets were as follows:

			December 31,
(in millions)			2022						2021
Projected benefit obligation			$	391					$	574
Accumulated benefit obligation			372						541
Fair value of plan assets			121						164

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

			Year Ended December 31,
(in millions)			2022						2021						2020
Domestic defined benefit pension plans:
Service cost			$	3					$	3					$	3
Interest cost			3						3						3
Expected return on plan assets			(6)						(7)						(7)
Amortization of net actuarial loss			3						4						3
Net periodic benefit cost			$	3					$	3					$	2
International defined benefit pension plans:
Service cost			$	12					$	14					$	13
Interest cost			13						11						16
Expected return on plan assets			(13)						(14)						(14)
Amortization of net actuarial loss			10						17						14
U.K. pension settlement expense			140						—						—
Net periodic benefit cost			$	162					$	28					$	29
Total net periodic benefit cost			$	165					$	31					$	31

Aside from the U.K. pension settlement expense, the components of net periodic benefit cost other than the service cost component are included in the line item "Other non-operating (expense) income, net" in the Consolidated Income Statements.

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss), as they pertain to our defined benefit pension plans are as follows:

			Year Ended December 31,
(in millions)			2022						2021						2020
Domestic defined benefit pension plans:
Net (gain) loss			$	3					$	—					$	3
Amortization of net actuarial loss			(3)						(4)						(3)
(Gains) losses recognized in other comprehensive income (loss)			$	—					$	(4)					$	—
International defined benefit pension plans:
Net (gain) loss			$	(95)					$	(51)					$	74
Amortization of net actuarial loss			(8)						(17)						(14)
U.K. pension settlement expense			(137)						—						—
Foreign Exchange			(39)						(11)						19
(Gains) losses recognized in other comprehensive income (loss)			$	(279)					$	(79)					$	79
Total (gains) losses recognized in other comprehensive income (loss)			$	(279)					$	(83)					$	79
Total (gains) losses recognized in comprehensive income			$	(114)					$	(52)					$	110

The components of net periodic benefit cost for other post-retirement employee benefit plans are as follows:

			Year Ended December 31,
(in millions)			2022						2021						2020
Interest cost			1						1						2
Amortization of prior service credit			(2)						(2)						(3)
Amortization of net actuarial loss			1						2						2
Net periodic benefit cost			$	—					$	1					$	1

Other changes in benefit obligations recognized in other comprehensive income (loss), as they pertain to other post-retirement employee benefit plans are as follows:

			Year Ended December 31,
(in millions)			2022						2021						2020
Net loss (gain)			$	(9)					$	—					$	1
Prior service credit			—						—						(5)
Amortization of prior service credit			2						3						3
Amortization of net actuarial loss			(1)						(2)						(2)
Losses (gains) recognized in other comprehensive income (loss)			$	(8)					$	1					$	(3)
Total losses (gains) recognized in comprehensive income			$	(8)					$	2					$	(2)

Assumptions

The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, as they pertain to our pension plans.

			2022												2021												2020
			U.S.						Int’l						U.S.						Int’l						U.S.						Int’l
Benefit Obligation Assumptions
Discount rate			5.25		%				4.13		%				3.00		%				1.55		%				2.50		%				1.06		%
Rate of future compensation increase			NM						2.79		%				NM						2.84		%				NM						2.79		%
Net Periodic Benefit Cost Assumptions
Discount rate			3.00		%				1.55		%				2.50		%				1.06		%				3.25		%				1.80		%
Expected long-term return on plan assets			5.50		%				2.79		%				6.50		%				2.60		%				6.50		%				2.82		%
Rate of future compensation increase			NM						2.84		%				NM						2.79		%				NM						2.94		%

NM Not meaningful. The pension benefits for future service for all the U.S. pension plans are based on years of service and not impacted by future compensation increases.

Management develops each assumption using relevant company experience in conjunction with market-related data for each individual country in which plans exist. Assumptions are reviewed annually and adjusted as necessary.

The expected long-term rate of return on assets reflects the expected returns for each major asset class in which the plans hold investments, the weight of each asset class in the target mix, the correlations among asset classes and their expected volatilities. The assets of the pension plans are held by a number of independent trustees, managed by several investment institutions and are accounted for separately in the Company’s pension funds.

Our expected return on plan assets is estimated by evaluating both historical returns and estimates of future returns. Specifically, we analyze the plans’ actual historical annual return on assets, net of fees, over the past 15, 20 and 25 years; we estimate future returns based on independent estimates of asset class returns; and we evaluate historical broad market returns over long-term timeframes based on our asset allocation range. For the U.S. Master Trust which has existed since 2011, historical returns were estimated using a constructed portfolio that reflects the Company’s strategic asset allocation and the historical compound geometric returns of each asset class for the longest time period available. Based on this approach, the weighted average expected long-term rate of return for all of our plan assets to be used in determining net periodic benefit costs for 2023 is estimated at 5.90%.

Investment Policy

The investment strategy for managing worldwide post-retirement benefit plan assets is to seek an optimal rate of return relative to an appropriate level of risk for each plan. Investment strategies vary by plan, depending on the specific characteristics of the plan, such as plan size and design, funded status, liability profile and legal requirements. In general, the plans are managed closely to their strategic allocations.

The following table provides the actual asset allocations of plan assets as of December 31, 2022 and 2021, and the related asset target allocation ranges by asset category:

			2022						2021						Target Allocation Ranges
Equity securities			47.1		%				23.0		%				35-75%
Fixed income			43.9		%				21.9		%				45-70%
Cash, insurance contracts and other			9.0		%				55.1		%				0-15%

Fair Value of Plan Assets

In measuring plan assets at fair value, the fair value hierarchy is applied which categorizes and prioritizes the inputs used to estimate fair value into three levels. See Note 1, "Summary of Significant Accounting Policies" for further detail on fair value hierarchy.

In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the pricing service, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including NAV.

The following is a description of the valuation methodologies and inputs used to measure fair value for major categories of investments.

• Equity securities — Equities (including common and preferred shares, domestic listed and foreign listed and closed end mutual funds) are generally valued at the closing price reported on the major market on which the individual securities are traded at the measurement date. Equity securities and mutual funds held by the Company that are publicly traded in active markets are classified within Level 1 of the fair value hierarchy. Those equities that are held in proprietary funds pooled with other investor accounts and collective trust funds measured at fair value using the NAV per share practical expedient are not classified in the fair value hierarchy.

• Fixed income — Government securities are generally valued using quoted prices of securities with similar characteristics. Corporate bonds are generally valued by using pricing models, quoted prices of securities with similar characteristics or broker quotes and are classified in Level 2. Fixed income securities held in proprietary funds pooled with other investor accounts and collective trust funds measured at fair value using the NAV per share practical expedient are not classified in the fair value hierarchy. Hedging instruments are collateralized daily with either cash or government bonds, have daily liquidity and pricing based on observable inputs from over-the-counter markets, and are classified as Level 2.

• Insurance contracts and other — Primarily comprised of insurance contracts held by foreign plans. Insurance contracts are valued on an insurer pricing basis calculated at purchase price adjusted for changes in discount rates and other actuarial assumptions or contract value, which approximates fair value. Insurance contracts are generally classified as Level 3.

• Cash — Cash and cash equivalents are held in accounts with brokers or custodians, available on demand, for liquidity and investment collateral and are classified as Level 1.

The following table provides the fair value of plan assets held by our pension benefit plans by asset class:

			2022																		2021
(in millions)			Level 1			Level 2			Level 3			NAV Practical Expedient			Total						Level 1			Level 2			Level 3			NAV Practical Expedient			Total
Equity securities
Global stock funds/securities			$	37		$	51		$	—		$	9		$	97					$	43		$	71		$	—		$	14		$	128
Diversified growth and income funds			—			—			—			19			19						—			—			—			28			28
Fixed income
Corporate bonds			1			67			—			5			73						1			92			—			7			100
Government bonds			—			13			—			18			31						—			17			—			27			44
Hedging instruments			—			4			—			—			4						—			5			—			—			5
Insurance contracts and other			—			—			20						20						—			—			368			—			368
Cash & cash equivalents			2			—			—			—			2						6			—			—			—			6
Total plan assets subject to leveling			$	40		$	135		$	20		$	51		$	246					$	50		$	185		$	368		$	76		$	679

The following table presents a reconciliation of the beginning and ending balances of fair value measurement within our pension plans using significant unobservable inputs (Level 3):

(in millions)						Insurance Contracts and Other
Balance, December 31, 2020						$	384
Purchases, sales, settlements, net						(8)
Actual return on plan assets						(6)
Currency impact						(2)
Balance, December 31, 2021						368
Purchases, sales, settlements, net						(210)
Actual return on plan assets						(99)
Currency impact						(39)
Balance, December 31, 2022						$	20

Contributions and Estimated Future Benefit Payments

Funding requirements under governmental regulations are a significant consideration in making contributions to our post-retirement plans. We made contributions of $19 million and $29 million to our pension and post-retirement defined benefit plans during 2022 and 2021, respectively. We currently anticipate making contributions to our pension and post-retirement defined benefit plans in the range of $18 million to $26 million during 2023, of which approximately $5 million is expected to be made in the first quarter.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

(in millions)			Pension						Other Benefits
2023			$	27					$	3
2024			27						3
2025			27						3
2026			28						3
2027			28						3
Years 2026 - 2030			147						11

Note 16. Share-Based Compensation Plans

Our share-based compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. In addition, members of our Board of Directors participate in our share-based compensation program in connection with their service on our board. Share-based awards issued to employees include non-qualified stock options, restricted stock unit awards and performance share unit awards. Under the 2011 Omnibus Incentive Plan, the number of shares initially available for awards was 18 million. On November 18, 2022, there were an additional 3.2 million of shares registered for issuance under this plan but does not increase the total pool of 18 million. As of December 31, 2022, there were approximately 7 million shares of common stock available for future awards.

Total share-based compensation costs recognized for 2022, 2021 and 2020 were $37 million, $33 million, and $26 million, respectively. The unamortized compensation expense at December 31, 2022 related to our stock options, restricted share units and performance share units was $7 million, $26 million and $13 million, respectively, and is expected to be recognized over a weighted average period of 1.7, 1.8 and 2.1 years, respectively.

The amount of cash received from the exercise of stock options was $8 million, $19 million and $20 million for 2022, 2021 and 2020 with a tax benefit of $3 million, $6 million and $13 million realized associated with stock option exercises and vesting of restricted stock units, respectively. We classify as an operating activity the cash flows attributable to excess tax benefits arising from stock option exercises and restricted stock unit vestings.

Stock Option Grants

Options are awarded with a contractual term of 10 years and generally vest over a three-year period and are exercisable within the contractual term, except in certain instances of termination due to death, retirement, disability and other limited circumstances in accordance with the terms of the grant agreements. The exercise price per share is the fair market value of the underlying common stock on the date each option is awarded. At December 31, 2022, there were options to purchase an aggregate of 1.9 million shares of common stock. The following is a summary of the changes in outstanding stock options for 2022:

			Share units (in thousands)						Weighted Average Exercise Price / Share						Weighted Average Remaining Contractual Term (Years)						Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2022			1,827						$	64.12					6.1
Granted			323						87.72
Exercised			(131)						60.07
Forfeited and expired			(84)						82.35
Outstanding at December 31, 2022			1,935						$	67.55					5.9						$	83
Options exercisable at December 31, 2022			1,342						$	58.69					4.7						$	70
Vested and non-vested expected to vest as of December 31, 2022			1,889						$	67.03					5.6						$	82

The amount of non-vested options outstanding was 0.6 million, 0.7 million and 0.7 million at a weighted average grant date share price of $87.62, $84.66 and $74.00 as of December 31, 2022, 2021 and 2020, respectively. The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during 2022, 2021 and 2020 was $4 million, $27 million and $20 million, respectively.

The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions used for 2022, 2021, and 2020:

			2022						2021						2020
Dividend yield			1.37		%				1.10		%				1.42		%
Volatility			26.25		%				26.29		%				24.16		%
Risk-free interest rate			1.74		%				0.86		%				0.83		%
Expected term (in years)			5.6						5.7						5.8
Weighted-average fair value per option			$	20.38					$	23.26					$	14.84

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

Restricted Stock Unit Grants

Restricted stock units awarded to employees vest over a three-year period. Prior to the time a restricted unit becomes fully vested, the awardees cannot transfer, pledge or encumber such units. Prior to the time a restricted unit is fully vested, the awardees do not have certain rights of a stockholder, such as the right to vote and receive dividends; however, dividends accrue during the vesting period and are paid upon vesting. If an employee leaves prior to vesting, whether through resignation or termination for cause, the restricted stock unit and related accrued dividends are forfeited. If an employee retires, a pro-rata portion of the restricted stock unit may vest in accordance with the terms of the grant agreements. Restricted stock units awarded to Board members become fully vested upon the day prior to the next annual meeting. The fair value of the restricted stock unit awards is determined using the closing price of our common stock on date of grant.

The following is a summary of the changes in outstanding restricted stock units for 2022:

			Share Units (in thousands)						Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022			484						$	88.47
Granted			349						87.01
Vested			(231)						84.75
Forfeited			(49)						90.99
Outstanding at December 31, 2022			553						$	88.88

Performance Share Units

Performance share units awarded under the long-term incentive plan vest based upon performance by the Company over a three-year period against targets approved by the Leadership Development & Compensation Committee of the Company's Board of Directors prior to the grant date. For the performance periods, the performance share units were awarded at a target of 100% with actual payout contingent upon the achievement of a pre-set, three-year adjusted ROIC performance target for ROIC performance share units, a pre-set third year revenue target for Revenue performance share units and a relative TSR performance for TSR performance share units. The calculated compensation cost for ROIC and Revenue performance share units is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the probable outcome of the performance condition.

ROIC Performance Share Unit Grants

The fair value of the ROIC performance share unit awards is determined using the closing price of our common stock on date of grant.

The following is a summary of the changes in outstanding ROIC performance share units for 2022:

			Share units (in thousands)						Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022			177						$	84.84
Granted			35						86.77
Forfeited			(66)						77.15
Outstanding at December 31, 2022			146						$	88.78

Revenue Performance Share Unit Grants

The fair value of the Revenue performance share unit awards is determined using the closing price of our common stock on date of grant.

The following is a summary of our Revenue performance share unit grants for 2022:

			Share units (in thousands)																		Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022			—																		$	—
Granted			35																		86.77
Forfeited			(3)																		86.76
Outstanding at December 31, 2022			32																		$	86.77

TSR Performance Share Unit Grants

The following is a summary of the changes in outstanding TSR performance share units for 2022:

			Share units (in thousands)						Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2022			177						$	102.96
Granted			70						71.18
Adjustment for Market Condition Achieved (a)			22						89.62
Vested			(75)						89.62
Forfeited			(16)						89.04
Outstanding at December 31, 2022			178						$	100.67

(a) Represents an increase in the number of original TSR performance share units awarded based on the final market condition achievement at the end of the performance period of such awards. The fair value of TSR performance share units were calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The following are weighted-average key assumptions for 2022 grants.

			2022						2021						2020
Volatility			33.3		%				33.5		%				22.6		%
Risk-free interest rate			1.44		%				0.24		%				1.08		%

ESG Performance Share Unit Grants

During the first quarter of 2021, we issued a special grant of less than 0.1 million ESG performance share units. The shares will vest on March 1, 2026 based on our performance as of December 31, 2025 against certain of the Company's 2025 sustainability goals.

Note 17. Capital Stock

The Company has the authority to issue an aggregate of 750 million shares of common stock having a par value of $0.01 per share. The stockholders of Xylem common stock are entitled to receive dividends as declared by the Xylem Board of Directors. Dividends declared were $1.20, $1.12 and $1.04 during 2022, 2021 and 2020, respectively.

The changes in shares of common stock outstanding for the three years ended December 31 are as follows:

(share units in thousands)			2022						2021						2020
Beginning Balance, January 1			180,392						180,354						180,140
Stock incentive plan net activity			437						716						986
Repurchase of common stock			(576)						(678)						(772)
Ending Balance, December 31			180,253						180,392						180,354

For the years ended December 31, 2022 and December 31, 2021 the Company repurchased 0.6 million shares of common stock for $52 million and repurchased 0.7 million shares of common stock for $68 million, respectively. Repurchases include both share repurchase programs approved by the Board of Directors and repurchases in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. The detail of repurchases by each program are as follows:

On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our stockholders and maintains our focus on growth. For the year ended December 31, 2022 we repurchased 0.5 million shares for $46 million. For the year ended December 31, 2021 we repurchased 0.6 million shares for $60 million. There are up to $182 million in shares that may still be purchased under this plan as of December 31, 2022.

Aside from the aforementioned repurchase programs, we repurchased approximately 0.1 million and 0.1 million shares for $6 million and $8 million during 2022 and 2021, respectively, in relation to settlement of employee income tax withholding obligations due as a result of the vesting of restricted stock units. These repurchases are included in the stock incentive plan net activity in the above table.

Note 18. Accumulated Other Comprehensive Loss

The following table provides the components of accumulated other comprehensive loss for 2022, 2021 and 2020:

(in millions)			Foreign Currency Translation						Post-retirement Benefit Plans						Derivative Instruments						Total
Balance at January 1, 2020			(103)						(269)						(3)						(375)
Foreign currency translation adjustment			(22)																		(22)
Income tax impact on foreign currency translation adjustment			39																		39
Changes in post-retirement benefit plans									(73)												(73)
Foreign currency translation adjustment for post-retirement benefit plans									(19)												(19)
Income tax expense on changes in post-retirement benefit plans, including settlement									18												18
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net									16												16
Income tax impact on amortization of post-retirement benefit plan items									(3)												(3)
Unrealized loss on derivative hedge agreements															9						9
Reclassification of unrealized gain on foreign exchange agreements into revenue															(4)						(4)
Reclassification of unrealized (gain) loss on foreign exchange agreements into cost of revenue															1						1
Balance at December 31, 2020			(86)						(330)						3						(413)
Foreign currency translation adjustment			20																		20
Income tax impact on foreign currency translation adjustment			(35)																		(35)
Changes in post-retirement benefit plans									51												51
Foreign currency translation adjustment for post-retirement benefit plans									11												11
Income tax expense on changes in post-retirement benefit plans									(15)												(15)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net									20												20
Income tax impact on amortization of post-retirement benefit plan items									(5)												(5)
Unrealized gain on derivative hedge agreements															(10)						(10)
Tax on unrealized gain on derivative hedge agreements															1						1
Reclassification of unrealized gain on foreign exchange agreements into revenue															4						4
Balance at December 31, 2021			$	(101)					$	(268)					$	(2)					$	(371)
Foreign currency translation adjustment			(53)																		(53)
Income tax impact on foreign currency translation adjustment			(26)																		(26)
Changes in post-retirement benefit plans									101												101

(in millions)			Foreign Currency Translation						Post-retirement Benefit Plans						Derivative Instruments						Total
U.K. pension settlement									137												137
Foreign currency translation adjustment for post-retirement benefit plans									39												39
Income tax expense on changes in post-retirement benefit plans, including settlement									(58)												(58)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net									10												10
Income tax impact on amortization of post-retirement benefit plan items									(2)												(2)
Unrealized gain on derivative hedge agreements															(24)						(24)
Tax on unrealized gain on derivative hedge agreements															—						—
Reclassification of unrealized gain on foreign exchange agreements into revenue															19						19
Reclassification of unrealized gain on foreign exchange agreements into cost of revenue															2						2
Balance at December 31, 2022			(180)						(41)						(5)						(226)

Note 19. Commitments and Contingencies

Legal Proceedings

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

See Note 6 "Income Taxes" of our consolidated financial statements for a description of a pending tax litigation matter.

Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claims, we do not believe it is reasonably possible that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of operations, or financial condition.

We have estimated and accrued $5 million and $4 million as of December 31, 2022 and 2021, respectively, for these general legal matters.

Guarantees

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

Environmental

In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned and/or operated by Xylem and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.

Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Our accrued liabilities for these environmental matters represent our best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis. We have estimated and accrued $4 million and $3 million as of December 31, 2022 and 2021, respectively, for environmental matters.

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

Warranties

We warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and specific non-performance. Warranty expense was $24 million, $27 million, and $57 million for 2022, 2021 and 2020, respectively. The table below provides changes in the combined current and non-current product warranty accruals over each period.

(in millions)			2022						2021						2020
Warranty accrual – January 1			$	57					$	65					$	41
Net charges for product warranties in the period			24						27						57
Settlement of warranty claims			(25)						(32)						(34)
Foreign currency and other			(2)						(3)						1
Warranty accrual – December 31			$	54					$	57					$	65

Note 20. Related Party Transactions

Sales to and purchases from unconsolidated entities for 2022, 2021 and 2020 are as follows:

(in millions)						2022						2021						2020
Sales to unconsolidated affiliates						$	1					$	1					$	10
Purchases from unconsolidated affiliates						16						18						16

Note 21. Segment and Geographic Data

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

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

The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1, "Summary of Significant Accounting Policies"). The following tables contain financial information for each reportable segment:

			Year Ended December 31,
(in millions)			2022						2021						2020
Revenue:
Water Infrastructure			$	2,364					$	2,247					$	2,079
Applied Water			1,767						1,613						1,434
Measurement & Control Solutions			1,391						1,335						1,363
Total			$	5,522					$	5,195					$	4,876
Operating income:
Water Infrastructure			$	418					$	387					$	318
Applied Water			258						240						205
Measurement & Control Solutions			2						12						(106)
Corporate and other			(56)						(54)						(50)
Total operating income			622						585						367
Interest expense			50						76						77
U.K. pension settlement expense			140						—						—
Other non-operating (expense) income, net			7						—						(5)
Gain on sale of businesses			1						2						—
Income before taxes			$	440					$	511					$	285
Depreciation and amortization:
Water Infrastructure			$	53					$	51					$	57
Applied Water			19						22						24
Measurement & Control Solutions			137						145						142
Regional selling locations (a)			19						20						20
Corporate and other			8						7						8
Total			$	236					$	245					$	251
Capital expenditures:
Water Infrastructure			$	71					$	74					$	48
Applied Water			21						22						18
Measurement & Control Solutions			77						79						90
Regional selling locations (b)			23						25						22
Corporate and other			16						8						5
Total			$	208					$	208					$	183

(a) Depreciation and amortization expense incurred by the Regional selling locations was included in an overall allocation of Regional selling location costs to the segments; however, a certain portion of that expense was not specifically identified to a segment. That expense is captured in this Regional selling location line.

(b) Represents capital expenditures incurred by the Regional selling locations not allocated to the segments.

The following table illustrates revenue by product category, net of intercompany revenue:

			Year Ended December 31,
(in millions)			2022						2021						2020
Pumps, accessories, parts and service			$	3,728					$	3,442					$	3,120
Other (a)			1,794						1,753						1,756
Total			$	5,522					$	5,195					$	4,876

(a)Other includes treatment equipment, analytical instrumentation, heat exchangers, valves, controls and smart meters.

The following table contains the total assets for each reportable segment as of December 31, 2022, 2021 and 2020:

			Total Assets
(in millions)			2022						2021						2020
Water Infrastructure			$	1,302					$	1,289					$	1,255
Applied Water			1,132						1,093						1,005
Measurement & Control Solutions			3,126						3,198						3,345
Regional selling locations (a)			844						1,503						1,413
Corporate and other (b)			1,548						1,193						1,732
Total			$	7,952					$	8,276					$	8,750

(a)The Regional selling locations have assets that consist primarily of cash, accounts receivable and inventory which are not allocated to the segments.

(b)Corporate and other consists of items pertaining to our corporate headquarters function, which principally consist of cash and pension assets.

Geographical Information

Revenue is attributed to countries based upon the location of the customer. Property, Plant & Equipment is attributed to countries based upon the location of the assets:

			Revenue
			Year Ended December 31,
(in millions)			2022						2021						2020
United States			$	2,573					$	2,280					$	2,297
Western Europe			1,411						1,414						1,259
Emerging Markets			1,074						1,066						919
Other			464						435						401
Total			$	5,522					$	5,195					$	4,876

			Property, Plant & Equipment
			December 31,
(in millions)			2022						2021						2020
United States			$	239					$	251					$	253
Western Europe			227						231						235
Emerging Markets			133						132						139
Other			31						30						30
Total			$	630					$	644					$	657

Note 22. Valuation and Qualifying Accounts

The table below provides changes in the allowance for credit losses over each period:

(in millions)			2022						2021						2020
Balance at beginning of year			$	35					$	38					$	25
Additions charged to expense			5						2						25
Deductions/other			(6)						(5)						(12)
Balance at end of year			$	34					$	35					$	38

Note 23. Subsequent Events

As previously announced on January 23, 2023, Xylem entered into a definitive agreement under which Xylem will acquire Evoqua in an all-stock transaction that reflects an implied enterprise value of approximately $7.5 billion. Evoqua shareholders will receive 0.480 shares of Xylem for each Evoqua share and upon closing, Xylem shareholders will own approximately 75 percent and Evoqua shareholders will own approximately 25 percent of the combined company on a fully diluted basis. The transaction, which is anticipated to close in mid-2023, is subject to approval by shareholders of Xylem and Evoqua, the receipt of required regulatory approvals and other customary closing conditions.