Xylem Annual Report 2011

FY2011 Annual Report · Xylem
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Annual Report 2011

Let's Solve Water is an inspirational call to action for the 12,500

global employees at Xylem. It's also an invitation to like-minded

partners around the world to join us in developing solutions to

one of the world's most urgent issues – the need for clean, safe

water and sanitation. We have the resources, reach and expertise

to be a leader in this vital pursuit, and are committed to helping

our customers, suppliers and industry associates take on – and

tackle – one of the most pressing challenges of the 21st century.

Selected Financial Highlights

Dollars in Millions

Revenue

Operating Income1

Net Income2

Free Cash Flow3

2009

2,849

276

202

308

2010

3,202

388

286

301

2011

3,803

482

358

388

1

Operating income excludes one-time separation costs of $87M in 2011.

2

Net income excludes separation costs and special tax items for the periods presented: 2011 separation costs, net of tax of $72M, and special tax cost items of $7M; 2010 special tax beneﬁt items
of $43M; 2009 special tax beneﬁt items of $61M.

3

Free cash ﬂow deﬁned as net cash provided by operating activities less capital expenditures and other signiﬁcant items that impact current results which management believes are not related 
to our ongoing operations and performance.  Free cash ﬂow  for 2011 has been adjusted for $65M for separation cash payments.

Earnings Per Share (EPS) – Diluted*

2009

2010

2011

$1.93

$1.55

$1.10

On October 31, 2011, Xylem Inc. completed the spin-off through a tax-free stock dividend to
ITT Corporation's shareholders. ITT Corporation shareholders received one share of Xylem Inc.
common stock for each share of ITT common stock. As a result on October 31, 2011, we had
184.6 million shares of common stock outstanding and this share amount is being utilized to
calculate earnings per share for all periods presented prior to the spin-off.

*

Adjusted to exclude separation costs and special tax items for the periods presented: 2011
separation costs, net of tax of $0.39, and special tax cost items of $0.04; 2010 special tax 
beneﬁt items of $0.23; 2009 special tax beneﬁt items of $0.32.

Revenue by Geography

Other
16%

Asia
Paciﬁc
11%

Europe
37%

United 
States
36%

19% of Xylem’s 2011 revenue came from emerging markets.

Table of Contents

Letter to Shareowners
page 1

Solutions for the Entire Water Cycle
page 4

A Focus on Sustainability
page 6

Board of Directors and Ofﬁcers
page 8

Letter to Shareowners

Dear Shareowners,

it more often. Smarter approaches can

our customers, industry associations,

save water, energy, labor costs and time.

other thought leaders, non-governmen-

When it comes to solving water, there’s

tal organizations and – where appropri-

strength – and hope – in numbers.

These urgent needs also make our work

ate – our competitors, Xylem is showing

at Xylem very exciting and meaningful,

that collaboration, systems solutions and

The issues surrounding our planet’s

and make water the ﬁeld to be in for 

open minds can offer a way forward. 

water supplies are intensifying so fast

people and businesses seeking to 

that they can no longer be ignored. 

make a difference. 

2011 results and highlights

This is actually a positive development,

In our quest to solve water, we started

because for too long, it’s been easy for

On October 31, 2011, Xylem stepped

from a position of ﬁnancial strength.

large segments of the world’s population

forward into this space – and out from

with ready access to water to take this 

beneath the ITT Corporation umbrella.

In 2011, Xylem reached $3.8 billion in

resource for granted. 

Our stock began trading on the New

revenue and $358 million in adjusted net

York Stock Exchange, and we were

income, excluding one-time separation

But now population growth, rapid urban-

added to the Standard & Poor’s 500

costs and other special items. This repre-

ization, droughts, poor water quality and

Index. As a $3.8 billion pure-play water

sents an increase of 19 percent and 

an aging water infrastructure affect every-

company with 12,500 global employees,

25 percent, respectively, when compared

one. Because water is a ﬁnite resource, we

we’re here to bring the best minds 

with our performance as part of ITT the

are all linked to the issues surrounding 

together, to reach out across real and

year before. Adjusted operating margins

it. Finally, it seems the world as a whole 

perceived boundaries, to attain strength

grew 60 basis points to 12.7 percent, 

is recognizing the signiﬁcant challenges

in numbers and to address the world’s

and we generated free cash ﬂow of $388 

that lie just in front of us and saying – 

water needs. We’re here to take our

million. These results set the stage for 

with one loud voice – Let’s Solve Water.

place as a leading resource and voice for

future growth.

water solutions across the entire water

This past year, Xylem came into existence

cycle. When we say, “Let’s Solve Water,”

•

Our orders this year were also up 

prepared to answer that call for action.

our efforts don’t begin and end inside

19 percent to $3.8 billion. The increase

With more than a century of experience

the walls of Xylem. 

and broad applications expertise in

transporting, treating and testing water,

A strong portfolio, 

was propelled by our recent acquisitions

in areas such as dewatering and analytical

instrumentation, organic growth invest-

and doing business in more than 150

a commitment to partnerships 

ments focused on providing energy-

countries, we are in an excellent position

Our proven and innovative technologies

efﬁcient solutions to our customers, and

to marshal our many resources and reach

help customers around the globe trans-

growth from emerging market regions.

out to others to ﬁnd solutions to the

port, treat, test and efﬁciently use and 

world’s most challenging water issues.

reuse our world’s most precious resource.

•

We continued to execute our strategy 

We have a large installed base of equip-

to build strong growth platforms in 

We believe strongly that water is the

ment around the globe, well-known and

analytical instrumentation and dewatering.

challenge that will deﬁne the 21st 

respected product brands and services,

In 2011, we acquired YSI Incorporated – 

century. This vital resource plays a central

and a distribution network unrivaled in

a global provider of analytical instruments

role in the physical, social and economic

the industry. And with our deep applica-

for environmental water monitoring and a

health of our global society, and has a

tions expertise – the know–how needed

great complement to our Nova Analytics

critical place in the life of every person

to solve customers’ unique problems –

acquisition of the year before. We also

on this planet. We need to enable the

we can see the big picture, and have 

continued investing in our 2010 acquisi-

delivery of the right quality of water –

the people and the tools to bring the best

tion of Godwin Pumps by moving forward

wherever and whenever it is required. 

solutions to our customers.

with plant expansions to meet the 

growing demand for dewatering pumps.

We need to use it more efﬁciently, treat it

We’re a central player in water, waste-

more intelligently and ﬁnd ways to reuse 

water and ﬂuid technology, but not the

only player. By forging partnerships with 

1

members brings a deep level of industry

expertise to our new company, and they

share a commitment to solving higher-

order water issues with systems solutions

and partnerships. Some were instrumental

in orchestrating our spin-off as members

of the ITT Board of Directors, and others

joined the Xylem Board at spin-off. But 

all were highly instrumental in ensuring

we began existence as an independent

company in a strong position and were

ready to go from Day One.

•

We maintained our commitment to inno-

Two, Three and Four, and the World

When we look back at 2011, we will 

vation, with a number of new products

Trade Center transportation hub are 

remember it as a critical starting point,

focused on energy efﬁciency, a critical el-

also made by Xylem. 

ement in helping our customers commit

to systems that deliver more efﬁcient use

The Xylem spirit

not just for our new company, but for 

the newfound commitment – surfacing

everywhere – to three powerful words:

and reuse of water.

Our 2011 accomplishments would 

Let’s Solve Water. That’s what we are all

have been impressive in a normal year.

about at Xylem. We began by facing the

•

We expanded our presence in emerging

The fact that our people enabled this 

challenges head-on and looking to our

markets. In India – as part of a three-year,

performance while preparing for and

Xylem colleagues, our external partners

$22 million investment in the country –

launching a new company was frankly

and our fellow thought leaders for 

we began construction of a new manu-

amazing... but not surprising. 

solutions that best ﬁt the challenge.

facturing facility and engineering center

Looking at 2012 and beyond, we see 

to increase production of pumps for the

Xylem’s people are everywhere around

exciting opportunities to create value

booming building services market and to

the world and speak many languages.

and make an impact.

provide testing for irrigation pumps for

They are familiar with local water issues

Indian customers. Similar projects helped

and know they can draw on Xylem’s 

The issues confronting our planet around

us achieve double-digit revenue growth

resources as a global water leader. They

water are many, and they’re complex. 

in 2011 in Asia, Latin America, the Middle

understand and appreciate a disciplined

No one government, non-proﬁt group 

East and Africa.

approach to deliver value to shareowners

or company can solve them all. But by

through strong ﬁnancial performance.

working together, over time, we can –

•

We entered into a ﬁrst-ever partnership

They make the world more livable through

and we will. 

with General Electric (GE) to distribute its

sustainable water solutions. Our sales

line of ZeeWeed™ advanced membrane

representative in the Middle East... 

The people of Xylem are excited about

technologies in selected global markets.

our machine operator in Europe... our

the challenge. We invite you to join us. 

We provide customers a product that

engineer in Asia... our business develop-

completes our technology portfolio for

ment administrator in America all 

Let’s Solve Water! 

the water and wastewater segment, and

possess the same passion and pride 

GE enjoys access to our unrivaled sales

for our work in water. 

footprint and service know-how.

Xylem employees throw themselves fully

•

Our pumps and systems provided the

into every project because they grasp the

Gretchen W. McClain

power and ﬂow at the beautiful 9–11 

magnitude of the water challenge – and

President and Chief Executive Ofﬁcer 

memorial park in New York City. Nearly

welcome the chance to tackle it. 

every one of the hundreds of heat 

exchangers, below-ground storm, sump,

So, too, does the Xylem leadership team

and wastewater pumps in Towers One,

and our Board of Directors. Like our 

2

company leaders, each of our Board 

Markos I. Tambakeras

Chairman 

build bridges and relationships. At Xylem, we work closely

with our colleagues and customers around the globe and

with water researchers, water advocates and even other

water companies – because answers to an issue this big 

will only come if we confront it together.

Water matters much more than the

•

Our Flygt Experior pump solutions for

•

For building services customers, we con-

cool drink or hot shower we often take

wastewater customers combine state-of-

tinued to enhance our energy-efﬁcient

for granted.

the-art hydraulics, premium efﬁciency

offerings, such as adding smart controls

It enables our very way of life – from basic

single system that offers up to 50 percent

provide best-in-class efﬁciency and up 

sanitation and health to the production

energy savings compared to conven-

to 50 percent energy savings.

motors and intelligent controls into a 

to our eSV multistage booster pump to

of our food, the operation of every fac-

tional pumps. 

tory and even our recreation. Much of the

•

For homeowners and boat owners, 

world’s electricity is used to move water

•

Our newest acquisition, YSI Incorporated,

our new AquaCharge is a revolution in

from its source to your tap, remove it

allows us to offer customers more leading-

portable, rechargeable water pumping

after you use it, and clean it so that it can

edge sensors, instruments and software

design – and winner of Popular Mechanics

be returned safely to the environment. 

for environmental water monitoring.

magazine’s Editor’s Choice award.

Take away water, degrade its quality so

•

Our Flygt Ready dewatering pumps now

•

For HVAC professionals, we introduced a

that it’s not usable or make it prohibi-

feature a removable top and replaceable

mobile app that allows them to calculate

tively expensive to treat and reuse, and

components for easier servicing – and

life as we know it quickly changes.

longer life.

ﬂow rates and pressure drops in piping
systems from their iPhone® or iPad,®*
giving them the same functionality out 

At Xylem, we have more than a century

•

Our Godwin NC series of portable dewa-

in the ﬁeld as they enjoy at their home 

of experience and broad applications 

tering pumps includes Xylem’s patented

or workplace. 

expertise in moving, treating and testing

non-clogging technology to offer maxi-

water to ensure it is available for genera-

mum uptime and effectiveness. 

•

For beverage customers, our diaphragm

tions to come. We are helping our cus-

pumps already serve more than 2 billion

tomers to deliver water without wasting

•

Our WEDECO Spektron ultraviolet light

drinks a year from fountain drink dis-

energy, adhere to stricter environmental

disinfection units now include new lamps

pensers. Now, our newest pump stands 

regulations, improve water infrastructure,

and power controls that enable plants 

up better to corrosive syrups and lasts 25

and raise awareness of the urgency for

to use 20 percent less energy for disin-

percent longer than previous technologies.

smart water use and reuse. 

fecting drinking water.

Xylem and our many market-leading

Applied Water

Our solutions are most often unique to

each situation. As a global company, we

product brands are known for innovation

The businesses in our Applied Water

tap into the talent of our local engineers

and reliability. Our people offer deep 

segment focus on how people use 

and product developers to design or

industry knowledge and new ways of

water in their daily lives. We create break-

adapt technologies to meet the speciﬁc

thinking about how we can meet many 

through technologies to enhance their

needs of customers in their area. We’re

of the world’s most critical water needs. 

experience in ofﬁces, homes, factories

building on the strength of engineering

Water Infrastructure

tant advances for customers on this side

and Europe to expand our product 

The Xylem businesses in our Water Infra-

of the water cycle.

offering in emerging markets and bring

and farms. In 2011, we also made impor-

centers of excellence in North America

structure segment help customers collect

water from a source, treat it, test it and

distribute it to users. When it becomes

wastewater, our equipment collects and

moves it to the treatment plant, where

our solutions ﬁlter, disinfect, and renew it  

before it is returned to the environment.

In 2011, Xylem provided a number of

new solutions for customers on the Water

Infrastructure side of the water cycle.

4

us closer to those customers.

No matter where you go in the world,

Xylem is there – treating water to make 

it potable, transporting it to where it is

needed, ensuring it is used in the most

efﬁcient manner, testing and analyzing 

its qualities, and cleaning it after its many

uses. In short, Xylem is there to help 

customers – and the world – meet their

water needs.

We expanded our Analytics business 

and capabilities through the acquisition

of YSI Incorporated.

*

iPhone and iPad are registered trademarks of Apple Inc.

When it comes to water, there are many interwoven 

issues to be considered, from energy efﬁciency to 

urbanization. With our broad applications expertise

and focus on innovations, Xylem sees the big picture

and develops next-generation products that transport,

treat and

When it comes to water, the math 

•

Partnerships. Water is too big an issue to

•

Citizenship. Our corporate social 

is uncomplicated – and unnerving. 

be solved alone. There’s a need for pub-

investment program, Xylem Watermark, 

lic-private partnerships, with collaboration

delivers safe water supplies to schools

The volume of fresh water available for

between businesses, non-governmental

and communities in need, as well as 

drinking and other uses on our planet

organizations and government agencies.

disaster areas around the globe. In 2011,

will stay the same forever. But the global

Xylem has long-standing partnerships

we made a three-year $10.5 million 

population this water must serve and the

with many such groups, including the

commitment to Xylem Watermark with

ever-rising per capita demand for water

World Business Council for Sustainable

the goal of reaching one million more

are placing signiﬁcant strain on this ﬁnite,

Development and Singapore’s Public 

people, in addition to the 500,000 who

precious resource.

Utilities Board, to name a few. And in 

have already been helped since the pro-

the past year, we established a Water 

gram’s launch in 2008. Xylem employees

The crisis point has already arrived in

Advisory Board. This group of experts

are engaged in the program, volunteer-

some parts of the world, and is fast ap-

from across the industry brings new 

ing for trips to help build sustainable

proaching in many others. The situation 

ideas and insights into our planning

water systems in drought-stricken areas,

is made more urgent by unsustainable

process and helps us enhance existing

erecting clean water towers for schools

consumption habits, pollution and aging

connections and build new ones 

and communities, and organizing

infrastructure that allows clean water to

around the world.

leak out of the system at rates that in

fundraisers to help Xylem Watermark

and its partners support relief efforts. 

some areas exceed 30 percent. It’s 

•

Education. Xylem is a global sponsor of

Employees’ monetary gifts are matched

becoming increasingly clear that to avoid

the Stockholm Junior Water Prize, which

by Xylem, further expanding our impact. 

full-scale crisis, we need sustainable 

promotes innovation in water science re-

solutions that ensure an ongoing supply

search and education. By supporting this

•

Courage. The technology to solve most

of water. We believe all communities 

competition for outstanding high school

of the world’s water challenges exists

deserve sustainable access to clean

students in more than 30 countries, we

today. What’s needed is a broader

water in order to grow and prosper. 

are creating a sustainable pool of water

awareness that water has value, and

experts who will contribute new ideas for

recognition that maintaining access to

At Xylem, we are energized by our central

years to come. We also share knowledge

safe water is a shared responsibility. Gov-

role in creating a sustainable water future.

within the water industry. For example,

ernments can enact legislation to protect

Our products are part of the solution, 

our own Little Red Schoolhouse in 

water from pollution at its source and to

and further, we understand that the issues

Morton Grove, Illinois has trained tens 

enable building and investing in efﬁcient

our world faces can only be addressed

of thousands of building designers, 

water systems. Industry and citizens 

through technology and behavior change.

contractors and other professionals from

can more rapidly adopt current efﬁcient

around the world on efﬁcient and 

technologies, promote the efﬁcient use

This is where innovation, partnerships,

effective water use in building services

of water, and be willing to pay a fair price

education, citizenship and courage come

applications. The program was recently

for it. Xylem plays an active role in world-

into play.

approved by the Green Building Certiﬁca-

wide discussions on these issues, and will

•

Innovation. We have to develop “new”

tinuing education for LEED professionals.

use and reuse of water everywhere.

tion Institute (GBCI) as a provider of con-

continue to be a strong voice for smart

sources of water. This means developing

and deploying water reuse technologies

and practices, including closed-loop

wastewater reclamation systems and 

desalination systems where they make

sense. We offer those technologies – and

use them. At our own pump production

facility in Nanjing, China, we designed 

a water reuse system that transports,

treats and recycles all 5,000 gallons of

water and wastewater running through

the plant each day. We can do more, 

and we’re urging others to join us.

6

Little Red Schoolhouse

There are no easy answers to water 

challenges, but there are answers. At

Xylem, we’re willing to put in the hard

work and build the bridges needed to

tackle the tough issues in front of us.

We’re a water technology company at

the leading edge of the world’s next big

challenge. This is our area of expertise,

and we invite the world to join us at this

critical moment.

Let’s Solve Water.

can’t be taken for granted. We provide products that give us water

today, and we’re creating solutions and forming alliances to enhance

the sustainability of safe, clean water. Our goal is to ensure that 

the world will have the water it needs the next day... and every day

after that.

Board of Directors

From left to right:

Victoria D. Harker
Chief Financial Ofﬁcer and President of
Global Business Services 
AES Corporation

Steven R. Loranger 
Chairman Emeritus
Former Chairman, President and Chief 
Executive Ofﬁcer, ITT Corporation

Sten E. Jakobsson
Former President and Chief Executive Ofﬁcer
ABB AB

Gretchen W. McClain
President and Chief Executive Ofﬁcer
Xylem Inc.

Curtis J. Crawford, Ph.D.
President and Chief Executive Ofﬁcer 
XCEO, Inc.

Markos I. Tambakeras
Chairman
Former Chairman, President and Chief 
Executive Ofﬁcer, Kennametal, Inc.

John J. Hamre, Ph.D.
President and Chief Executive Ofﬁcer
Center for Strategic & International Studies

Surya N. Mohapatra, Ph.D.
Chairman, President and Chief Executive 
Ofﬁcer, Quest Diagnostics Incorporated

Edward J. Ludwig
Chairman and Former Chief Executive 
Ofﬁcer, Becton, Dickinson and Company

Executive Leadership

Gretchen W. McClain
President and Chief Executive Ofﬁcer

Angela A. Buonocore
Senior Vice President and 
Chief Communications Ofﬁcer

Frank R. Jimenez
Senior Vice President,
General Counsel and Corporate Secretary

8

Michael L. Kuchenbrod
Senior Vice President and President,
Water Solutions

Colin R. Sabol
Senior Vice President and 
Chief Strategy & Growth Ofﬁcer

Christopher R. McIntire
Senior Vice President and President,
Analytics

Michael T. Speetzen
Senior Vice President and 
Chief Financial Ofﬁcer 

Robyn T. Mingle
Senior Vice President and 
Chief Human Resources Ofﬁcer  

Robert E. Wolpert
Senior Vice President and President,
Flow Control & China/ India

Kenneth Napolitano
Senior Vice President and President,
Residential & Commercial Water

(Mark One)
Í

‘

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

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

For the fiscal year ended December 31, 2011

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from

to
Commission file number: 1-35229

Xylem Inc.

(Exact name of registrant as specified in its charter)

Indiana
(State or other jurisdiction of incorporation or
organization)

45-2080495
(I.R.S. Employer Identification No.)

1133 Westchester Avenue, Suite N200, White Plains, NY
(Address of principal executive offices)

10604
(Zip Code)

Registrant’s telephone number, including area code: (914) 323-5700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.01 per share

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ‘ No Í
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No Í
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Í No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ‘

Non-Accelerated Filer Í
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No Í
As of January 31, 2012, there were 184,722,909 outstanding shares of the registrant’s common stock, par value $0.01
per share. As of June 30, 2011 (the last business day of registrant’s most recently completed second fiscal quarter), all
shares of Xylem Inc.’s common stock were held by ITT Corporation. Xylem Inc.’s Spin-off from ITT Corporation,
pursuant to which shares of Xylem Inc.’s common stock were distributed to holders of voting stock of ITT Corporation,
was completed on October 31, 2011.

Smaller reporting company ‘

Accelerated Filer ‘

The information required by Part III of this Report is incorporated herein by reference from the registrant’s definitive
proxy statement relating to its annual meeting of stockholders to be held on May 10, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Xylem Inc.
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2011

Table of Contents

PART I

ITEM

1.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.

3.

4.

*

5.

6.

7.

Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Executive Officers of the Registrant

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .

7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.

9.

Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . .

9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12. Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .

14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PAGE

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17

26

27

27

28

29

30

32

33

49

51

97

97

97

98

98

98

98

98

PART IV

15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

101

* Included pursuant to Instruction 3 of Item 401(b) of Regulation S-K.

2

PART I

This Report contains information that may constitute “forward-looking statements.” Forward-looking statements
by their nature address matters that are, to different degrees, uncertain. Generally, the words “anticipate,”
“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target” and similar expressions identify forward-
looking statements, which generally are not historical in nature. However, the absence of these words or
similar expressions does not mean that a statement is not forward-looking.

These forward-looking statements include, but are not limited to, statements about the separation of Xylem Inc.
(the “Company”) from ITT Corporation, the terms and the effect of the separation, the nature and impact of the
separation, capitalization of the Company, future strategic plans and other statements that describe the
Company’s business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future
operating or financial performance. All statements that address operating performance, events or
developments that we expect or anticipate will occur in the future — including statements relating to orders,
sales, operating margins and earnings per share growth, and statements expressing general views about
future operating results — are forward-looking statements.

Caution should be taken not to place undue reliance on any such forward-looking statements because they
involve risks, uncertainties and other factors that could cause actual results to differ materially from those
expressed or implied in, or reasonably inferred from, such statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially from the Company’s historical
experience and our present expectations or projections. These risks and uncertainties include, but are not
limited to, those set forth in this Report, and those described from time to time in subsequent reports filed with
the Securities and Exchange Commission.

The following discussion should be read in conjunction with the consolidated and combined financial
statements, including the notes thereto, included elsewhere in this Report. Except as otherwise indicated or
unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and “the Company” refer to Xylem Inc. and its
subsidiaries. References to the consolidated and combined financial statements to “ITT” or “parent” refers to
ITT Corporation and its consolidated subsidiaries (other than Xylem Inc.).

ITEM 1.

BUSINESS

Separation from ITT Corporation (“ITT”)

On October 31, 2011, ITT Corporation completed the previously announced Spin-off (the “Spin-off”) of Xylem,
formerly ITT’s water equipment and services businesses. Effective as of 12:01 a.m., Eastern time on
October 31, 2011 (the “Distribution Date”), the common stock of Xylem was distributed, on a pro rata basis, to
ITT’s shareholders of record as of the close of business on October 17, 2011 (the “Record Date”). On the
Distribution Date, each of the shareholders of ITT received one share of Xylem common stock for every one
share of common stock of ITT held on the Record Date. The Spin-off was completed pursuant to the
Distribution Agreement, dated as of October 25, 2011, among ITT, Exelis Inc. (“Exelis”) and Xylem. After the
Distribution Date, ITT did not beneficially own any shares of Xylem common stock and, following such date,
financial results of Xylem will not be consolidated in ITT’s financial reporting. Xylem’s Registration Statement
on Form 10 filed with the U.S. Securities and Exchange Commission (“SEC”) was declared effective on
October 6, 2011. Xylem’s common stock began “regular-way” trading on the New York Stock Exchange on
November 1, 2011 under the symbol “XYL”.

Business Overview

Xylem, with 2011 revenue of $3.8 billion, is a world leader in the design, manufacturing, and application of
highly engineered technologies for the water industry. We are 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. We have leading market

3

positions among equipment and service providers in the core application areas of the water equipment
industry: transport, treatment, test, building services, industrial processing and irrigation. Our Company’s
brands, such as Bell & Gossett and Flygt, are well known throughout the industry and have served the water
market for many years.

We operate in two segments, Water Infrastructure and Applied Water. The Water Infrastructure segment
focuses on the transportation, treatment and testing of water, offering a range of products including water and
wastewater pumps, treatment and testing equipment, and controls and systems. Key brands in this segment
include Flygt, Wedeco, Godwin Pumps, WTW, Sanitaire, AADI and Leopold. The Applied Water segment
encompasses the uses of water and focuses on the residential, commercial, industrial and agricultural markets.
The segment’s major products include pumps, valves, heat exchangers, controls and dispensing equipment.
Key brands in this segment include Goulds Water Technology (“Goulds”), Bell & Gossett, AC Fire, Standard,
Flojet, Lowara, Jabsco and Flowtronex. In both our segments, we benefit from a large and growing installed
base of products driving growth in aftermarket revenue for replacement parts and services.

We serve a global customer base across diverse end markets while offering localized expertise. We sell our
products in more than 150 countries through a balanced distribution network consisting of our direct sales force
and independent channel partners. In 2011, approximately 64% of our revenues were generated outside the
United States.

Our Industry

Our planet faces a serious water challenge. Less than 1% of the total water available on earth is fresh water,
which is declining due to factors such as the draining of aquifers, increased pollution and climate change. In
addition to this declining supply, demand is rising rapidly due to population growth, industrial expansion, and
increased agricultural development, with consumption estimated to double every 20 years. By 2025, over 30%
of the world’s population is expected to live in areas without adequate water supply. Even in developed
countries with sufficient supply, existing infrastructure for water supply is relatively underfunded and aging. In
the United States, degrading pipe systems leak one out of every six gallons of water, on average, on its way
from a treatment plant to the customer. These challenges are driving opportunities for growth in the global
water industry, which we estimate to have a total market size of $500 billion.

The water industry supply chain is comprised of Equipment and Services companies, Design and Build service
providers, and water utilities. Equipment and Service providers serve two distinct customer types. The first,
utilities, supplies water through an infrastructure network. Companies that operate on this side of the supply
chain provide single, or sometimes combined, functions from equipment manufacturing and services to facility
design (engineering, procurement and construction, or “EPC” firms) to plant operations (utilities), as depicted
below in Figure 1. The utility and EPC customers are looking for technology and application expertise from
their Equipment and Services providers, due to trends such as rising pollution, stricter regulations, and the
increased outsourcing of process knowledge by utilities. The second customer type, the end users of water,
comprises a wide array of entities, ranging from farms to power plants to residential homes. These customers
are predominately served through specialized distributors and original equipment manufacturers (“OEMs”).

4

Xylem
Operations

Equipment and Services

• Approximately 20,000 companies globally

Served market approximately
$280 billion

Design and Build

• Approximately 8,000
EPC firms globally

Served market approximately
$220 billion

Utilities

End Use Applications

• Approximately 250,000
utilities globally

• Farms, power plants,
homes, etc.

Figure 1: Water Industry Supply Chain, based upon Global Water Intelligence’s “Global Water Market 2011”

and Management Estimates

Our business focuses on the beginning of the supply chain, by providing technology-intensive equipment and
services. We sell our equipment and services via direct and indirect channels that serve the needs of each
customer type. On the utility side, we provide over 70% direct sales with strong application expertise, with the
remaining amount going through distribution partners. To end users of water, we provide over 85% of our sales
through long-standing relationships with the world’s leading distributors, with the remainder going direct to
customers. The total market opportunity for this Equipment and Services portion of the water industry supply
chain is estimated at $280 billion.

The Equipment and Services market addresses the key processes of the water industry, which is best
illustrated through the cycle of water, as depicted in Figure 2, below. We believe this industry has two distinct
sectors within the cycle of water: Supply Infrastructure and Usage Applications. The key processes of this cycle
begin when raw water is extracted by pumps, which provide the necessary pressure and flow, to move, or
Transport, this water from natural sources, such as lakes, oceans or aquifers, through pipes to a treatment
facility. Treatment facilities can provide many forms of treatment, such as filtration, disinfection and
desalination, to remove solids, bacteria, and salt, respectively. A network of pipes and pumps again Transports
this clean water to where it is needed, such as to crops for Irrigation, to power plants to provide cooling in
Industrial Water, or to an apartment building as drinking water in Residential and Commercial Building
Services. After usage, the wastewater is collected by a separate network of pipes and pumps and transported
to a wastewater treatment facility, where processes such as digestion deactivate and reduce the volume of
solids, and disinfection purifies effluent water. Once treated, analytical instruments Test the treated water to
ensure regulatory requirements are met so that it can be discharged back to the environment, thereby
completing the cycle.

5

Oceans

Ground Water

Lakes

Rivers

Test

Water Transport

Water Transport

Test

Wastewater
Treatment

Water Treatment

Supply Infrastructure

Test

Wastewater Transport

Water Transport

Industrial
Processing

Residential,
Commercial,
Retail

Agricultural
Irrigation

20%

10%

70%

Usage Applications

% of Global Water
Usage

Figure 2: Cycle of Water

Our two operating segments are aligned with each of the sectors in the cycle of water: Water Infrastructure
serves the Supply Infrastructure sector, and Applied Water serves Usage Applications. Within the Supply
Infrastructure sector, our pump systems Transport water from aquifers, lakes, rivers and seas. From there, our
filtration, UV and ozone systems provide Treatment, making the water fit for use. After consumption, our pump
lift stations move the wastewater to treatment facilities where our mixers, biological treatment, monitoring, and
control systems provide the primary functions in the treatment process. Throughout each of these stages, our
analytical systems Test and ensure water quality, allowing the water to be consumed and returned to nature.
Our served market size in this sector is approximately $16 billion.

In the Usage Applications sector, we participate in all major areas of water demand. Irrigation is approximately
70% of all water usage globally. Examples of what we provide include: boosting systems for farming irrigation,
pumps for dairy operations, and rainwater reuse systems for small scale crop and turf irrigation. Industrial
Water applications account for 20% of global consumption. Our pumps, heat exchangers, valves and controls
provide cooling to power plants and manufacturing facilities, as well as circulation for food and beverage
processing. The remaining 10% of global water use resides in human and building consumption, where we
deliver water boosting systems for drinking, heating, ventilation and air conditioning (HVAC) and fire protection
systems to Residential and Commercial Building Services. Our served market size in this sector is estimated at
$14 billion.

Customers in the water industry vary by end market. Two end markets exist within the Supply Infrastructure
sector: public utility and industrial, representing 85% and 15% of the total equipment and services market,
respectively. The public utility market comprises public, private and public-private institutions that handle water
and wastewater for mostly residential and commercial purposes. The industrial market involves the supply of
water and removal of wastewater for industrial facilities. We view the main macro drivers of this sector to be
water quality, the desire for energy-efficient products, water scarcity and infrastructure needs, for both the

6

repair of aging systems in developed countries and new installations in developing countries. These markets
tend to be less cyclical and are estimated to grow annually in the mid-single digits through 2015, according to
management estimates.

In the Usage Applications sector, end-use customers fall into four main markets: residential, commercial,
industrial and agricultural. Homeowners represent the end users in the residential market. Owners and
managers of properties such as apartment buildings, retail stores, restaurants, hospitals, and hotels are
examples of end users in the commercial market. The industrial market is wide ranging, involving developers
and managers of facilities operated by electrical power generators, chemical manufacturers, machine shops,
clothing manufacturers, beverage production and dispensing firms and car washes. The agricultural market
end users are owners and operators of businesses such as crop and livestock farms, aquaculture, golf
courses, and other turf applications. We believe population growth and urbanization are the two primary macro
drivers of these markets, as these trends drive the need for housing, food, community services and retail goods
within growing city centers. Water reuse and conservation are driving the need for new technologies. Annual
total market growth in these industrial, commercial, residential, and agricultural markets is estimated to be in
the low- to mid-single digits through 2015, according to management estimates.

Business Strategy

Our strategy is focused on enhancing shareholder value by providing solutions for our customers and by
growing revenues, both organically and through strategic acquisitions. Key elements of our strategy are
summarized below:

•

•

•

•

•

Grow Our Product Offerings and Solutions through Portfolio Differentiation. We will continue to extend leading
market positions where we have a strong competitive position, cost leadership and proven technology. In
addition, we will invest in the differentiation of our core product lines to build on our strong product and
application expertise. We also plan to expand into adjacent and complementary technologies as
demonstrated by the recent acquisitions of analytical instrumentation and dewatering solutions
businesses.

Focus on Organic Growth Initiatives. We have launched a global commercial excellence initiative, deploying
people, processes and tools to make our sales and marketing teams more effective and efficient. We have
trained over 500 front-line sales agents under this initiative and have 30 dedicated commercial excellence
leaders to service our most profitable accounts. In addition, we have launched digital selling tools, which
improve our value propositions, and have built a strategic accounts program to focus on our most
important customers. These efforts have already improved the revenues generated per sales agent across
our businesses. We will continue to make investments in customer relationship management, mobile
technologies, customer applications and other technologies that improve our knowledge of customers and
the critical activities that drive growth.

Investing in New Technology and Innovation. We will continue to make targeted investments in research and
development activities to develop breakthrough products and solutions. We will pursue and execute a
robust pipeline of opportunities in core and emerging markets. We have established a wastewater Center
of Excellence in Stockholm, Sweden, with over 100 research, development and engineering employees.
We have also launched engineering Centers of Excellence in India and China, where we are accelerating
the customization of our application expertise to local needs. Our engineers will continue to work closely
with our customers in an effort to identify new applications for our products and develop new technologies
and solutions to expand our current portfolio further.

Build on Our Presence in Fast-Growing Emerging Markets. Urbanization trends and growth in the middle class
in developing countries are generating significant demand for water applications. We intend to continue to
capture this growth by further expanding into emerging markets, such as China, India and Brazil,
increasing our existing presence of over 40 facilities. We plan to leverage our strong global reach,
manufacturing footprint and extensive distribution network to capitalize on growth opportunities in these
regions. We will continue to establish and reinforce local capabilities by growing our local presence in
these markets with investments in sales, marketing and manufacturing capabilities globally.

Growth through Disciplined Acquisitions. Acquisitions are an important part of our growth strategy. Certain
segments of the global water industry we serve are highly fragmented, providing numerous acquisition

7

opportunities. We have completed and integrated 20 acquisitions over the past five years, including
Godwin Pumps, Nova Analytics, YSI Incorporated and OI Corporation, and we will selectively pursue
highly targeted acquisitions that will broaden our core product portfolio, expand our geographic footprint
and enhance our position in strategic markets.

Business Segments

We operate in two business segments that are aligned with the cycle of water and the key strategic market
applications they provide: Water Infrastructure (collection, distribution, return) and Applied Water (usage). See
Note 15, “Industry Segment and Geographic Data” in the notes to the consolidated financial statements for
financial information about segments and geographic areas.

The table and descriptions below provide an overview of our business segments.

Segment

Market
Applications

2011
Revenue

%
Revenue

Major Products

Primary Brands

Water Infrastructure . . . Transport
Treatment
Test

$ 1,771
425
220

73% • Water and wastewater
18%
9%

• Filtration, disinfection

pumps

$ 2,416

100%

and biological
treatment equipment

• Test equipment
• Controls

Applied Water . . . . . . . . Building Services $

Industrial Water
Irrigation

743
603
98

51%
42%
7%

$ 1,444

100%

• Pumps
• Valves
• Heat exchangers
• Controls
• Dispensing

equipment systems

• Flygt
• Wedeco
• Godwin Pumps
• WTW
• Sanitaire
• AADI
•

Leopold

• Goulds
• Bell & Gossett
• AC Fire
• Standard
Lowara
•
•
Jabsco
• Flojet
• Flowtronex

In recent years, we have expanded our capabilities in Treatment, the cleaning of water and wastewater, and
Test, the measurement of water characteristics such as quality. Both of these application areas, Treatment and
Test, reside within the Water Infrastructure segment.

Water Infrastructure

Water Infrastructure involves the process that collects water from a source and distributes it to users, and then
returns the wastewater responsibly to the environment. Water Infrastructure serves three basic closely-linked
applications: Transport, Treatment and Test of water and wastewater for two types of customers: public utilities
and industrial facilities.

Transport

The Transport application includes all of the equipment and services involved in the safe and efficient movement
of water from sources, such as oceans, lakes, rivers and ground water, to treatment facilities, and then to users.
It also includes the movement of wastewater from the point of use to a treatment facility and then back into the
environment. We serve the higher-value equipment markets, such as water and wastewater submersible
pumps, monitoring controls, and application solutions; we do not serve the market for lower-value equipment
such as pipes and fittings. We believe our business is the largest player in this served market based on
management estimates. With operations on six continents, we also have the world’s largest dewatering rental
fleet, serviced with our Flygt and Godwin brands. In our Water Infrastructure Segment, Transport accounted for
approximately 73% of our consolidated revenue in 2011 and 74% of our consolidated revenue in 2010.

8

Flygt — Flygt is the world’s premier manufacturer of submersible pumps, mixers, and aeration equipment for
use in environments such as water and wastewater treatment, raw water supply, abrasive or contaminated
industrial processes, mining and crop irrigation. The Flygt brand was founded in 1901 in Lindås, Sweden and
developed the world’s first submersible close-coupled motor-driven pump. Flygt products have leading
non-clogging capabilities and innovative N-technology, which provide customers with highly sustainable
efficiencies and lowest total cost of ownership. Flygt products have applications in various markets, including
wastewater lift stations, water and wastewater treatment facilities, pressurized sewage systems, oil and gas,
steel, mining and leisure markets. Customers include public utility wastewater and clean water treatment
facilities, oil and gas platforms, and steel manufacturing companies. As an example, Flygt recently served the
village of Hartland, WI, population 8,350, located in Wisconsin’s Lake Country. The Hartland Department of
Public Works (DPW) is, among other things, responsible for operation and maintenance of sanitary sewers, lift
stations and manholes. The DPW had experienced a range of problems resulting from ongoing clogging of the
pumps in their collection-system lift stations. Replacing the pumps with self-cleaning Flygt N-pumps eliminated
the clogging as well as unscheduled and costly service calls.

Godwin Pumps — With more than 30 years as a leader in pump manufacturing, Godwin Pumps has
established itself as a well-recognized and respected brand in the global portable pump market for removal of
temporary, unwanted water. It manufactures, sells, rents and services products that are economical, reliable
and customized to the specific needs of its clients. Founded in Quenington, England, Godwin Pumps is
currently headquartered in Bridgeport, NJ. Godwin Pumps’ products include the fully automatic self-priming
Dri-Prime pump, a range of Sub-Prime electric and Heidra hydraulic submersible pumps, Wet-Prime gasoline-
powered contractor pumps and a broad line of generators and portable light towers. Godwin products are
primarily used in construction, disaster recovery, flooding, heavy industry, marine use, mining, oil, gas and
chemical extraction, refineries, temporary fire protection and water and wastewater transport. Customers
include industrial plants, construction contractors, public utility wastewaters and clean water treatment and
transportation facilities, oil, gas and chemical drilling outfits, and refineries. Godwin’s fleet of equipment is
rented through 33 U.S. branches and a global network of distributors.

Treatment

The Treatment application includes equipment and services that treat both water for consumption and
wastewater to be returned responsibly to the environment. While there are several treatment solutions in the
market today, we focus on three basic treatment types: (i) filtration, (ii) disinfection and (iii) biological treatment
systems. Filtration uses gravity-based media filters and clarifiers to clean both water and wastewater. Leopold,
with more than 80 years of experience, is our leading filtration brand. Disinfection systems, both ultraviolet (UV)
and ozone oxidation, treat both public utility drinking water and wastewater, as well as industrial process water,
and are provided through our WEDECO brand. Biological treatment systems are key to the treatment of solids
in wastewater plants, which is provided through our Sanitaire brand. We believe our business is the largest
player in this served market based on management estimates. In our Water Infrastructure Segment, Treatment
accounted for approximately 18% of our consolidated net sales in 2011 and 20% of our consolidated net sales
in 2010.

Sanitaire — Launched in 1967, the Sanitaire brand provides complete biological wastewater treatment
solutions for public utility and industrial applications. Sanitaire’s comprehensive offering includes diffused
aeration, sequencing batch reactors, drum filters and state-of-the-art controls. Sanitaire is regarded as a
leading brand in diffused aeration, which is a process that introduces air into a liquid, providing an aerobic
environment for degradation of organic matter. Fine-pore diffusion of air is highly competitive due to its high
oxygen transfer efficiency and lower energy costs. Sanitaire wide-band aeration systems are used in
applications such as grit chambers and sludge that require non-clogging, maintenance-free systems. Principal
Sanitaire customers are public utility and industrial wastewater treatment facilities.

WEDECO — WEDECO was founded in 1975 in Herford, Germany to develop chemical-free and
environmentally friendly water treatment technologies, including ultraviolet light and ozone systems. There are
over 250,000 installed WEDECO systems for UV disinfection and ozone oxidation globally in private, public
utility and industrial locations. WEDECO introduced ozone technology in 1988 and has been expanding
internationally ever since. UV disinfection systems have a number of applications including water treatment

9

and aquaculture. Ozone disinfection systems have applications in drinking water, wastewater, process water,
product polishing, bleaching, ozonolysis/synthesis and desodoration. Customers include public utility
wastewater and clean water treatment facilities, power plants, pulp and paper mills, food products
manufacturers and aquaculture facilities.

Leopold — Founded in 1924 in Pittsburgh, PA, Leopold is a leader in rapid gravity media filtration and
clarification solutions for the water and wastewater industry. In Potable Drinking Water treatment plants, the
Clari-DAF system is used to clarify raw water to remove contaminants such as turbidity, algae, color, iron/
manganese, organics, and taste and odor compounds. In public utility wastewater treatment plants, the
ClariVAC system is used in final clarifiers to remove the sludge solids. For those areas where nitrogen and
phosphorus nutrient removal is required, we provide elimi-NITE systems which convert the filters to become
biologically active so that the effluent meets the mandated nitrate and phosphorus levels. In desalination
systems, Leopold Clari-DAF systems and Filterworx systems are provided to remove contaminants that will
harm reverse osmosis membranes, so that salt can be removed from the seawater to make it potable. Primary
customers are public utility water and wastewater systems, as well as desalination plant facilities.

Test

Analytical instrumentation is used across most industries to ensure regulatory requirements are met. Growth in
this market is primarily driven by increasing regulation of water and wastewater in North America, Europe and
Asia. Largely through our 2010 acquisition of Nova Analytics, our served market is predominately focused on
water and the environment for quality levels throughout the water infrastructure loop. Analytical systems are
applied in three primary ways: in the field, in a facility laboratory, or real time, online monitoring in a treatment
facility process. We believe we have a leading position in this served market based on management estimates.
In our Water Infrastructure Segment, Test accounted for approximately 9% of our consolidated net sales in
2011 and 6% of our consolidated net sales in 2010.

WTW — In wastewater treatment facilities, WTW-branded systems monitor parameters such as dissolved
oxygen, pH, and turbidity throughout the water process to ensure regulatory standards are met before water is
discharged back into the environment. Founded in 1945 as a major brand in Europe, WTW has particularly
strong market penetration in the environmental, water and wastewater segments. WTW holds leading market
positions in both field and on-line instrumentation and manufactures premium positioned robust and reliable
analysis products for the measurement of pH, dissolved oxygen, conductivity, total dissolved solids, turbidity,
specific ions and biological oxygen demand. WTW’s product offering includes meters, sensors, data-loggers,
photometers and software providing customers solutions to even the most challenging applications.

AADI — Aanderaa Data Instruments AS (AADI), founded in 1966 and headquartered in Bergen, Norway, offers
sensors, instruments and systems for measuring and monitoring in the most demanding environments such as
rivers, oceans and the polar regions through fully networked systems using wireless technology that monitors
temperature, salinity, oxygen, turbidity, current and waves for ecosystem health. The main market areas are
marine transportation, environmental and ocean research, oil and gas, aquaculture, road and traffic, and
construction. AADI’s new technologies underlie the most advanced distributed instrumentation for underwater
and atmospheric measurements. Hydro-acoustic, electro-optical, electro-chemical, pressure, temperature and
meteorological data are captured by observing networks and self-contained instrumentation using real-time
communication. Key customers include many oceanographic institutes, universities, geophysical surveyors,
navies, offshore oil and gas companies, drilling companies, port and harbor authorities, government agencies,
water authorities and electric power utilities internationally.

OI Analytical — Oceanography International Corporation (OI Analytical) provides innovative products used for
chemical analysis. We develop, manufacture, sell, and service analytical instruments that detect, measure,
analyze, and monitor chemicals in liquids, solids, and gases. OIC was originally focused on oceanography
equipment. This led to OIC’s production of water-quality measurement instrumentation, as oceanography
equipment sales declined. In 1969, O.I. Corporation developed the Company’s first total organic carbon
analyzer. Since that time, the Company has become recognized worldwide as a provider of quality analytical
instrumentation. We also provide products used to digest, extract, and separate components of chemical
mixtures.

10

YSI — Yellow Springs Instrument Company (YSI), founded in 1948, develops and manufactures sensors,
instruments, software and data collection platforms for environmental and coastal water quality monitoring and
testing. YSI also offers Life Sciences products including biochemical analyzers for bioprocess monitoring, food
and beverage processing, and sports physiology. The main market areas are marine transportation,
environmental and ocean research, oil and gas, aquaculture, road and traffic, and construction.

Applied Water

Applied Water encompasses all the uses of water. Since water is used to some degree in almost every aspect
of human, economic and environmental activity, this segment has innumerable applications. Our served market
today consists of the main uses of global water: Building Services, Industrial Water and Irrigation.

Building Services

This business is defined by four main uses of water in building services applications, such as in residential
homes and commercial buildings, including offices, hotels, restaurants and malls. The first is the supply of
potable water for consumption, such as for drinking and hygiene. The Goulds brand is a leader in pumps and
boosting systems utilized within buildings, sourcing water from distribution networks or from wells. The second
application is wastewater removal with sump and sewage pumps. The third application is in heating, ventilation
and air conditioning (HVAC), where Bell & Gossett specializes in pumps and valves that are used in water-
based heating and cooling systems. The fourth water-related building service area is fire protection, where our
AC Fire brand supplies full pump systems for emergency fire suppression. In Europe, Lowara is a leading
brand in the commercial and residential water market with applications in the four main uses of water. We
believe our business is the second largest player in this served market based on management estimates. In
our Applied Water Segment, Building Services accounted for approximately 51% of our consolidated net sales
in 2011 and 55% of our consolidated net sales in 2010.

Industrial Water

Water is used in most industrial facilities to provide processing steps such as cooling, cleaning and mixing. Our
Goulds brand supplies vertical multistage pumps to boost pressure for purposes such as circulating water
through a manufacturing facility to cool machine tools. Our Lowara brand focuses on water treatment, industrial
washing equipment and machine tool cooling. The Standard brand delivers heat exchangers for combined heat
and power (CHP) applications within power generation plants. We also provide niche applications such as
flexible impeller pumps for wine processing facilities served by our Jabsco brand, and water-based detergent
dispensing and water circulation within car washes served by Flojet and Goulds air-operated diaphragm and
end suction pumps. Across all these various end applications, we believe our business is the second largest
player in this served market based on management estimates. In our Applied Water Segment, Industrial Water
accounted for approximately 42% of our consolidated net sales in 2011 and 38% of our consolidated net sales
in 2010.

Irrigation

The irrigation business consists of irrigation-related equipment and services associated with bringing water
from a source to the plant or livestock need, including hoses, sprinklers, center pivot and drip irrigation. We
focus on the pumps and boosting systems that supply this ancillary equipment with water. Our Goulds brand
brings mixed flow pumps, and our Flowtronex group specializes in equipment solutions such as the Hydrovar
boosting system, which incorporates monitoring and controls to optimize energy efficiency in irrigation delivery.
Our Lowara brand also produces pumps for agriculture applications and irrigation of gardens and parks. We
believe we have a leading position in this served market based on management estimates. In our Applied
Water Segment, Irrigation accounted for approximately 7% of our consolidated net sales in 2011 and 2010.

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As described above, the following brands and products are used across the applications in our Applied Water
segment:

Our Brands

Goulds — With origins dating back over 150 years, Goulds is a leading brand of centrifugal and turbine pumps,
controllers, variable frequency drives and accessories for residential and commercial water supply and
wastewater applications. Goulds is a leader in the water technologies market with its line of residential water
well pumps. The Goulds product portfolio includes submersible and line shaft turbine, 4” submersible, jet,
sump, effluent, sewage and centrifugal pumps for residential, agriculture and irrigation, sewage and drainage,
commercial and light industrial use. Goulds submersible, deepwell or other pumps can be found in more than a
quarter of the existing 15 million household wells and more than 380,000 public and community wells in the
United States. Products for commercial wastewater include sewage, effluent and grinder pumps and packages.
Agriculture products include pump and control products for irrigation, stockwater, wash systems, cooling
systems and waste management, with turf irrigation products including submersible and surface pumps for
landscape and turf irrigation systems. We serve the building trades market with filtration, chilling, pressure
boost, wash system, water, supply, wastewater and boiler feed applications. We also have a range of standard
cast iron and bronze end-suction and multistage pumps for various commercial applications.

Lowara — Founded in 1968, and headquartered in Vicenza, Italy, Lowara is a leader in stainless steel pump
manufacturing technology for water technology applications. The Lowara range includes submersible, sump,
effluent, sewage, centrifugal pumps and booster packages for water supply and water pumping needs in the
residential, agriculture, industrial, public utility, building service and commercial markets worldwide, with
particular strength in Europe. Residential applications include pumps for pressurization, conditioning, fire-
fighting systems, lifting stations and dewatering. Agriculture applications include pumps for irrigation of gardens
and parks. Industrial applications include drinking water, water treatment, industrial washing equipment and
machine tool cooling. As an example of how Lowara has served the commercial building services market,
seven Lowara water booster sets are used for even pressure water supply in the world’s tallest building, the
“Burj Khalifa” in the United Arab Emirates.

Bell & Gossett — Founded in 1916 in Chicago, IL, Bell & Gossett has been headquartered in Morton Grove, IL
since 1941. Bell & Gossett, or B&G, is a leader in plumbing and water-based heating and air conditioning
markets. Products are used in residential applications where single- or multi-family homes are heated with hot
water or steam. Key products include circulating pumps, valves, and specialty products used in these systems.
B&G also sells wastewater pumps for residential applications. In commercial applications, B&G provides a
broad range of products, including a wide variety of pumps, heat exchangers, valves and controls for heating
and air-conditioning systems, sump pumps for wastewater systems, condensate pumping systems for steam
heating systems and a comprehensive line of energy-saving variable speed controls. Training is provided for
Building System Design Engineers at B&G’s industry renowned Little Red Schoolhouse in Morton Grove. Key
commercial building types include hospitals, schools, and data centers. B&G products are sold globally by
independent manufacturer representatives and distributed locally by heating, ventilating and air conditioning, or
HVAC, wholesalers. B&G recently sold some of its largest pumps to the new Children’s Memorial Hospital
building in Chicago, IL. These pumps will circulate chilled water throughout the building to provide
air-conditioning for the occupants.

AC Fire — Allis-Chalmers Company was founded in the 1840s in Milwaukee, WI. It offers turnkey fire pump
systems for commercial, residential and industrial applications. We design and custom-build a wide range of
fire pump systems including prefabricated packages and house units that meet every fire protection need. AC
Fire products include In-Line Pumps, Vertical Turbine, Package Systems, Split Case (various series) and 13D
Home Defender for residential fire pump service. The 13D Home Defender is designed to boost water pressure
for automatic residential sprinkler systems. In addition to residential applications, turnkey fire pumping systems
from A-C Pump protect an increasing number of petrochemical facilities, commercial buildings and factories
around the world.

Flowtronex — Flowtronex, founded in 1974 as Pumping Systems, Inc., began by producing some of the golf
industry’s first prefabricated water pumping systems. The Silent Storm package and Pace Integrated Pump

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Controller are our two primary products sold into the golf market. In landscape, Flowtronex products, primarily
the Floboy system, are sold to customers such as cities and nurseries. In golf, Flowtronex products are sold to
golf course superintendents through our Toro Distribution partnership. Retrofit sales of golf pumping systems
are sold through our FlowNet Service Network, a group of factory authorized service technicians that provide
set up and start up and service and repair of Flowtronex pump stations.

Standard — For close to 90 years Standard has been the leader in the design and manufacture of shell and
tube heat exchangers. Standard is the brand of our complete line of heat transfer products used in industrial
and process applications such as heating or cooling liquids or gases, heat recovery in chemical processing,
power and co-generation, paper and pulp, OEM and commercial marine markets. Products include basic
shell-and-tube heat exchangers, air coolers, heat transfer coils, compact brazed, welded, gasketed plate units
and packaged steam condensers.

Jabsco — The Jabsco brand is known for its marine, industrial, and hygienic/sanitary pumps and systems that
are used in many industries, including marine, industrial, healthcare and food processing. It was founded in
1941 by the inventors of the flexible impeller pump. Jabsco is a leader in the leisure marine market, with a
broad range of products including water system, engine cooling pumps, searchlights and marine waste
systems. Jabsco also offers industrial pumps for hygienic applications, fluid transfer in chemical processing,
laboratory, paint processing, plating, and construction. Jabsco rotary lobe pumps offer outstanding
performance with unique capabilities. Jabsco Hy-line and Ultima rotary lobe pumps support food and dairy
product production, healthcare, chemical, pharmaceutical and biotech applications, whether the product is thin,
viscous or fragile. Jabsco also offers multi-purpose and specialized flexible impeller, diaphragm and sliding
vane pumps for chemical and general transfer applications.

Flojet — Established in 1975, the Flojet brand encompasses a broad range of small pumps, motors and
dispensing pumps for the beverage, industrial, RV, marine and food processing markets. Flojet is a leader in
the small pump market, offering a versatile range of products serving the beverage market, including both air-
and motor-operated diaphragm pumps and centrifugal chilling pumps, as well as booster systems and
accumulator tanks. Flojet’s beverage pumps can be found in applications such as beer dispensing, syrup
mixing for carbonated drinks, re-circulation in vending machines and refrigerators, bottled water dispensers,
icemakers and coffee machines. In addition to significant beverage applications, Flojet’s electric and
air-operated diaphragm pumps are utilized in street sweepers, car washes, carpet cleaners, parts washers,
agricultural spraying and road rollers. Flojet’s positive displacement diaphragm pumps can be driven by air,
electric motor or solenoid. The positive displacement diaphragm design of Flojet pumps makes them ideal for
use in conditions that require self-priming and dry running capability for short periods of time. Additionally, the
compact size of these pumps makes them very useful in tight spaces where one cannot ensure a flooded
suction. Flojet pumps are designed to be more efficient and are often the choice of customers for applications
where low power consumption is critical.

Geographic Profile

In addition to the traditional markets of the United States and Western Europe, opportunities in emerging
markets within Asia Pacific, Eastern Europe, Latin America and other countries are growing. Revenue derived
from emerging markets comprised 19% of our revenue in 2011 including growth in Latin America and the
Middle East.

The table below illustrates the annual revenue and long-lived assets, by geographic area, for the three years
ended December 31, 2011.

(in millions)

Revenue
2010

2011

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,363 $ 1,125 $
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,262
343
472

1,422
426
592

2009

956
1,217
269
407

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,803 $ 3,202 $ 2,849

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Property, Plant & Equipment
2009
2010

2011

$ 178
209
57
19

$ 463

$ 168
219
49
18

$ 454

$ 73
196
46
19

$ 334

Percentage of revenue by geographic area

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011

2010

2009

36%
37%
11%
16%

35%
39%
11%
15%

34%
43%
9%
14%

Distribution, Training and End Use

Water Infrastructure provides more than 70% of its sales through direct channels with remaining sales through
indirect channels and service capabilities. Both public utility and industrial facility customers increasingly
require our teams’ global but locally proficient expertise to use our equipment in their specific applications.
Several trends are increasing the need for this application expertise: (i) the increase in type and amount of
contaminants in water supply, (ii) increasing environmental regulations, (iii) the need to increase system
efficiencies due to rising energy costs, and (iv) the retirement of a largely aging water industry workforce not
systematically replaced at utilities.

In the Applied Water segment, many end-use areas are widely different, so specialized distribution partners are
often preferred. Our commercial teams have built long-standing relationships around our brands in many of
these industries through which we can continue to leverage new product and service applications. Revenue
opportunities are balanced between OEM and after-market customers. Our products in the Applied Water
segment are sold through our global direct sales and world-class indirect channels with more than 85% of
revenue going through indirect channels. We have long-standing relationships with the leading independent
distributors in the markets we serve, and we provide incentives to distributors, such as specialized training
programs, to exclusively sell our products.

Aftermarket Parts and Service

We have more than 120 service centers around the world which employ approximately 600 service employees
to provide aftermarket parts and services to our customers. During their lifecycle, installed products require
maintenance, repair services and parts due to the harsh environments in which they operate.

In addition, depending on the type of product, median lifecycles range from 5 years to over 50 years, at which
time they must be replaced. Many of our products are precisely selected and applied within a larger network of
equipment driving a strong preference by customers and installers to replace them with the same exact brand
and model when they reach the end of their lifecycle. This dynamic establishes a large recurring revenue
stream for our business.

Supply and Seasonality

We have a global manufacturing footprint, with production facilities in Europe, North America, Latin America,
and Asia. In addition, we maintain a global network of service centers providing after-market customer care.
Service centers offer an array of integrated service solutions for the industry including: preventive monitoring,
contract maintenance, emergency field service, engineered upgrades, inventory management, and overhauls
for pumps and other rotating equipment.

We offer a wide range of highly engineered products. We primarily employ configure-to-order capabilities to
maximize manufacturing and logistics efficiencies by producing high volumes of basic product configurations.
When we provide a configure-to-order solution, we configure a standard product to our customers’
specifications. To a lesser extent, we provide engineer-to-order products to meet the customization
requirements of our customers. This process requires that we apply our technical expertise and production
capabilities to provide a non-standard solution to the customer.

Our inventory management and distribution practices seek to minimize inventory holding periods by taking
delivery of the inventory and manufacturing immediately prior to the sale or distribution of products to our

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customers. All of our businesses require various parts and raw materials, the availability and prices of which
may fluctuate. Parts and raw materials commonly used in our products include motors, fabricated parts,
castings, bearings, seals, nickel, copper, aluminum, and plastics. While we may recover some cost increases
through operational improvements, we are still exposed to some pricing risk. We attempt to control costs through
fixed-priced contracts with suppliers and various other programs, such as our global strategic sourcing initiative.

Our business relies on third-party suppliers, contract manufacturing and commodity markets to secure raw
materials, parts and components used in our products. We typically acquire materials and components through
a combination of blanket and scheduled purchase orders to support our materials requirements. For most of
our products, we have existing alternate sources of supply, or such sources are readily available.

We may experience price volatility or supply constraints for materials that are not available from multiple
sources. From time to time, we acquire certain inventory in anticipation of supply constraints or enter into
longer-term pricing commitments with vendors to improve the priority, price and availability of supply. There
have been no raw material shortages that have had a significant adverse impact on our business as a whole.

Customers

Our business is not dependent on any single customer or a few customers, the loss of which would have a
material adverse effect on the respective market or on us as a whole. No individual customer accounted for
more than 10% of our consolidated 2011 revenue.

Backlog

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. Total backlog was $651 million at
December 31, 2011 and $620 million at December 31, 2010. We anticipate that in excess of 80% of the
backlog at December 31, 2011 will be recognized as revenue during 2012.

Competition

Given the highly fragmented nature of the water industry, Water Infrastructure competes with a large number of
businesses. Competition in the water transport and treatment technologies markets focuses on product
performance, application expertise, design, quality, delivery, and price. In the sale of products and services, we
benefit from our large installed base of pumps and complementary products, which require maintenance, repair
and replacement parts due to the nature of the products and the conditions under which they operate.
Timeliness of delivery, quality and the proximity of service centers are important customer considerations when
selecting a provider for after-market products and services as well as equipment rentals. In geographic regions
where we are locally positioned to provide a quick response, customers have historically relied on us, rather
than our competitors, for after-market products relating to our highly engineered and customized solutions.

Competition in the Applied Water segment focuses on brand names, application expertise, product delivery
and performance, quality, and price. We compete by offering a wide variety of innovative and high quality
products, coupled with world-class application expertise. We believe our distribution through well-established
channels and our reputation for quality significantly enhance our market position. Our ability to deliver
innovative product offerings has allowed us to compete effectively, to cultivate and maintain customer
relationships and to serve and to expand into many niche and new markets.

Research and Development

Research and development (“R&D”) is a key element of our engineering culture and is generally focused on
the design and development of products and application know-how that anticipate customer needs and
emerging trends. Our engineers are involved in new product development and improvement of existing
products. Our businesses invest substantial resources for R&D. We anticipate we will continue to develop and
invest in our R&D capabilities to promote a steady flow of innovative, high-quality and reliable products and
applications to further strengthen our position in the markets we serve. We invested $100 million, $74 million,
and $63 million for the years ended December 31, 2011, 2010 and 2009, respectively, towards R&D.

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We have over 600 engineering and research employees in more than 40 technology centers around the
world. R&D activities are initially conducted in our technology centers, located in conjunction with some of
our major manufacturing facilities to ensure an efficient development process. We have established a
wastewater Center of Excellence in Stockholm, Sweden, with over 100 research, development and
engineering employees. We have launched Centers of Excellence in India and China, where we are
accelerating the customization of our application expertise to local needs. In the scale-up process, our R&D
activities are conducted at our piloting and testing facilities or at strategic customer sites. These piloting and
testing facilities enable us to serve our strategic markets in each region of the world.

We generally seek patent protection for those inventions and improvements likely to be incorporated into our
products or where proprietary rights will improve our competitive position. We believe that our patents and
applications are important for maintaining the competitive differentiation of our products and improving our
return on research and development investments. While we own, control or license a significant number of
patents, trade secrets, confidential information, trademarks, trade names, copyrights, and other intellectual
property rights which, in the aggregate, are of material importance to our business, management believes
that our business, as a whole, as well as each of our core business segments, is not materially dependent
on any one intellectual property right or related group of such rights.

Patents, patent applications, and license agreements expire or terminate over time by operation of law, in
accordance with their terms or otherwise. As the portfolio of our patents, patent applications, and license
agreements has evolved over time, we do not expect the expiration of any specific patent to have a material
adverse effect on our financial position, results of operations or cash flows.

Environmental Matters and Regulation

Our manufacturing operations worldwide are subject to many requirements under environmental laws. In the
United States, the Environmental Protection Agency and similar state agencies administer laws and
regulations concerning air emissions, water discharges, waste disposal, environmental remediation, and
other aspects of environmental protection. Such environmental laws and regulations in the United States
include, for example, the Federal Clean Air Act, the Clean Water Act, the Resource, Conservation and
Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act.
Environmental requirements significantly affect our operations. We have established an internal program to
address compliance with applicable environmental requirements and, as a result, management believes that
we are in substantial compliance with current environmental regulations.

While environmental laws and regulations are subject to change, such changes can be difficult to predict
reliably and the timing of potential changes is uncertain. Management does not believe, based on current
circumstances, that compliance costs pursuant to such regulations will have a material adverse effect on our
financial position, results of operations or cash flows. However, the effect of future legislative or regulatory
changes could be material to our financial condition or results of operations.

Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, based on current law and
existing technologies. It can be difficult to estimate reliably the final costs of investigation and remediation
due to various factors. Our accrued liabilities for these environmental matters represent the best estimates
related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and
structures, as well as related legal fees based upon the facts and circumstances as currently known to us.
These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and
remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental
expenditures are recorded on an undiscounted basis. We do not anticipate these liabilities will have a
material adverse effect on our consolidated and combined financial position, results of operations or cash
flows. We cannot make assurances that other sites, or new details about sites known to us, that could give
rise to environmental liabilities with such material adverse effects on us will not be identified in the future. At
December 31, 2011, we had estimated and accrued $15 million related to environmental matters.

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Employees

As of December 31, 2011, Xylem had approximately 12,500 employees worldwide. We believe that our
facilities are in favorable labor markets with ready access to adequate numbers of workers, and we believe
our relations with our employees are good.

Available Information

Xylem’s website address is www.xyleminc.com. We make available free of charge on or through
investors.xyleminc.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Information
contained on our website is not incorporated by reference unless specifically stated therein.

In addition, the public may read or copy any materials filed with the SEC at the SEC’s Public Reference
Room located at 100 F Street NE, Washington, D.C. 20549. The public may also obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports and other
information are also available, free of charge, at www.sec.gov.

ITEM 1A. RISK FACTORS

Each of the following risks should be carefully considered, along with all of the other information in this
Annual Report on Form 10-K. We believe these risks to be the principal ones we face and of which we are
currently aware. Some of the risks described below relate to our business, while others relate to the Spin-off.
Other risks relate principally to the securities markets and ownership of our common stock.

Should any of the following risks and uncertainties develop into actual events, our business, financial
condition or results of operations could be materially and adversely affected, the trading price of our
common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Operations

Failure to compete successfully in our markets could adversely affect our business.

We provide products and services into competitive markets. We believe the principal points of competition in
our markets are product performance, reliability and innovation, application expertise, brand reputation,
energy efficiency, product life cycle cost, timeliness of delivery, proximity of service centers, effectiveness of
our distribution channels and price. Maintaining and improving our competitive position will require continued
investment by us in manufacturing, research and development, engineering, marketing, customer service
and support, and our distribution networks. We may not be successful in maintaining our competitive
position. Our competitors may develop products that are superior to our products, or may develop more
efficient or effective methods of providing products and services or may adapt more quickly than we do to
new technologies or evolving customer requirements. Pricing pressures also could cause us to adjust the
prices of certain products to stay competitive. We may not be able to compete successfully with our existing
or new competitors. Failure to continue competing successfully could adversely affect our business, financial
condition, results of operations and cash flow.

Our business could be adversely affected by the inability of suppliers to meet delivery requirements.

Our business relies on third-party suppliers, contract manufacturing and commodity markets to secure raw
materials, parts and components used in our products. Parts and raw materials commonly used in our
products include motors, fabricated parts, castings, bearings, seals, nickel, copper, aluminum, and plastics.
We are exposed to the availability of these materials, which may be subject to curtailment or change due to,
among other things, interruptions in production by suppliers, labor disputes, the impaired financial condition
of a particular supplier, suppliers’ allocations to other purchasers, changes in exchange rates and prevailing
price levels, ability to meet regulatory requirements, weather emergencies or acts of war or terrorism. Any
delay in our suppliers’ abilities to provide us with necessary materials could impair our ability to deliver
products to our customers and, accordingly, could have a material adverse effect on our business, financial
condition, results of operations and cash flow.

17

Our strategy includes acquisitions, and we may not be able to make acquisitions of suitable
candidates or integrate acquisitions successfully.

Our historical growth has included acquisitions. As part of our growth strategy, we plan to pursue the
acquisition of other companies, assets and product lines that either complement or expand our existing
business. We cannot assure you, however, that we will be able to identify suitable candidates successfully,
negotiate appropriate acquisition terms, obtain financing that may be needed to consummate those
acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into our existing
operations or expand into new markets. In addition, we cannot assure you that any acquisition, once
successfully integrated, will perform as planned, be accretive to earnings, or prove to be beneficial to our
operations or cash flow.

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

Our business could be adversely affected by inflation and other manufacturing and operating cost
increases.

Our operating costs are subject to fluctuations, particularly due to changes in commodity prices, raw
materials, energy and related utilities, freight, and cost of labor. In order to remain competitive, we may not
be able to recuperate all or a portion of these higher costs from our customers through product price
increases. Further, our ability to realize financial benefits from Six Sigma and Lean projects may not be able
to mitigate fully or in part these manufacturing and operating cost increases and, as a result, could
negatively impact our profitability.

Changes in our effective tax rates may adversely affect our financial results.

We sell our products in more than 150 countries and approximately 64% of our revenue was generated
outside the United States in 2011. Given the global nature of our business, a number of factors may
increase our future effective tax rates, including:

•

•

•

•

•

our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes;

the jurisdictions in which profits are determined to be earned and taxed;

sustainability of historical income tax rates in the jurisdictions in which we conduct business;

the resolution of issues arising from tax audits with various tax authorities; and

changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation
allowances.

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

Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption
legislation could result in fines, criminal penalties and an adverse effect on our business.

We operate in a number of countries throughout the world, including countries known to have a reputation
for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We
are subject, however, to the risk that we, our affiliated entities or our or their respective officers, directors,
employees and agents may take action determined to be in violation of such anti-corruption laws, including
the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act of 2010 and others. Any such violation
could result in substantial fines, sanctions, civil and/or criminal penalties, and curtailment of operations in
certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In
addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore,
detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant
time and attention of our senior management.

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We may be negatively impacted by litigation and regulatory proceedings.

We are subject to laws, regulations and potential liability relating to claims, complaints and proceedings,
including those related to antitrust, environmental, product, and other matters.

We are subject to various laws, ordinances, regulations and other requirements of government authorities in
foreign countries and in the United States, any violations of which could potentially create a substantial
liability for us, and also could cause harm to our reputation. Changes in laws, ordinances, regulations or
other government policies, the nature, timing, and effect of which are uncertain, may significantly increase
our expenses and liabilities.

From time to time, we are involved in legal proceedings that are incidental to the operation of our
businesses. Some of these proceedings seek remedies relating to environmental matters, intellectual
property matters, product liability and personal injury claims, employment and pension matters, government
contract issues and commercial or contractual disputes, sometimes related to acquisitions or divestitures.
We may become subject to significant claims of which we are currently unaware, or the claims of which we
are aware may result in our incurring a significantly greater liability than we anticipate or can estimate.
Additionally, we may receive fines or penalties or be required to change or cease operations at one or more
facilities if a regulatory agency determines that we have failed to comply with laws, regulations or orders
applicable to our business.

Our business could be adversely affected by interruptions in information technology,
communications networks and operations.

Our business operations rely on information technology and communications networks, and operations that
are vulnerable to damage or disturbance from a variety of sources. Regardless of protection measures,
essentially all systems are susceptible to disruption due to failure, vandalism, computer viruses, security
breaches, natural disasters, power outages and other events. In addition, cybersecurity threats are evolving
and include, among others, malicious software, attempts to gain unauthorized access to data, and other
electronic security breaches that could lead to disruptions in our systems, unauthorized release of
confidential or otherwise protected information and corruption of data. We also have a concentration of
operations on certain sites, e.g. production, and shared services centers, where business interruptions could
cause material damage and costs. Transport of goods from suppliers, and to customers, could also be
hampered for the reasons stated above. Although we have assessed these risks, implemented controls, and
performed business continuity planning, we cannot be sure that interruptions with material adverse effects
will not occur.

Risks Related to Liquidity

Our indebtedness may affect our business and may restrict our operational flexibility.

As of December 31, 2011, our total outstanding indebtedness was $1,206 million including our 3.55%
Senior Notes of $600 million aggregate principal amount due September 2016 and 4.875% Senior Notes of
$600 million aggregate principal amount due October 2021. We have an existing Four Year Competitive
Advance and Revolving Credit Facility (the “Credit Facility”), which provides for an aggregate principal
amount of up to $600 million.

Our indebtedness could:

•

•

•

•

•

increase our vulnerability to general adverse economic and industry conditions;

limit our ability to obtain additional financing or borrow additional funds;

limit our ability to pay future dividends;

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate;

require that a substantial portion of our cash flow from operations be used for the payment of interest
on our indebtedness instead of funding working capital, capital expenditures, acquisitions or other
general corporate purposes; and

19

•

increase the amount of interest expense that we must pay because some of our borrowings are at
variable interest rates, which, as interest rates increase, would result in a higher interest expense.

In addition, there can be no assurance that future borrowings or equity financing will be available to us on
favorable terms or at all for the payment or refinancing of our indebtedness. If we incur additional debt or
raise equity through the issuance of our preferred stock, the terms of the debt or our preferred stock issued
may give the holders rights, preferences and privileges senior to those of holders of our common stock,
particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent
restrictions on our operations than we currently have. Also, regardless of the terms of our debt or equity
financing, the amount of our stock that we can issue may be limited because the issuance of our stock may
cause the distribution to be a taxable event for ITT under Section 355(e) of the Internal Revenue Code of
1986, as amended (the “Code”), and under the Tax Matters Agreement entered into by ITT in connection
with the Spin-off (the “Tax Matters Agreement”), we could be required to indemnify ITT for that tax.

Our ability to make scheduled principal payments of, to pay interest on, or to refinance our indebtedness
and to satisfy our other debt obligations will depend on our future operating performance, which may be
affected by factors beyond our control. If we are unable to service our indebtedness, our business, financial
condition and results of operations would be materially adversely affected.

Risks Related to External Factors

Our results of operations and financial condition may be adversely affected by global economic and
financial market conditions.

We compete around the world in various geographic and product markets. In 2011, 37% and 36% of our
total revenue was from customers located in Europe and the United States, respectively. We expect
revenue from these markets to be significant for the foreseeable future. Important factors impacting our
businesses include the overall strength of these economies and our customers’ confidence in both local and
global macro-economic conditions; industrial and federal, state, local and municipal governmental spending;
the strength of the residential and commercial real estate markets; interest rates; availability of commercial
financing for our customers and end-users; and unemployment rates. A slowdown or downturn in these
financial or macro-economic conditions could have a significant adverse effect on our business, financial
condition, results of operations and cash flow.

We have experienced and expect to continue to experience fluctuations in revenues and operating results
due to economic and business cycles, particularly within the portion of our business that provides products
and services used in residential and commercial buildings. We believe our level of business activity is
influenced by residential and commercial building starts and renovations, which are heavily influenced by
interest rates, consumer debt levels, changes in disposable income, employment growth and consumer
confidence. Credit market conditions greatly affect the ability of residential and commercial builders to obtain
the necessary capital to complete and begin new projects. We closely monitor the credit worthiness of our
customers, and evaluate their financial ability to pay for those products and services we provide to them. As
it relates to our customers’ ability to pay for products and services, we have not experienced any significant
negative impact as a result of the recent economic downturn. If market conditions worsen, it may result in
the delay or cancellation of orders from our customers or potential customers and adversely affect our
revenues and our ability to manage inventory levels, collect customer receivables and maintain current
levels of profitability.

Economic and other risks associated with international sales and operations could adversely affect
our business.

In 2011, 64% of our total revenue was from customers outside the United States. We expect our
international operations and export sales to continue to be a significant portion of our revenue. Both our
sales from international operations and export sales are subject in varying degrees to risks inherent to doing
business outside the United States. These risks include the following:

•

•

possibility of unfavorable circumstances arising from host country laws or regulations;

currency exchange rate fluctuations and restrictions on currency repatriation;

20

•

•

•

•

potential negative consequences from changes to taxation policies;

disruption of operations from labor and political disturbances;

changes in tariff and trade barriers and import and export licensing requirements; and

insurrection or war.

Any payment of distributions, loans or advances to us by our foreign subsidiaries could be subject to
restrictions on, or taxation of, dividends on repatriation of earnings under applicable local law, monetary
transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries
operate. In addition to the general risks that we face outside the United States, we now conduct more of our
operations in emerging markets than we have in the past, which could involve additional uncertainties for us,
including risks that governments may impose limitations on our ability to repatriate funds; governments may
impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes
may increase; an outbreak or escalation of any insurrection or armed conflict may occur; governments may
seek to nationalize our assets; or governments may impose or increase investment barriers or other restrictions
affecting our business. In addition, emerging markets pose other uncertainties, including the protection of our
intellectual property, pressure on the pricing of our products, and risks of political instability. We cannot predict
the impact such future, largely unforeseeable events might have on our business, financial condition, results of
operations and cash flow.

Our business could be adversely affected by significant movements in foreign currency exchange rates.

We are exposed to fluctuations in foreign currency exchange rates, particularly with respect to the Euro,
Swedish Krona, British Pound, Australian Dollar, Canadian Dollar, Polish Zloty, and Hungarian Forint. Any
significant change in the value of currencies of the countries in which we do business relative to the value of
the U.S. Dollar could affect our ability to sell products competitively and control our cost structure, which could
have a material adverse effect on our business, financial condition, results of operations and cash flow.

The level of returns on postretirement benefit plan assets, changes in interest rates and other factors
could affect our earnings and cash flows in future periods.

Certain members of our current and retired employee population are covered by pension and other employee-
related defined benefit plans (collectively, postretirement benefit plans). We may experience significant
fluctuations in costs related to our postretirement benefit plans as a result of macro-economic factors, such as
interest rates, that are beyond our control. The cost of our postretirement plans is incurred over long periods of
time and involves factors and uncertainties during those periods which can be volatile and unpredictable,
including rates of return on postretirement benefit plan assets, discount rates used to calculate liabilities and
expenses and rates of future compensation increases. Management develops each assumption using relevant
plan and Company experience and expectations in conjunction with market-related data. Our liquidity, financial
position (including shareholders’ equity) and results of operations could be materially affected by significant
changes in key economic indicators, actuarial experience, financial market volatility, future legislation and other
governmental regulatory actions.

We make contributions to fund our postretirement benefit plans when considered necessary or advantageous
to do so. The macro-economic factors discussed above, including the return on postretirement benefit plan
assets and the minimum funding requirements established by local government funding or taxing authorities, or
established by other agreement, may influence future funding requirements. A significant decline in the fair
value of our plan assets, or other adverse changes to our overall pension and other employee-related benefit
plans, could require us to make significant funding contributions and affect cash flows in future periods.

Weather conditions may adversely affect our financial results.

Weather conditions, particularly heavy flooding and droughts, can benefit portions of our business which
provide equipment with dewatering and irrigation applications. Pumps provided through our Godwin brand are
used to remove excess or unwanted water. Heavy flooding due to weather conditions drives increased demand

21

for these applications. Drought conditions drive higher demand for pumps used in agricultural and turf irrigation
applications, such as those provided by our Goulds, Flowtronex and Lowara brands. We cannot assure you
that weather conditions will not have a material adverse effect on our results of operations.

Unforeseen environmental issues could impact our financial position, results of operations, or cash
flows.

Our operations are subject to and affected by many federal, state, local and foreign environmental laws and
regulations. In addition, we could be affected by future environmental laws or regulations, including, for
example, those imposed in response to climate change concerns. Compliance with current and future
environmental laws and regulations currently requires and is expected to continue to require operating and
capital expenditures.

Environmental laws and regulations may authorize substantial fines and criminal sanctions as well as facility
shutdowns to address violations, and may require the installation of costly pollution control equipment or
operational changes to limit emissions or discharges. We also incur, and expect to continue to incur, costs to
comply with current environmental laws and regulations related to remediation of conditions in the
environment.

Developments such as the adoption of new environmental laws and regulations, stricter enforcement of
existing laws and regulations, violations by us of such laws and regulations, discovery of previously unknown
or more extensive contamination, litigation involving environmental impacts, our inability to recover costs
associated with any such developments, or financial insolvency of other responsible parties could in the future
have a material adverse effect on our financial position, results of operations, or cash flows.

Risks Related to our Recent Separation

If the Spin-off were to fail to qualify as a tax-free transaction under the Internal Revenue Code, then we
and/or our former parent and our stockholders could be subject to significant tax liability.

In connection with the Spin-off, we and our former parent, ITT Corporation, received an IRS ruling (the “IRS
Ruling”) stating that ITT and its shareholders will not recognize any taxable income, gain or loss for U.S.
Federal income tax purposes as a result of the Spin-off. In addition, ITT received an opinion of tax counsel as
to the satisfaction of certain requirements necessary for the Spin-off to receive tax-free treatment upon which
the IRS did not rule. The IRS Ruling, while generally binding upon the IRS, was based on certain factual
statements and representations. If any such factual statements or representations were incomplete or untrue in
any material respect, or if the facts on which the IRS Ruling were based were materially different from the facts
at the time of the Spin-off, the IRS could modify or revoke the IRS Ruling retroactively.

As discussed above, certain requirements for tax-free treatment that are not covered in the IRS Ruling were
addressed in the opinion of counsel. The opinion of counsel is not binding on the IRS. Accordingly, the IRS
may reach conclusions with respect to the Spin-off that are different from the conclusions reached in the
opinion. Like the IRS Ruling, the opinion was based on certain factual statements and representations, which,
if incomplete or untrue in any material respect, could alter counsel’s conclusions.

If all or a portion of the Spin-off does not qualify as a tax-free transaction because any of the factual statements
or representations in the IRS Ruling or the legal opinion are incomplete or untrue, or because the facts upon
which the IRS Ruling is based were materially different from the facts at the time of the Spin-off, ITT would
recognize a substantial gain for U.S. Federal income tax purposes. In such case, under U.S. Treasury
regulations each member of the ITT consolidated group at the time of the Spin-off (including us and our
subsidiaries), would be jointly and severally liable for the entire amount of any resulting U.S. Federal income
tax liability.

Notwithstanding the foregoing, the Spin-off will be taxable to ITT (but not to ITT shareholders) pursuant to
Section 355(e) of the Internal Revenue Code if there are one or more acquisitions (including issuances) of the
stock of either us or ITT, representing 50% or more, measured by vote or value, of the then-outstanding stock

22

of either corporation and the acquisition or acquisitions are deemed to be part of a plan or series of related
transactions that include the Spin-off. Any acquisition of our common stock within two years before or after the
Spin-off (with exceptions, including public trading by less-than-5% shareholders and certain compensatory
stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. The
tax liability resulting from the application of Section 355(e) would be substantial. In addition, under U.S.
Treasury regulations, each member of the ITT consolidated group at the time of the Spin-off (including us and
our subsidiaries) would be severally liable for the resulting U.S. Federal income tax liability.

We have agreed not to enter into any transaction that could cause any portion of the Spin-off to be taxable to
ITT, including under Section 355(e). Pursuant to the Tax Matters Agreement, dated as of October 25, 2011
among ITT, Exelis and Xylem, we have also agreed to indemnify ITT and Exelis for any tax liabilities resulting
from such transactions, and ITT and Exelis have agreed to indemnify us for any tax liabilities resulting from
such transactions entered into by ITT or Exelis. These obligations may discourage, delay or prevent a change
of control of our Company.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-off.

As an independent, publicly traded company, we believe that our business will benefit from, among other
things, (i) greater strategic focus of financial resources and management’s efforts, (ii) enhanced customer
focus, (iii) direct and differentiated access to capital resources, (iv) enhanced investor choices by offering
investment opportunities in a separate entity from ITT, (v) improved management incentive tools, and
(vi) utilization of stock as an acquisition currency. However, as a result of separating from ITT, we may be more
susceptible to market fluctuations and other adverse events than we would have been as a part of ITT. In
addition, we may not be able to achieve some or all of the benefits that we expect to achieve as an
independent company in the time we expect, if at all.

We may incur greater costs as an independent company than we did when we were part of ITT.

As a part of ITT, we had the advantage of ITT’s size and purchasing power in procuring certain goods and
services such as insurance and health care benefits, and technology such as computer software licenses. We
also relied on ITT to provide various corporate functions. As a separate, independent entity, we may be unable
to obtain these goods, services and technologies at prices or on terms as favorable to us as those we obtained
prior to the distribution. We may also incur costs for functions previously performed by ITT that are higher than
the amounts reflected in our historical financial statements, which may cause our profitability to decrease.

We do not have a recent operating history as an independent company and our historical financial
information may not be a reliable indicator of our future results.

The historical financial information we have included in this Annual Report has been prepared on a “carve-out”
basis from ITT’s consolidated financial statements and does not necessarily reflect what our financial position,
results of operations and cash flows would have been as a separate, stand-alone entity during the periods
presented. ITT did not account for us, and we were not operated, as a single stand-alone entity or segment for
all the periods presented. In addition, the historical information is not necessarily indicative of what our results
of operations, financial position and cash flows will be in the future. While we were profitable as part of ITT, we
cannot assume that as a stand-alone company our profits will continue at a similar level.

Our customers, prospective customers and suppliers will need assurances that our financial stability
on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business
with them.

Some of our customers, prospective customers, and suppliers will need assurances that our financial stability
on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with
them. If our customers, prospective customers or suppliers are not satisfied with our financial stability, it could
have a material adverse effect on our ability to bid for and obtain or retain projects, our business, financial
condition or results of operations.

23

Our accounting and other management systems and resources may not be adequately prepared to
meet the financial reporting and other requirements to which we are subject as a new independent,
publicly traded company.

Our financial results previously were included within the consolidated results of ITT, and we believe that our
financial reporting and internal controls were appropriate for those of subsidiaries of a public company.
However, we were not directly subject to the reporting and other requirements of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). As an independent, publicly traded company, we are subject to
reporting and other obligations under the Exchange Act. Beginning with our Annual Report on Form 10-K for
the year ending December 31, 2012, we will be required to comply with Section 404 of the Sarbanes-Oxley Act
of 2002 (the “Sarbanes-Oxley Act”), which will require annual management assessments of the effectiveness
of our internal control over financial reporting and a report by our independent registered public accounting firm
addressing these assessments. These reporting and other obligations may place significant demands on our
management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and
financial condition. Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls
and procedures and internal controls over financial reporting. We expect to incur additional annual expenses
for the purpose of addressing these requirements, and those expenses may be significant. If we are unable to
upgrade our financial and management controls, reporting systems, information technology systems and
procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and
other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve
and maintain effective internal controls could have a material adverse effect on our financial condition, results
of operations or cash flows.

The Spin-off may expose us to potential liabilities arising out of state and federal fraudulent
conveyance laws and legal distribution requirements.

The Spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid
creditor or an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a
bankruptcy) could claim that the Spin-off left us, ITT and/or Exelis insolvent or with unreasonably small capital
or that we, ITT and/or Exelis intended or believed it would incur debts beyond its ability to pay as they mature
and that ITT did not receive fair consideration or reasonably equivalent value in the Spin-off. If a court were to
agree with such a plaintiff, then such court could void the Spin-off as a fraudulent transfer and could impose a
number of different remedies, which could adversely affect our financial condition and our results of operations.
Among other things, the court could require the return of assets or our shares to ITT, voiding the liens of Xylem
and claims against ITT, or providing ITT with a claim for money damages against us.

The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which
jurisdiction’s law is applied. Generally, however, an entity would be considered insolvent if either the fair
saleable value of its assets is less than the amount of its liabilities (including the probable amount of contingent
liabilities), or it is unlikely to be able to pay its liabilities as they become due. No assurance can be given as to
what standard a court would apply to determine insolvency or that a court would determine that we, ITT or
Exelis were solvent at the time of or after giving effect to the Spin-off.

The Spin-off could also be challenged under state corporate distribution statutes. Under the Indiana Business
Corporation Law, a corporation may not make distributions to its shareholders if, after giving effect to the
distribution, (i) the corporation would not be able to pay its debts as they become due in the usual course of
business; or (ii) the corporation’s total assets would be less than the sum of its total liabilities. No assurance
can be given that a court will not later determine that the distribution of our shares in connection with the
Spin-off was unlawful.

Under the Distribution Agreement, from and after the Spin-off, we will be responsible for the debts, liabilities
and other obligations related to the business or businesses which we own and operate following the
consummation of the Spin-off. Although we do not expect to be liable for any of these or other obligations not
expressly assumed by us pursuant to the Distribution Agreement, it is possible that we could be required to
assume responsibility for certain obligations retained by ITT or Exelis should ITT or Exelis fail to pay or perform
its retained obligations (for example, tax, asbestos and/or environmental liabilities).

24

In connection with our separation, ITT and Exelis will indemnify us for certain liabilities and we will
indemnify ITT or Exelis for certain liabilities. If we are required to indemnify ITT or Exelis, we may need
to divert cash to meet those obligations and our financial results could be negatively impacted. In the
case of ITT’s or Exelis’s indemnity, there can be no assurance that those indemnities will be sufficient
to insure us against the full amount of such liabilities, or as to ITT’s or Exelis’s ability to satisfy its
indemnification obligations in the future.

Pursuant to the Distribution Agreement and certain other agreements with ITT and Exelis, ITT and Exelis
agreed to indemnify us from certain liabilities, and we agreed to indemnify ITT and Exelis for certain liabilities.
Indemnities that we may be required to provide ITT and Exelis may be significant and could negatively impact
our business, particularly indemnities relating to our actions that could impact the tax-free nature of the Spin-
off. Third parties could also seek to hold us responsible for any of the liabilities that ITT or Exelis has agreed to
retain. Further, there can be no assurance that the indemnities from ITT and Exelis will be sufficient to protect
us against the full amount of such liabilities, or that ITT and Exelis will be able to fully satisfy its indemnification
obligations. Moreover, even if we ultimately succeed in recovering from ITT and Exelis any amounts for which
we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could
negatively affect our business, results of operations and financial condition.

Risks Relating to Our Common Stock

You face the following risks in connection with ownership of our common stock:

There is not a long market history for our common stock and the market price of our common stock
may fluctuate significantly.

We cannot predict the prices at which our common stock may trade. The market price of our common stock
may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

actual or anticipated fluctuations in our operating results due to factors related to our business;

success or failure of our business strategy;

our quarterly or annual earnings, or those of other companies in our industry;

our ability to obtain financing as needed;

announcements by us or our competitors of significant new business awards;

announcements by us or our competitors of significant acquisitions or dispositions;

changes in accounting standards, policies, guidance, interpretations or principles;

changes in earnings estimates by securities analysts or our ability to meet those estimates;

the operating and stock price performance of other comparable companies;

natural or environmental disasters that investors believe may affect us;

overall market fluctuations;

fluctuations in the budgets of federal, state and local governmental entities around the world;

results from any material litigation or government investigation;

changes in laws and regulations affecting our business; and

general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating
performance of a particular company. These broad market fluctuations could adversely affect the trading price
of our common stock.

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We cannot assure you that we will pay dividends on our common stock, and our indebtedness could
limit our ability to pay dividends on our common stock.

The timing, declaration, amount and payment of future dividends to our shareholders fall within the discretion of
our Board of Directors and will depend on many factors, including our financial condition, results of operations
and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business
considerations that our Board of Directors considers relevant. There can be no assurance that we will pay a
dividend in the future or continue to pay dividends.

Additionally, if we cannot generate sufficient cash flow from operations to meet our debt-payment obligations,
then our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be
required to attempt to restructure or refinance our debt, raise additional capital or take other actions such as
selling assets, reducing or delaying capital expenditures or reducing our dividend. There can be no assurance,
however, that any such actions could be effected on satisfactory terms, if at all, or would be permitted by the
terms of our debt or our other credit and contractual arrangements.

Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a
change in control.

Certain provisions of our amended and restated articles of incorporation and our amended and restated
by-laws may delay or prevent a merger or acquisition that a shareholder may consider favorable. For example,
the amended and restated articles of incorporation and the amended and restated by-laws, among other
things, provide for a classified board and require advance notice for shareholder proposals and nominations,
do not permit shareholders to convene special meetings and do not permit action by written consent of the
shareholders. In addition, the amended and restated articles of incorporation authorize our Board of Directors
to issue one or more series of preferred stock. These provisions may also discourage acquisition proposals or
delay or prevent a change in control, which could harm our stock price. Indiana law also imposes some
restrictions on mergers and other business combinations between any holder of 10% or more of our
outstanding common stock and us, as well as certain restrictions on the voting rights of “control shares” of an
“issuing public corporation.”

Under the Tax Matters Agreement, we have agreed not to enter into any transaction involving an acquisition
(including issuance) of Xylem common stock or any other transaction (or, to the extent we have the right to
prohibit it, to permit any such transaction) that could cause the Spin-off to be taxable to ITT. We have also
agreed to indemnify ITT for any tax resulting from any such transactions. Generally, ITT will recognize taxable
gain on the Spin-off if there are one or more acquisitions (including issuances) of our capital stock, directly or
indirectly, representing 50% or more, measured by vote or value, of our then-outstanding capital stock, and the
acquisitions or issuances are deemed to be part of a plan or series of related transactions that include the
Spin-off. Any such shares of our common stock acquired, directly or indirectly, within two years before or after
the Spin-off (with exceptions, including public trading by less-than-5% shareholders and certain compensatory
stock issuances) will generally be presumed to be part of such a plan unless that presumption is rebutted. As a
result, our obligations may discourage, delay or prevent a change of control of our company.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

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ITEM 2.

PROPERTIES

We have over 320 locations in over 40 countries. These properties total approximately 8.5 million square feet,
of which over 280 locations, or approximately 4.9 million square feet, are leased. We consider the many
offices, plants, warehouses, and other properties that we own or lease to be in good condition and generally
suitable for the purposes for which they are used. The following table shows the significant locations by
segment.

Location

Emmaboda
Shenyang
Stockholm

Morton Grove
Montecchio
Nogales
Auburn
Lubbock
Cheektowaga

State or
Country

Principal Business Activity

Water Infrastructure

Approx.
Square
Feet

Owned or
Expiration
Date
of Lease

Sweden Administration and Manufacturing
China Manufacturing
Sweden Administration and Research and Development

1,156,000 Owned
394,000 Owned
2019
172,000

Applied Water

Illinois
Italy

Administration and Manufacturing
Manufacturing
Mexico Manufacturing
Manufacturing
Manufacturing
Manufacturing

NY
TX
NY

530,000 Owned
379,000 Owned
2013
358,000
298,000 Owned
229,000 Owned
200,000 Owned

Corporate Headquarters

White Plains

NY

Administration

46,000

2013

Our corporate headquarters is currently located at 1133 Westchester Avenue, Suite N200, White Plains, New
York. We are currently located in the same building as our former parent, ITT, but occupy an independent
space on separate floors with each company having its own entrance, security and maintenance systems. We
have agreed to lease this space directly from the third-party building owner at market rates for a two-year
period through 2013.

ITEM 3.

LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses.
Some of these proceedings seek remedies relating to environmental matters, intellectual property matters,
product liability and personal injury claims, employment and pension matters, government contract issues and
commercial or contractual disputes, sometimes related to acquisitions or divestitures. Although we cannot
predict the outcome of these and other proceedings, including the cases below, with certainty, we believe that
they will not have a material adverse effect on our consolidated financial position, results of operations or cash
flows.

On December 20, 2011, the Ad Hoc Committee of ITT Bondholders filed a Complaint in New York State court
alleging that ITT breached the early redemption provisions of certain bonds issued in 2009. In 2009, ITT issued
$500 million in bonds with a 10-year maturity date in 2019 and an interest rate of 6.125%. The documents
governing the bonds contained certain provisions governing early redemptions. On September 20, 2011, ITT
notified the holders of the debt that it intended to redeem the bonds on October 20, 2011 in accordance with
the terms of the governing documents. On October 18, 2011, the redemption price was disclosed. The
Plaintiffs contend that ITT used an inappropriate discount rate in calculating the redemption price and
otherwise failed to comply with required redemption procedures. If the plaintiffs’ claims are sustained, ITT could
have to pay over $5 million in additional redemption fees and interest. Costs associated with this matter, if any,
are shared with the Company and Exelis, in accordance with the Distribution Agreement.

On October 26, 2011, the Company and ITT filed a declaratory judgment action against Xylem Group LLC in
the U.S. District Court for the Northern District of Georgia, seeking a declaration of non-infringement regarding
the Company’s use of the name Xylem. The suit was filed in response to a letter received in July 2011 from
Xylem Group LLC, a supplier of bath furniture and fixtures, demanding that the Company cease and desist

27

using the “XYLEM” mark worldwide for its water treatment business. The Company seeks an order declaring its
use of “XYLEM” does not infringe upon Xylem Group LLC’s trademark rights, and Xylem Group LLC, in its
counterclaim, seeks an order enjoining the Company from further use of the “XYLEM” mark in certain markets
and unspecified monetary damages.

On or about February 17, 2009, following a statement submitted to the Spanish Competition Authority
(Comision Nacional de la Competencia, “CNC”) by Grupo Industrial Ercole Marelli, S.A. regarding a cartel in
which it said it had been participating, the CNC conducted an investigation at the offices of ITT Water &
Wastewater Espana S.A. (now named Xylem Water Solutions Espana S.A.) and the offices of other members
of the Spanish Association of Fluid Pump Manufacturers. On September 16, 2009, the Investigations Division
of the CNC commenced formal proceedings for alleged restrictive practices, such as agreement on general
terms and conditions of sale, prohibited under applicable law. Following the conclusion of the formal
proceedings, the CNC Council imposed fines on nineteen Spanish manufacturers and distributors of fluid
pumps, including a fine of Euro 2,373,675 applied to ITT Water & Wastewater Espana S.A. and ITT
Corporation. The Company has appealed the findings to the court, Audiencia Nacional, and is vigorously
defending the case.

ITEM 4.

MINE SAFETY DISCLOSURES

Pursuant to the reporting requirements under Section 1503(a) of the Dodd-Frank Act, the Company is
providing the following information: one facility owned and operated by Xylem Water Solutions Zelienople LLC
(f/k/a ITT Water and Wastewater Leopold, Inc.) is regulated by the Federal Mine Health and Safety Act
(MHSA). This facility is a coal processing facility located in Watsontown, Pennsylvania. In December 2010, the
Watsontown facility was inspected by the MHSA and was issued a minor citation. Corrective actions have been
taken and this citation was terminated by the MHSA inspector in March 31, 2011.

28

EXECUTIVE OFFICERS OF THE REGISTRANT

The following information is provided regarding the executive officers of Xylem. Each of the executive officers
was elected to his or her position by the Company’s Board of Directors in connection with the Spin-off.

NAME
Gretchen W. McClain . . . . . 49 President and Chief Executive

AGE CURRENT TITLE

Officer

PREVIOUS BUSINESS EXPERIENCE
President, ITT Fluid and Motion
Control

Michael T. Speetzen . . . . . 42 Senior VP and Chief Financial Officer VP of Finance, ITT Fluid and Motion

Frank R. Jimenez . . . . . . . . 47 Senior VP, General Counsel and

Corporate Secretary
Angela A. Buonocore . . . . . 54 Senior VP and Chief

Communications Officer

Kenneth Napolitano . . . . . . 50 Senior VP and President, Residential

and Commercial Water

Michael L. Kuchenbrod . . . 47 Senior VP and President, Water

Solutions

Christopher R. McIntire . . . 48 Senior VP and President, Analytics

Robyn T. Mingle . . . . . . . . . 46 Senior VP and Chief Human

Resources Officer

Colin R. Sabol . . . . . . . . . . . 44 Senior VP and Chief Strategy and

Growth Officer

Robert E. Wolpert . . . . . . . . 53 Senior VP, and President, Flow

Control and China/India

Control
VP and General Counsel, ITT

Senior VP and Chief
Communications Officer, ITT
President, ITT Industrial Process
Business
President, ITT China Operations

President and Chief Operating
Officer, Nova Analytics
Senior VP of Human Resources,
Hovnanian Enterprises, Inc.
VP of Marketing and Business
Development, ITT Fluid and Motion
Control
VP and General Manager, ITT
Interconnect Solutions

29

PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades publicly on the New York Stock Exchange under the trading symbol “XYL.” The
following table shows the high and low sales prices per share of our common stock as reported by the New
York Stock Exchange and the dividends declared per share for the periods indicated. Data is provided only for
the fourth quarter of 2011 because Xylem became a publicly traded company on November 1, 2011.

Fiscal Year ended December 31, 2011
NA
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NA
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28.28 $22.67

NA
NA
NA

NA
NA
NA
$0.10

High

Low

Dividend

The closing price of our common stock on the NYSE on January 31, 2012 was $25.91 per share. As of
January 31, 2012, there were 18,680 holders of record of our common stock.

Dividends are declared and paid on the common stock at the discretion of our Board of Directors and depend
on our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by
our board. Therefore, there can be no assurance as to what level of dividends, if any, will be paid in the future.
In the first quarter of 2012, we declared a dividend of $0.1012 per share for shareholders of record on March 5,
2012.

There have been no unregistered offerings nor any repurchases of our common stock during the fourth quarter
of 2011.

30

PERFORMANCE GRAPH

CUMULATIVE TOTAL RETURN

The following graph compares the relative performance of our common stock, the S&P 500 Index and the S&P
500 Industrials Index. This graph covers the period from October 13, 2011 (the first day our common stock
began “when-issued” trading on the NYSE) through December 31, 2011. Our common stock began “regular-
way” trading in connection with the Spin-off on November 1, 2011.

$112
$110
$108
$106
$104
$102
$100
$98
$96
$94
$92

10/13/11

10/31/11

11/30/11

12/31/11

Xylem Inc.

S&P 500

S&P 500 Industrials Index

October 13, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

XYL

100
110
99
106

S&P 500

100
104
104
105

S&P 1500
Industrials
Index

100
106
107
108

The graph is not, and is not intended to be, indicative of future performance of our common stock.

This performance graph shall not be deemed “filed” with the SEC or subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934, and should not be deemed incorporated by reference into any of our prior or
subsequent filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be
expressly set forth by specific reference in such filing.

31

ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the five years ended December 31, 2011.
This selected consolidated financial data should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto.

Results of Operations Data:

Year Ended
December 31,
2009

2010 (2)

2011 (3)

2008

2007

(Dollars in millions, except per share data)

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,803 $ 3,202 $ 2,849 $ 3,291 $ 3,068
Gross profit
1,057

1,037

1,214

1,141

1,461

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38.4% 37.9% 36.4% 34.7% 34.5%
395
276
9.7%
10.4% 12.1%
279
263

315
9.6%
224

288
9.4%
219

329

388

Per Share Data:

Earnings per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.51 $ 1.78 $ 1.42 $ 1.22 $ 1.19
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.50
1.19
1.42
Basic shares outstanding (1) . . . . . . . . . . . . . . . . . . .
185.1
184.6
184.6
Diluted shares outstanding (1) . . . . . . . . . . . . . . . . . .
185.3
184.6
184.6
Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . $ 0.1012
—
—

1.78
184.6
184.6
—

1.22
184.6
184.6
—

Balance Sheet Data (at period end):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

318 $
860
4,393
1,206

131 $
770
3,735
4

81 $

81 $

622
2,535
4

652
2,530
5

104
767
2,832
6

(1) On October 31, 2011, the Spin-off was completed through a tax-free stock dividend to ITT’s shareholders.

ITT shareholders received one share of Xylem common stock for each share of ITT common stock. As a
result on October 31, 2011, we had 184.6 million shares of common stock outstanding and this share
amount is being utilized to calculate earnings per share and diluted earnings per share for all prior periods
presented.

(2)

In 2010, we acquired Godwin Pumps of America, Inc. and Nova Analytics Corporation. These businesses
in the aggregate contributed 2010 revenue of $247 million and $1,070 million of total assets, respectively,
on date of acquisition.

(3)

In 2011, we acquired YSI Incorporated, which contributed $371 million of total assets.

32

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the
notes thereto. This discussion summarizes the significant factors affecting our results of operations and the
financial condition of our business during each of the fiscal years in the three year period ended December 31,
2011. Except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and
“the Company” refer to Xylem Inc. and its subsidiaries. References in the consolidated and combined financial
statements to “ITT” or “parent” refer to ITT Corporation and its consolidated subsidiaries (other than Xylem
Inc.).

On and prior to October 31, 2011, our financial position, results of operations and cash flows consisted of the
water equipment and services businesses of ITT Corporation (“WaterCo”) and have been derived from ITT’s
historical accounting records and are presented on a carve-out basis through our Distribution Date, while our
financial results for Xylem post Spin-off are prepared on a stand-alone basis. In addition, financial information
for the twelve months ended December 31, 2011 consists of the consolidated results of Xylem on a stand-
alone basis for the two months of November and December and the combined results of operations of
WaterCo for ten months on a carve-out basis. The twelve months ended December 31, 2010 and 2009 consist
entirely of the combined results of WaterCo on a carve-out basis.

Overview

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 two segments, Water
Infrastructure and Applied Water. The Water Infrastructure segment focuses on the transportation, treatment
and testing of water, offering a range of products including water and wastewater pumps, treatment and testing
equipment, and controls and systems. The Applied Water segment encompasses all the uses of water and
focuses on the residential, commercial, industrial and agricultural markets. The segment’s major products
include pumps, valves, heat exchangers, controls and dispensing equipment. Xylem Inc. (f/k/a ITT WCO, Inc.)
was incorporated in Indiana on May 4, 2011. The name of the Company was changed from ITT WCO, Inc. to
Xylem Inc. on July 14, 2011.

Our business focuses on providing technology-intensive equipment and services. We sell our equipment and
services via direct and indirect channels that serve the needs of each customer type. On the utility side, we
provide over 70% direct sales with strong application expertise, with the remaining amount going through
distribution partners. To end users of water, we provide over 85% of our sales through long-standing
relationships with the world’s leading distributors, with the remainder going direct to customers. The total
market opportunity for this Equipment and Services portion of the water industry supply chain is estimated at
$280 billion.

Our product and service offerings are organized into two segments: Water Infrastructure and Applied Water.
Our segments are aligned with each of the sectors in the cycle of water, supply infrastructure and usage
applications.

• Water Infrastructure serves the supply infrastructure sector with pump systems that transport water from
aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment,
making the water fit to use; and providing pump lift stations that move the wastewater to treatment facilities
where our mixers, biological treatment, monitoring, and control systems provide the primary functions in
the treatment process.

•

Applied Water serves the usage applications sector with boosting systems for farming irrigation, pumps for
dairy operations, and rainwater reuse systems for small scale crop and turf irrigation. In addition, our
pumps, heat exchangers, valves and controls provide cooling to power plants and manufacturing facilities,
as well as circulation for food and beverage processing.

33

Separation from ITT Corporation (“ITT”)

On October 31, 2011, ITT Corporation completed the previously announced Spin-off (the “Spin-off”) of Xylem,
formerly ITT’s water equipment and services businesses. Effective as of 12:01 a.m., Eastern time on
October 31, 2011 (the “Distribution Date”), the common stock of Xylem was distributed, on a pro rata basis, to
ITT’s shareholders of record as of the close of business on October 17, 2011 (the “Record Date”). On the
Distribution Date, each of the shareholders of ITT received one share of Xylem common stock for every one
share of common stock of ITT held on the Record Date. The Spin-off was completed pursuant to the
Distribution Agreement, dated as of October 25, 2011, among ITT, Exelis Inc. and Xylem. After the Distribution
Date, ITT does not beneficially own any shares of Xylem common stock and, following such date, financial
results of Xylem will not be consolidated in ITT’s financial reporting. Xylem’s Registration Statement on Form
10 filed with the U.S. Securities and Exchange Commission was declared effective on October 6, 2011.
Xylem’s common stock began “regular-way” trading on the New York Stock Exchange on November 1, 2011
under the symbol “XYL”.

Executive Summary

Xylem reported revenue for 2011 of $3,803 million, an increase of 18.8% from $3,202 million reported in 2010,
due to broad-based growth across both segments. Operating income for the year ended 2011, excluding costs
of $87 million incurred to execute the separation from ITT, was $482 million, reflecting an increase of $94
million or 24.2% compared to $388 million in 2010.

Additional financial highlights for 2011 include the following:

•

•

•

•

•

•

Net income of $279 million, or $1.50 per diluted share

Order growth of 18.8% over the prior year; organic orders were up 6.7%

Revenue increase of 18.8% from 2010; organic revenue was up 7.1%

Completion of the YSI Incorporated (“YSI”) acquisition, which contributed approximately $35 million of
revenue to the Water Infrastructure segment results

Adjusted net income of $358 million, an increase of $72 million from 2010’s adjusted net income

Free cash flow generation of $388 million, up $87 million from 2010

Key Performance Indicators and Non-GAAP Measures

Management reviews key performance indicators including revenue, segment operating income and margins,
earnings per share, orders growth, and backlog, among others. In addition, we consider certain measures to be
useful to management and investors evaluating our operating performance for the periods presented, and
provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can
assist investors in assessing our financial performance and measures our ability to generate capital for
deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends,
acquisitions, share repurchases and debt repayment. These metrics, however, are not measures of financial
performance under accounting principles generally accepted in the United States of America (“GAAP”) and
should not be considered a substitute for revenue, operating income, net income, earnings per diluted share or
net cash from continuing operations as determined in accordance with GAAP. We consider the following
non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies,
to be key performance indicators:

•

“organic revenue” and “organic orders” defined as revenue and orders, respectively, excluding the impact
of foreign currency fluctuations, intercompany transactions and contributions from acquisitions and
divestitures. Divestitures include sales of insignificant portions of our business that did not meet the criteria
for classification as a discontinued operation. The period-over-period change resulting from foreign
currency fluctuations assumes no change in exchange rates from the prior period.

34

•

“adjusted net income” and “adjusted earnings per share” defined as net income and earnings per share,
respectively, adjusted to exclude non-recurring separation costs associated with the Spin-off and
tax-related special items. A reconciliation of adjusted net income is provided below.

(in millions, except per share data)

2011

2010

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Separation costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-related special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

279 $

72
7
358 $

329
—
(43)
286

Weighted average number of shares — Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted earnings per diluted share (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

185.3

1.93 $

184.6
1.55

(a) Subsequent to the Spin-off, on October 31, 2011, we had 184.6 million shares of common stock

outstanding and this share amount is being utilized to calculate diluted earnings per share for all periods
prior to October 31, 2011 presented.

•

•

•

“operating expenses excluding separation costs” defined as operating expenses, adjusted to exclude
non-recurring costs incurred in connection with the separation.

“adjusted segment operating income” defined as segment operating income, adjusted to exclude
non-recurring costs incurred in connection with the separation and “adjusted segment operating margin”
defined as adjusted segment operating income divided by total segment revenue.

“free cash flow” defined as net cash provided by operating activities less capital expenditures and other
significant items that impact current results which management believes are not related to our ongoing
operations and performance. Our definition of free cash flow does not consider certain non-discretionary
cash payments, such as debt. The following table provides a reconciliation of free cash flow for the three
year period ended December 31, 2011.

(in millions)

2011

2010

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 449
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(126)
Separation cash payments (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 388

$ 395
(94)
—
$ 301

(a)

Includes the separation costs allocated by ITT that have been treated as though they were settled in cash,
and capital expenditures associated with the spin-off of $11 million.

Results of Operations:

(in millions)

2011

2010

2009

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,803 $ 3,202 $ 2,849
1,037
Gross profit

1,214

1,461

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses excluding separation costs . . . . . . . . . .
Expense to revenue ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other non-operating expense, net . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

38.4%
979
25.7%
87
1,066
395
10.4%
12
104
27.4%
279 $

37.9%
826
25.8%
—
826
388
12.1%
—
59
15.2%
329 $

36.4%
761
26.7%
—
761
276
9.7%
1
14
5.0%
263

2011 v.
2010

2010 v.
2009

18.8% 12.4%
20.3% 17.1%

18.5% 8.5%

—

—

29.1% 8.5%
1.8% 40.6%

—

—

76.3% 321.4%

(15.2)% 25.1%

35

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue

Revenue generated for 2011 was $3,803 million, an increase of $601 million, or 18.8%, compared to $3,202
million in the same period of 2010. The following table illustrates the impact from organic growth, recent
acquisitions, and fluctuations in foreign currency, in relation to revenue during the annual 2011 period.

(in millions)

2010 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,202
226
Organic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
264
Acquisitions/(Divestitures), net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.1%
8.2%
3.5%

Total change in revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

601

18.8%

2011 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,803

$ Change % Change

The following table summarizes revenue by segment for 2011 and 2010:

(in millions)

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,416 $ 1,930
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,327
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(55)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,803 $ 3,202

1,444
(57)

25.2%
8.8%

18.8%

2011

2010

Change

Water Infrastructure

Water Infrastructure’s revenue increased $486 million, or 25.2% in 2011, including incremental revenue of
$264 million from acquisitions, including Godwin and Nova in 2010 and YSI in September 2011. Our 2011
acquisition of YSI contributed $35 million and continued our expansion in the analytical instrumentation market.

Organic revenue growth of $137 million or 7.1% during the year was primarily attributable to transport and
treatment applications. Transport increased due to dewatering equipment volume from both the public utility
and industrial sectors. The results also reflect increased public utility investment in treatment projects in Latin
America and the Middle East. Overall growth was partially offset by decreased volume in Southern Europe,
which continues to present challenging economic conditions.

Foreign currency translation was favorable by $87 million for the annual period ended December 31, 2011, as
compared to 2010.

Applied Water

Applied Water’s revenue increased $117 million, or 8.8% in 2011, driven by organic revenue growth of $88
million or 6.6%. The organic revenue growth reflects gains across all regions lead by double-digit growth rates
in Eastern Europe, Latin America, China and the Middle East, primarily due to increased volume in light
industrial and building service applications as a result of new products such as e-SV, a high-efficiency vertical
multi-stage pump, and increased volume in the irrigation applications as a result of favorable weather
conditions in the United States. Pricing initiatives executed throughout the period also contributed to the
revenue growth.

Foreign currency translation was favorable by $28 million for 2011, as compared to 2010.

36

Orders/Backlog

Orders received during 2011 increased by $610 million, or 18.8% to $3,847 million, including benefits of $272
million from acquisitions and $120 million from foreign currency translation adjustments. Organic order growth
was 6.7% for the year. The Water Infrastructure segment generated order growth of $513 million, or 26.4% to
$2,454 million, including $272 million and $96 million from acquisitions and favorable foreign currency,
respectively. Order growth in our Applied Water segment was $100 million or 7.4% to $1,452 million, driven by
5.3% organic order growth and $27 million of favorable foreign currency translation due to increased activity in
the light industrial, agriculture and heat transfer markets.

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. Total backlog was $651 million at
December 31, 2011 and $620 million at December 31, 2010. We anticipate that in excess of 80% of the
backlog at December 31, 2011 will be recognized as revenue during 2012.

Gross Margin

Gross margins, as a percentage of consolidated revenue, increased to 38.4% in 2011 from 37.9% in 2010. The
increase is attributable to benefits from productivity and price realization initiatives offset, in part, by rising
commodity costs and higher labor and overhead costs due to increased spending related to additional volume.

Operating Expenses excluding Separation Costs

(in millions)

Selling, General and Administrative (SG&A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
SG&A as a % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Development (R&D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
R&D as a % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and asset impairment charges, net
. . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses excluding separation costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense to revenue ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

737

19.0%
877 $
10bp
23.1% 23.0%
35.1%
74
100
30bp
2.3%
2.6%
(86.7)%
15
2
18.5%
826
979
25.7% 25.8% (10)bp

2011

2010

Change

Selling, General and Administrative Expenses

SG&A increased by $140 million to $877 million or 23.1% of revenue in 2011, as compared to $737 million or
23.0% of revenue in 2010. The increase in SG&A expenses is principally due to sales volume related
increases in selling, marketing and distribution expenses, including the impact of recent acquisitions.

Research and Development Expenses

R&D spending increased $26 million to $100 million or 2.6% of revenue for 2011 as compared to $74 million or
2.3% of revenue in 2010. These increases were primarily due to $11 million incremental expense from recent
acquisitions and programs as we continued to invest in new product developments.

Restructuring and Asset Impairment Charges, net

During 2011, we incurred a $2 million charge related to the impairment of a facility in our Applied Water
segment. During 2010, we recognized restructuring charges totaling $15 million as part of an initiative to
improve effectiveness and efficiency of operations. As of December 31, 2011, we consider these restructuring
initiatives to be substantially completed, with a remaining liability of $1 million.

37

Separation Costs

We had non-recurring pre-tax separation costs of $87 million, or $72 million after tax, during 2011. The
components of separation costs incurred during these periods is presented below (in millions).

IT costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee retention and hiring costs . . . . . . . . . . . . . . . .
Rebranding and marketing costs . . . . . . . . . . . . . . . . . . .
Lease termination and other real estate costs . . . . . . . .
Non-cash asset impairments (a) . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Total separation costs in operating income . . . . . . . . . . . .
Tax-related separation costs . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total separation costs, net of tax . . . . . . . . . . . . . . . . . . . . . $

19
18
14
13
10
8
5

87
6
(21)

72

(a) During the third quarter, we recorded an impairment charge of $8 million on one of our facilities in China within our Applied

Water segment. Prior to the separation this was a shared facility among certain Xylem and ITT businesses and in connection
with the separation, the removal of certain ITT operations triggered an impairment evaluation. The fair value of the applicable
assets was calculated using the cost approach.

Our current estimate of the pre-tax cash impact of the remaining activities associated with the separation
ranges from approximately $15 million to $20 million.

Operating Income

We generated operating income of $395 million during 2011, a 1.8% increase from the prior year, primarily
reflecting increased revenues offset, in part, by non-recurring separation costs of $87 million. The following
table illustrates operating income results by business segments for 2011 and 2010.

(in millions)

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 343 $ 276
158
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
434
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(46)
Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 395 $ 388

160
503
(108)

24.3%
1.3%

1.8%

2011

2010

Change

38

The table included below provides a reconciliation from segment operating income to adjusted operating
income, and a calculation of the corresponding adjusted operating margin.

(in millions)

Water Infrastructure

2011

2010

Change

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

343
16

Adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjusted operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

359
14.9%

Applied Water

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

160
13

Adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjusted operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

173
12.0%

Total Xylem

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

395

87(a)

Adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjusted operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

482
12.7%

$

$

$

$

$

$

276
—

276
14.3%

158
—

158
11.9%

388
—

388
12.1%

24.3%

30.1%
60bp

1.3%

9.5%
10bp

1.8%

24.2%
60bp

(a) Comprised of non-recurring separation costs of $29 million in our business segments and $58 million

within Corporate.

Water Infrastructure

Operating income for our Water Infrastructure segment increased $67 million or 24.3% ($83 million or 30.1%
excluding separation costs) compared with the prior year. This increase is led by incremental operating income
of $42 million from acquisitions over the same period. Also contributing to the increase were higher sales
volumes, lower restructuring expense and benefits from productivity and material costs savings initiatives,
partially offset by higher labor and overhead costs, material inflation and unfavorable mix.

Applied Water

Operating income for our Applied Water segment increased $2 million or 1.3% ($15 million or 9.5% excluding
separation costs) compared to the prior year as higher sales volume and price realization was partially offset
by increased spend on research and development and the unfavorable impacts of inflation, and customer and
product mix.

Interest Expense

Interest expense increased to $17 million in 2011, primarily reflecting interest related to the issuance of $1.2
billion aggregate principal amount of senior notes issued in September 2011. Refer to Note 8, “Credit Facilities
and Long-Term Debt,” for further details.

Income Tax Expense

The income tax provision for 2011 was $104 million at an effective tax rate of 27.4% compared to $59 million at
an effective tax rate of 15.2% in 2010. The 2011 effective tax rate is higher than 2010 as a result of the
unfavorable impact of recording a deferred tax liability on the excess of financial reporting over the tax basis of
investments in certain foreign subsidiaries that has not been permanently reinvested, non deductible
separation costs, increase in valuation allowances on certain foreign losses offset in part by tax examination
settlements and increased tax exempt interest.

39

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue

Revenue generated during the year ended December 31, 2010 was $3,202 million reflecting an increase of $353
million or 12.4% as compared to prior year. Our 2010 revenue was marked by growth from strategic acquisitions,
a level of economic recovery within the majority of our served markets and foreign currency translation.

The following table illustrates the impact from organic growth, recent acquisitions, and fluctuations in foreign
currency, in relation to revenue during 2010.

(in millions)

2009 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Organic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions/(Divestitures), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,849
96
263
(6)

3.4%
9.2%
(0.2)%

Total change in revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

353

12.4%

2010 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

3,202

$ Change

% Change

The following table summarizes revenue by segment for 2010 and 2009:

(in millions)

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,930 $ 1,651
1,254
Applied Water
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(56)
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,327
(55)

16.9%
5.8%

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,202 $ 2,849

12.4%

2010

2009

Change

Water Infrastructure

Revenue generated by our Water Infrastructure segment for the year ended December 31, 2010 was $1,930
million reflecting an increase of $279 million, or 16.9% as compared to the prior year. This increase was
primarily driven by incremental revenue from acquisitions, including Godwin and Nova, which in the aggregate
contributed $247 million.

Organic revenue increased 1.5% in 2010 reflecting mixed regional results. Market share gains and favorable
economic conditions drove improved performance for treatment applications in Northern Europe and in
emerging markets such as Asia Pacific, Eastern Europe and Latin America. However, unfavorable economic
conditions and uncertainty within the region continued to negatively impact performance across our Southern
European markets.

Foreign exchange translation was favorable by $8 million for 2010, as compared to 2009.

Applied Water

Applied Water’s revenue increased $73 million, or 5.8%, for 2010 compared to 2009, as contributions from the
2009 Laing acquisition of $19 million were partially offset by a decline in revenues from businesses divested of
$3 million.

Despite relatively weak market conditions throughout the year, we recorded organic revenue growth of $72
million or 5.8% over 2009. This growth was primarily attributable to European and emerging market share gains
as well as the impact from new product launches, including energy efficient pumps and new beverage
applications. We also benefited from price realization initiatives. Organic revenue growth was partially offset by
unfavorable weather conditions in North America, which negatively impacted our sales of irrigation applications.

Foreign exchange translation was unfavorable by $16 million for 2010, as compared to 2009.

40

Gross Margin

Gross margins as a percentage of revenue increased 150 basis points to 37.9% in 2010 compared to 36.4% in
2009. The increase includes gross profits driven by increased organic sales volume, and benefits from
productivity and price realization initiatives.

Operating Expenses

(in millions)

Selling, General and Administrative (SG&A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
SG&A as a % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Development (R&D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
R&D as a % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and asset impairment charges, net . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense to revenue ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

737 $
23.0%
74
2.3%
15
826
25.8%

667
10.5%
23.4% (40)bp
17.5%
63
10bp
2.2%
(51.6)%
31
761
8.5%
26.7% (90)bp

2010

2009

Change

Selling, General and Administrative Expenses

SG&A increased by $70 million to $737 million or 23% of revenue in 2010 as compared to $667 million or
23.4% of revenue in 2009. The increase in SG&A expenses is principally due to additional costs of $55 million
in each period related primarily to our newly acquired Godwin and Nova businesses, as well as costs
attributable to an increase in sales volumes, and additional spending on various strategic investments.

Research and Development Expenses

R&D spending increased $11 million to $74 million or 2.3% of revenue in 2010 as compared to $63 million or
2.2% in 2009 primarily due to our newly acquired Nova business.

Restructuring and Asset Impairment Charges, net

During 2010, we recognized net restructuring charges of $15 million, representing a $16 million or 51.6%
decrease as compared to the prior year. During 2009, we initiated several actions, primarily within our Applied
Water segment in response to declining market conditions. The frequency and overall impact of such actions
subsided and as a result we incurred less cost during 2010.

Operating Income

We generated operating income of $388 million in 2010, which reflects an increase from the prior year of
40.6%. Operating margin increased to 12.1%, a year-over-year increase of 240 basis points. The following
table illustrates operating income results of our business segments, including operating margin results for 2010
and 2009.

(in millions)

2010

2009

Change

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

276 $
158

Segment operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

434
(46)

Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

388 $

227
109

336
(60)

276

21.6%
45.0%

29.2%

40.6%

Operating margin:

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Xylem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14.3 %
11.9 %
12.1 %

13.7 % 60 bp
8.7 % 320 bp
9.7 % 240 bp

41

Water Infrastructure

Operating income for our Water Infrastructure segment increased $49 million or 21.6% for 2010 compared with
2009. This increase is primarily attributable to contributions from the Nova and Godwin acquisitions, which
provided combined incremental operating income of $28 million during 2010. Operating productivity and lower
restructuring expense more than offset incremental strategic investments, higher pension costs, and
unfavorable foreign currency impacts. As a result, we saw operating margin expansion of 60 basis points over
2009.

Applied Water

Operating income for our Applied Water segment increased $49 million or 45.0% for the year ended
December 31, 2010 compared with the prior year. Operating productivity, including increased volume,
increased price, benefits from our cost savings initiatives, and lower restructuring charges of $12 million more
than offset incremental costs associated with strategic initiatives. Operating margin expansion of 320 basis
points over 2009 was largely attributable to these same factors.

Income Tax Expense

In 2010 and 2009, we recorded an income tax provision of $59 million and $14 million, respectively, which
represents effective tax rates of 15.2% and 5.0%, respectively. For 2010, the effective tax rate is lower than the
federal statutory rate of 35% due principally to a lower rate incurred on foreign earnings and the favorable
impact of the repatriation of foreign earnings net of foreign tax credits. For 2009, the effective tax rate is lower
than the federal statutory rate of 35% due principally to a lower rate incurred on foreign earnings and the
favorable impact of the restructuring of certain legal entities.

During 2009, the Company implemented an international restructuring in which it transferred the ownership of
its Canadian operations to its Luxembourg holding company. The transfer will allow the Company to recover, in
a more tax efficient manner, the earnings and book-to-tax basis differences attributable to our Canadian
investment. As a result, the Company reduced the deferred tax liability related to our investment in Canada.

Liquidity and Capital Resources

The following table summarizes our sources and uses of cash for the three years ended December 31, 2011.

Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 449 $
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 187 $

(423)
172
(11)

395 $

(1,093)
745
3

50 $

370
(84)
(292)
6
—

2011

2010

2009

(in millions)

Sources and Uses of Liquidity

Operating Activities

During 2011, net cash provided by operating activities was $449 million, compared to $395 million in 2010. The
$54 million year-over-year increase is primarily the result of lower tax and restructuring payments. This
increase was partially offset by net increased uses of cash in working capital driven by spending to support
increased sales volumes.

During 2010, net cash provided by operating activities increased by $25 million as compared to 2009, primarily
attributable to a $88 million increase in net income, excluding non-cash increases in depreciation and
amortization, partially offset by a reduced source of cash from working capital.

42

Investing Activities

Cash used in investing activities was $423 million for 2011, compared to $1,093 million in 2010 and $84 million
in 2009. We invested $309 million related to the acquisition of YSI in 2011 and $385 million and $580 million
related to the acquisitions of Nova and Godwin Pumps, respectively, in 2010. Capital expenditures in 2011
were $126 million compared to $94 million in 2010 and $62 million in 2009. The $32 million year-over-year
increase in capital expenditures in 2011 is primarily due to investments to increase productivity and the
expansion of the Godwin business.

Financing Activities

During 2011, cash provided by financing activities was $172 million, compared to cash provided by financing
activities of $745 million in 2010 and cash used in financing activities of $292 million in 2009. The decline in
2011 is due to net transfers to our former parent, ITT, as the net proceeds from the issuance of $1.2 billion
aggregate amount of senior notes (described below) funded a net cash transfer to ITT that included the
repayment of funds used in the acquisition of YSI. In general, the components of net transfers include: (i) cash
transfers from the Company to parent, (ii) cash investments from our parent used to fund operations, capital
expenditures and acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of the parent
company’s corporate expenses described in this Report. Dividends of $19 million were paid in 2011. No
dividends were paid in 2010 and 2009.

Funding and Liquidity Strategy

Prior to the Spin-off, the majority of our operations participated in U.S. and international cash management and
funding arrangements managed by ITT where cash was swept from our balance sheet daily, and cash to meet
our operating and investing needs was provided as needed from ITT. Transfers of cash both to and from these
arrangements are reflected as a component of “Parent company investment” in the Consolidated and
Combined Balance Sheets. The cash presented on our balance sheet prior to the Spin-off consists primarily of
U.S. and international cash from subsidiaries that do not participate in these arrangements.

As a result of the separation, our capital structure and sources of liquidity changed significantly. We no longer
participate in cash management and funding arrangements with ITT. Instead, our ability to fund our capital
needs depends on our ongoing ability to generate cash from operations, and access to the bank and capital
markets.

Historically, we have generated operating cash flow sufficient to fund our primary cash needs centered on
operating activities, working capital, capital expenditures, and strategic investments. Subsequent to the
separation, while our ability to forecast future cash flows is more limited, we expect to fund our ongoing
working capital, capital expenditures and financing requirements through cash flows from operations via
access to cash on hand and capital markets. If our cash flows from operations are less than we expect, we
may need to incur debt or issue equity. From time to time we may need to access the long-term and short-term
capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and
conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit
rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no
assurance that we will continue to have access to the capital markets on terms acceptable to us. We cannot
assure that such financing will be available to us on acceptable terms or that such financing will be available at
all.

We anticipate that our present sources of funds, including funds from operations and additional borrowings, will
provide us with sufficient liquidity and capital resources to meet our liquidity and capital needs in both the
United States and outside of the United States over the next twelve months.

On September 20, 2011, we issued $1.2 billion aggregate principal amount of Senior Notes, of which $600
million aggregate principal amount of 3.55% Senior Notes will mature on September 20, 2016 and $600 million
aggregate principal amount of 4.875% Senior Notes will mature on October 1, 2021, the net proceeds of which
funded a net cash transfer to ITT in connection with the Spin-off with the balance used for general corporate

43

purposes. The Senior Notes are our senior unsecured obligations and rank equally with all our existing and
future senior unsecured indebtedness. The notes were initially guaranteed on a senior unsecured basis by ITT.
The guarantee terminated and was automatically and unconditionally released upon the distribution of the
common stock of Xylem to the holders of ITT’s common stock in connection with the separation.

Our credit ratings as of December 31, 2011 are as follows:

Rating Agency

Standard & Poor’s
Moody’s Investors Service
Fitch Ratings

Short-Term
Ratings

Long-Term
Ratings

A-2
P-2
F-2

BBB
Baa2
BBB

In connection with the Spin-off, as of October 31, 2011, Xylem and its subsidiaries entered into a Four Year
Competitive Advance and Revolving Credit Facility with JPMorgan Chase Bank, N.A., as agent, and a
syndicate of lenders. The credit facility provides for an aggregate principal amount of up to $600 million of (i) a
competitive advance borrowing option which will be provided on an uncommitted competitive advance basis
through an auction mechanism (the “competitive loans”), (ii) revolving extensions of credit (the “revolving
loans”) outstanding at any time and (iii) the issuance of letters of credits in a face amount not in excess of $100
million outstanding at any time. As of December 31, 2011, there were no borrowings under the Credit Facility.

For the years ended 2011 and 2010, we generated approximately 64% and 65%, respectively, of our revenue
from non-U.S. operations. As we continue to grow our operations in the emerging markets and elsewhere
outside of the United States, we expect to continue to generate significant revenue from non-U.S. operations
and we expect our cash will be predominately held by our foreign subsidiaries. We expect to manage our
worldwide cash requirements considering available funds among the many subsidiaries through which we
conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash
from certain international subsidiaries to the U.S. and other international subsidiaries when it is cost effective to
do so. Our intent is to indefinitely reinvest all but $100 million of these funds outside of the United States.
However, we continually review our domestic and foreign cash profile, expected future cash generation and
investment opportunities which support our current designation of these funds as being indefinitely reinvested
and reassess whether there is a demonstrated need to repatriate funds held internationally to support our U.S.
operations. If, as a result of our review, it is determined that all or a portion of the funds may be needed for our
operations in the United States, we would be required to accrue U.S. taxes related to future tax payments
associated with the repatriation of these funds. As of December 31, 2011, our foreign subsidiaries were holding
$279 million in cash or marketable securities.

As of December 31, 2011, our excess of financial reporting over the tax basis of investments in certain foreign
subsidiaries totaled $1.6 billion. We have not asserted that $100 million of our excess basis difference will be
permanently reinvested and have therefore provided for United States or additional foreign withholding taxes
for that portion. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and
under certain other circumstances.

Contractual Obligations

The following table summarizes our contractual commitments as of December 31, 2011:

(in millions)

2012

1-3 Years

3-5 Years

5+ Years

Total

Debt and capital lease obligations (1) . . . . . . . . . . . . . . . . $
Interest payments (2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations (3) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term obligations reflected on the balance

sheet (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5
51
139
83
31

4

$

1
101
218
5
61

8

$ — $ 1,200 $ 1,206
421
685
89
356

168
211
—
194

101
117
1
70

6

8

26

Total commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 313

$ 394

$ 295

$ 1,781 $ 2,783

44

In addition to the amounts presented in the table above, we have recorded liabilities for uncertain tax positions
of $5 million. These amounts have been excluded from the contractual obligations table due to an inability to
reasonably estimate the timing of such payments in individual years.

(1) Refer to Note 8, “Credit Facilities and Long-Term Debt,” in the notes to the consolidated financial

statements for discussion of the use and availability of debt and revolving credit agreements. Amounts
represent principal payments of long-term debt including current maturities and exclude unamortized
discounts.

(2) Amounts represent estimate of future interest payments on long-term debt outstanding as of

December 31, 2011.

(3) Represents unconditional purchase agreements that are enforceable and legally binding and that specify

all significant terms to purchase goods or services, including fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase
agreements that are cancellable without penalty have been excluded.

(4) Other long-term obligations include estimated environmental payments. We estimate, based on historical
experience, that we will spend between $2 million and $4 million per year on environmental investigation
and remediation. At December 31, 2011, we had estimated and accrued $15 million related to
environmental matters.

Off-Balance Sheet Arrangements

As of December 31, 2011, we have issued guarantees for the debt and other obligations of consolidated
subsidiaries. We do not consider the maximum exposure to be material either individually or in the aggregate.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure
of contingent liabilities. Management bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources.

Significant accounting policies used in the preparation of the Consolidated Financial Statements are discussed
in Note 1, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements.
Accounting estimates and assumptions discussed in this section are those that we consider most critical to an
understanding of our financial statements because they are inherently uncertain, involve significant judgments,
include areas where different estimates reasonably could have been used, and changes in the estimate that
are reasonably possible could materially impact the financial statements. Management believes that the
accounting estimates employed and the resulting balances are reasonable; however, actual results in these
areas could differ from management’s estimates under different assumptions or conditions.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable, and collectability of the sales price is reasonably
assured. For product sales, delivery does not occur until the products have been shipped, risk of loss has been
transferred to the customer and the contractual terms have been fulfilled. 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. Revenue on service and repair contracts
is recognized after services have been agreed to by the customer and rendered.

We enter into contracts to sell our products and services, and while the majority of our sales agreements
contain standard terms and conditions, certain agreements contain multiple elements or non-standard terms
and conditions. Where sales agreements contain multiple elements or non-standard terms and conditions,

45

judgment is required to determine the appropriate accounting, including whether the deliverables specified in
these agreements should be treated as separate units of accounting for revenue recognition purposes, and, if
so, how the transaction price should be allocated among the elements and when to recognize revenue for each
element. When a sale involves multiple deliverables, the total revenue from the arrangement is allocated to
each unit of accounting based on the relative selling price of the deliverable to all other deliverables in the
contract. Revenue for multiple element arrangements is recognized when the appropriate revenue recognition
criteria for the individual deliverable have been satisfied. The allocation of sales price between elements may
impact the timing of revenue recognition, but will not change the total revenue recognized on the arrangement.
For delivered elements accounted for as separate units of accounting in a multiple element arrangement,
revenue is recognized only when the delivered elements have standalone value, there are no uncertainties
regarding customer acceptance and there are no customer-negotiated refund or return rights affecting the
sales recognized.

Certain businesses enter into long-term construction-type sales contracts for which revenue is recognized
under the percentage-of-completion method based upon percentage of costs incurred to total costs.

We record a reduction in revenue at the time of sale for estimated product returns, rebates and other
allowances, based on historical experience and known trends.

Warranty Accrual. Accruals for estimated expenses related to warranties are made at the time products are
sold or services are rendered and are recorded as a component of cost of revenue. These accruals are
established using historical information on the nature, frequency and average cost of warranty claims and
consider any factors that may cause differences in expected future warranty costs as compared to historical
claim experience. While we engage in extensive product quality programs and processes, we base our
estimated warranty obligation on product warranty terms offered to customers, ongoing product failure rates,
material usage and service delivery costs incurred in correcting a product failure, as well as specific product
class failures outside of our baseline experience. We assess the adequacy of our recorded warranty liabilities
quarterly and adjust amounts as necessary.

Income Taxes. 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. Based on the evaluation of available evidence, we recognize
future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than
not we will realize these benefits. We periodically assess the likelihood that we will be able to recover our
deferred tax assets and reflect any changes to our estimate of the amount we are more likely than not to
realize in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive
income, as appropriate.

In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary
differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated
future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory
tax rates and changes to future taxable income estimates.

Our effective tax rate reflects the impact of certain undistributed foreign earnings for which we have not
provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan
foreign earnings remittance amounts based on projected cash flow needs, as well as the working capital and
long-term investment requirements of our foreign subsidiaries and our domestic operations. Based on these
assumptions, we estimate the amount we will distribute to the United States and provide the U.S. federal taxes
due on these amounts. Material changes in our estimates of cash, working capital and long-term investment
requirements in the various jurisdictions in which we do business could impact our effective tax rate.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and
record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate
of whether, and to the extent to which, additional taxes will be due. Furthermore, we recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on

46

examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position are measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement.

We adjust our liability for uncertain tax positions in light of changing facts and circumstances; however, due to
the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially
different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the
ultimate assessment, an additional tax expense would result. If a payment of these amounts ultimately proves
to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized
in the period when we determine the liabilities are no longer necessary.

Goodwill and Intangible Assets. We review goodwill and indefinite-lived intangible assets for impairment
annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable. We also review the carrying value of our finite-lived intangible assets for potential impairment
when impairment indicators arise. We conduct our annual impairment test as of the first day of the fourth
quarter. We perform a two-step impairment test for goodwill. In the first step, we compare the estimated fair
value of each reporting unit to its carrying value. If the estimated fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and we are not required
to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds its fair
value, then we must perform the second step of the impairment test in order to measure the impairment loss to
be recorded. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an
impairment loss equal to the difference. In our annual impairment test for indefinite-lived intangible assets, we
compare the fair value of those assets to their carrying value. We recognize an impairment loss when the
estimated fair value of the indefinite-lived intangible asset is less than its carrying value. We estimate the fair
value of our reporting units and intangible assets with indefinite lives using an income approach. Under the
income approach, we calculate fair value based on the present value of estimated future cash flows.

Determining the fair value of a reporting unit or an indefinite-lived intangible asset is judgmental in nature and
involves the use of significant estimates and assumptions, particularly related to future operating results and
cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and
operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty
rates, future economic and market conditions and identification of appropriate market comparable data. In
addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units
when determining the carrying value of each reporting unit also require judgment. Goodwill is tested for
impairment at either the operating segment identified in Note 15, “Industry Segment and Geographic Data,” to
our notes to the consolidated financial statements, or one level below. The fair value of our reporting units and
indefinite-lived intangible assets are based on estimates and assumptions that are believed to be reasonable.
Significant changes to these estimates and assumptions could adversely impact our conclusions. Actual future
results may differ from those estimates.

Our 2011 annual goodwill impairment analysis indicated the estimated fair value of our reporting units
significantly exceeded their carrying value, and accordingly, no impairment charges were recorded. In order to
evaluate the sensitivity of the fair value estimates on the goodwill impairment test, we applied a hypothetical
100 basis point increase to the discount rates utilized, a ten percent reduction in expected future cash flows,
and reduced the assumed future growth rates of each reporting unit by 100 basis points. These hypothetical
changes did not result in any reporting unit failing step one of the impairment test. Further, our 2011 annual
indefinite-lived intangible asset impairment test did not result in an impairment charge as the estimated fair
value of the assets exceeded their carrying value.

Postretirement Plans. Prior to the Spin-off, employees who met certain eligibility requirements participated in
various retirement plans administered by ITT. In connection with the Spin-off, we entered into a Benefit and
Compensation Matters Agreement with ITT whereby Xylem agreed to adopt or assume sponsorship of certain
defined benefit plans and replicate certain ITT defined contribution plans to allow for continuation of those
benefits. Under this agreement, assets and liabilities attributable to Xylem employees were transferred from
ITT to our qualified defined benefit and defined contribution plans.

47

Company employees around the world participate in numerous defined benefit pension plans. The
determination of projected benefit obligations and the recognition of expenses related to these pension plans
are dependent on various assumptions. These major assumptions primarily relate to discount rates, expected
long-term rates of return on plan assets, rate of future compensation increases, mortality, health care inflation
and termination (some of which are disclosed in Note 12, “Postretirement Benefit Plans,” in the notes to the
consolidated and combined financial statements) and other factors. Actual results that differ from our
assumptions are accumulated and are amortized generally over the estimated future working life of the plan
participants, or for plans with all or substantially all inactive participants, over the average remaining life
expectancy.

Significant Assumptions

Management develops each assumption using relevant Company experience, in conjunction with market-
related data for each individual country in which such plans exist. All assumptions are reviewed annually with
third-party consultants and adjusted as necessary. The table included below provides the weighted average
assumptions used to estimate our defined benefit pension obligations and costs as of and for the years ended
2011 and 2010.

2011

2010 (a)

U.S.

Int’l

U.S.

Int’l

Obligation Assumptions:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of future compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.87% 4.76% 5.83% 5.18%
4.50% 3.58% 4.00% 3.40%

Cost Assumptions:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . .
Rate of future compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.83% 5.53% 6.00% 5.55%
9.00% 7.34% 9.00% 7.20%
4.50% 3.37% 4.00% 3.41%

(a) Represents pre Spin-off from ITT and does not include plans transferred from ITT upon Spin-off.

We determine the expected long-term rate of return on plan assets by evaluating both historical returns and
estimates of future returns. Specifically, the Company analyzes the estimated future returns based on
independent estimates of asset class returns and evaluates historical broad market returns over long-term
timeframes based on the strategic asset allocation, which is detailed in Note 12, “Postretirement Benefit Plans,”
in the notes to the consolidated financial statements.

Based on the approach described above, the chart below shows weighted average actual returns versus the
weighted average expected long-term rates of return for our pension plans that were utilized in the calculation
of the net periodic pension cost for each respective year.

Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . .
Actual rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.20%
7.52%
(1.40)% 15.34%

8.63%
33.96%

(a) Represents pre Spin-off from ITT and does not include returns on plans transferred from ITT upon Spin-

off.

2011

2010 (a)

2009 (a)

For the recognition of net periodic pension cost, the calculation of the expected long-term rate of return on plan
assets is generally derived using a market-related value of plan assets based on average asset values at the
measurement date over the last five years. The use of fair value, rather than a calculated value, could
materially affect net periodic pension cost. Our weighted average expected long-term rate of return on plan
assets for all pension plans, effective January 1, 2012 is 7.42%. We estimate that every 25 basis point change
in the expected return on plan assets impacts the expense by $1 million.

The discount rate reflects our expectation of the present value of expected future cash payments for benefits at
the measurement date. A decrease in the discount rate increases the present value of benefit obligations and
increases pension expense. We base the discount rate assumption on current investment yields of high-quality

48

fixed income investments during the retirement benefits maturity period. The pension discount rate was
determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero
and thirty years, developed by the plan’s actuaries. Annual benefit payments are then discounted to present
value using this yield curve to develop a single-point discount rate matching the plan’s characteristics. Our
weighted average discount rate for all pension plans effective January 1, 2012, is 4.77%. We estimate that
every 25 basis point change in the discount rate impacts the expense by $1 million.

The rate of future compensation increase assumption reflects our long-term actual experience and future and
near-term outlook. Effective January 1, 2012, our expected rate of future compensation is 3.65% for all pension
plans. The estimated impact of a 25 basis point change in the expected rate of future compensation is less
than $1 million.

The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.4%
for 2012, decreasing ratably to 5% in 2019. An increase or decrease in the health care trend rates by one
percent per year would not have a material effect on the benefit obligation or the aggregate annual service and
interest components. To the extent that actual experience differs from these assumptions, the effect will be
amortized over the average future service of the covered active employees.

Funded Status

Funded status is derived by subtracting the respective year-end values of the projected benefit obligations from
the fair value of plan assets. We estimate that every 25 basis point change in the discount rate impacts the
funded status by approximately $20 million.

Fair Value of Plan Assets

The plan assets of our pension plans comprise a broad range of investments, including domestic and foreign
equity securities, interests in private equity and hedge funds, fixed income investments, insurance contracts,
real estate, and cash and cash equivalents.

A portion of our pension benefit plan assets portfolio comprises investments in private equity and hedge funds.
The private equity and hedge fund investments are generally measured at net asset value. However, in certain
instances, the values reported by the asset managers were not current at the measurement date. Accordingly,
we made estimate adjustments to the last reported value where necessary to measure the assets at fair value
at the measurement date. These adjustments consider information received from the asset managers, as well
as general market information. There were no adjustments recorded for these assets at December 31, 2011.
Asset values for other positions were generally measured using market observable prices. We estimate that a
5% change in asset values will impact funded status by approximately $19 million.

New Accounting Pronouncements

See Note 2, “Recently Issued Accounting Pronouncements,” in the notes to the consolidated and combined
financial statements for a complete discussion of recent accounting pronouncements. There were no new
pronouncements which we expect to have a material impact on our financial condition and results of operations
in future periods.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These
exposures are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain
costs, revenues and borrowings being denominated in currencies other than one of our subsidiary’s functional
currency. Similarly, we are exposed to market risk as the result of changes in interest rates which may affect
the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent
necessary to manage exposures.

49

Foreign Currency Exchange Rate Risk

Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and
intercompany transactions denominated in foreign currencies. We may use derivative financial instruments to
offset risk related to receipts from customers and payments to suppliers, when it is believed that the exposure
will not be limited by our normal operating and financing activities. In January 2012, we began to periodically
enter into currency forward contracts in order to manage the exchange rate fluctuation risk on certain
intercompany transactions. Our principal currency exposures relate to the Euro, Swedish Krona, British Pound,
Australian Dollar, Canadian Dollar, Polish Zloty, and Hungarian Forint. We estimate that a hypothetical 10%
adverse movement in foreign currency exchange rates would not be material to Xylem’s financial position,
results of operations or cash flows.

Interest Rate Risk

As of December 31, 2011, we do not have a material exposure to interest rate risk as our debt portfolio entirely
comprises long-term, fixed-rate instruments. We do not account for our long-term debt using the fair value
option.

Commodity Price Exposures

Portions of our business are exposed to volatility in the prices of certain commodities, such as copper, nickel
and aluminum, among others. Our primary exposure to this volatility resides with the use of these materials in
purchased component parts. We generally maintain long-term fixed price contracts on raw materials and
component parts; however, we are prone to exposure as these contracts expire. We estimate that a
hypothetical 10% adverse movement in prices for raw metal commodities would not be material to our financial
position, results of operations or cash flows.

50

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Page
No.

Audited Consolidated and Combined Financial Statements:

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52

Consolidated and Combined Income Statements for the Years Ended December 31, 2011, 2010 and

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated and Combined Balance Sheets as of December 31, 2011 and December 31, 2010 . . . . .

53

54

Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2011,

2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55

Consolidated and Combined Statement of Stockholders’ Equity and Comprehensive Income for the

Years Ended December 31, 2011, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to consolidated and combined financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 1 Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 2 Recently Issued Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 3 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 4 Separation Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 5 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 6 Property, Plant and Equipment

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 7 Goodwill and Other Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 8 Credit Facilities and Long-Term Debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 9 Accrued and Other Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 10 Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 11 Stock-Based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 12 Postretirement Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 13 Other Non-Operating Income, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 14 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 15 Industry Segment and Geographic Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 16 Related Party Transactions and Parent Company Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 17 Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 18 Supplemental Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 19 Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

56

57

57

65

66

70

70

70

71

72

74

74

74

77

84

84

89

91

93

95

96

51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Xylem Inc.
White Plains, New York

We have audited the accompanying consolidated and combined balance sheets of Xylem Inc. and subsidiaries
(the “Company”) as of December 31, 2011 and 2010, and the related consolidated and combined statements
of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the
financial position of Xylem Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2011, in
conformity with accounting principles generally accepted in the United States of America.

As described in Note 1 to the consolidated and combined financial statements, prior to October 31, 2011, the
accompanying financial statements were derived from the accounting records of the water equipment and
services businesses of ITT Corporation. For periods prior to October 31, 2011, the financial statements include
expense allocations for certain corporate functions historically provided by ITT Corporation. These allocations
may not be reflective of the actual expenses which would have been incurred had the Company operated as a
separate entity apart from ITT Corporation. Included in Note 16 to the consolidated and combined financial
statements is a summary of transactions with related parties.

/s/ Deloitte & Touche LLP

Stamford, Connecticut
February 28, 2012

52

XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED INCOME STATEMENTS
(In Millions, except per share data)

Year Ended December 31,

2011

2010

2009

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,803 $ 3,202 $ 2,849
1,812
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,988

2,342

Gross profit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and asset impairments charges, net . . . . . . . . . . . . . . . . . . . . . .

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-operating income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,461
877
100
87
2

395
17
5

383
104

1,214
737
74
—
15

388
—
—

388
59

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

279 $

329 $

Earnings per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

1.51 $
1.50 $

1.78 $
1.78 $

Weighted average number of shares – Basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares – Diluted . . . . . . . . . . . . . . . . . . . . . . . . .

185.1
185.3

184.6
184.6

1,037
667
63
—
31

276
—
1

277
14

263

1.42
1.42
184.6
184.6

See accompanying notes to consolidated and combined financial statements.

53

XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In Millions, except per share amounts)

December 31,

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Receivable, less allowances for discounts and doubtful accounts of $37 and $32 in
2011 and 2010, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011

2010

318 $

131

756
426
97
45

1,642
463
1,610
505
173

690
389
79
47

1,336
454
1,437
416
92

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,393 $ 3,735

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Short-term borrowings and current maturities of long-term debt

322 $
490
5

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies
Stockholders’ equity:

Common Stock — par value $0.01 per share:

Authorized 750.0 shares, issued 184.6 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parent company investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

817
1,201
316
165
67

2,566

2
1,663
40
—
122

1,827

309
340
—

649
4
163
99
101

1,016

—
—
—
2,682
37

2,719

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,393 $ 3,735

See accompanying notes to consolidated and combined financial statements.

54

XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In Millions)

Year Ended December 31,

Operating Activities

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities (net of acquisitions):
Changes in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Cash — Operating activities
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of property, plant and equipment
. . . . . . . . . . . . . . . . . .
Acquisitions of businesses and assets, net of cash acquired . . . . . . . . . . . . . . . .
Other, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash — Investing activities
Financing Activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfer (to)/from parent
Issuance of short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of senior notes, net of discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments of long-term debt and capital lease obligations . . . . . . . . . .
Proceeds from exercise of employee stock options . . . . . . . . . . . . . . . . . . . . . . .
Payments of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash — Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes (net of refunds received)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011

2010

2009

$ 279

$

329

$ 263

137
8
13
10
2
(7)

(61)
(18)
(9)
53
56
(14)
449

92
(31)
9
—
15
(22)

(45)
7
41
12
(17)
5
395

(126)
11
(309)
1
(423)

(94)
4
(1,004)
1
(1,093)

70
(36)
9
—
31
(40)

45
62
(38)
(11)
(1)
16
370

(62)
11
(33)
—
(84)

(995)
5
1,198
(8)
1
(10)
(19)
172
(11)
187
131
$ 318

$

745
—
—
—
—
—
—
745
3
50
81
131

(292)
—
—
—
—
—
—
(292)
6
—
81
$ 81

$

64

$

110

$ 52

See accompanying notes to consolidated and combined financial statements.

55

XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY AND COMPREHENSIVE INCOME
(In Millions, except per share amounts)

BALANCE AT DECEMBER 31, 2008 . . . . . .
Comprehensive income:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation

adjustment . . . . . . . . . . . . . . . . . . . . . . . .

Net change in postretirement benefit

plans, net of tax of $2 . . . . . . . . . . . . . . .

Total comprehensive income . . . . . . . . . . . . .
. . . .
Change in parent company investment

BALANCE AT DECEMBER 31, 2009 . . . . . .
Comprehensive Income:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation

adjustment . . . . . . . . . . . . . . . . . . . . . . . .

Net change in postretirement benefit

plans, net of tax of $3 . . . . . . . . . . . . . . .

Total comprehensive income . . . . . . . . . . . . .
. . . .
Change in parent company investment

BALANCE AT DECEMBER 31, 2010 . . . . . .
Comprehensive Income:

Net income to October 30, 2011 . . . . . . . .
Net income from October 31, 2011 . . . . . .
Foreign currency translation

adjustment . . . . . . . . . . . . . . . . . . . . . . . .

Net change in postretirement benefit

plans, net of tax of $14 . . . . . . . . . . . . . .

Total comprehensive income . . . . . . . . . . . . .
Assumption of accumulated unrealized

gains (losses) on postretirement benefit
plans, net of tax of $32 . . . . . . . . . . . . . . . .

Contributed currency translation

adjustment . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
Change in parent company investment
Conversion of net investment
. . . . . . . . . . . .
Cash dividends paid ($0.1012 per share) . . .
Stock incentive plans and related tax

benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Parent
Company
Investment

Total

$— $

— $ —

$

(6)

$ 1,642 $ 1,636

81

(3)

263

263

81

(3)

341
(290)

(290)

—

—

—

72

1,615

1,687

(31)

(4)

329

329

(31)

(4)

294
738

738

—

—

—

37

2,682

2,719

59

220

(61)

(57)

(73)

276

2

1,660

(19)

3

(1,240)
(1,662)

220
59

(61)

(57)

161

(73)

276
(1,240)
—
(19)

3

BALANCE AT DECEMBER 31, 2011 . . . . .

$ 2

$ 1,663

$ 40

$ 122

$

— $ 1,827

See accompanying notes to consolidated and combined financial statements

56

XYLEM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED 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 two segments, Water
Infrastructure and Applied Water. The Water Infrastructure segment focuses on the transportation, treatment
and testing of water, offering a range of products including water and wastewater pumps, treatment and testing
equipment, and controls and systems. The Applied Water segment encompasses all the uses of water and
focuses on the residential, commercial, industrial and agricultural markets. The segment’s major products
include pumps, valves, heat exchangers, controls and dispensing equipment. Xylem Inc. (f/k/a ITT WCO, Inc.)
was incorporated in Indiana on May 4, 2011. The name of the Company was changed from ITT WCO, Inc. to
Xylem Inc. on July 14, 2011.

On October 31, 2011, ITT Corporation (“ITT”) completed the previously announced Spin-off (the “Spin-off”) of
Xylem, formerly ITT’s water equipment and services businesses. Effective as of 12:01 a.m., Eastern time on
October 31, 2011 (the “Distribution Date”), the common stock of Xylem was distributed, on a pro rata basis, to
ITT’s shareholders of record as of the close of business on October 17, 2011 (the “Record Date”). On the
Distribution Date, each of the shareholders of ITT received one share of Xylem common stock for every one
share of common stock of ITT held on the Record Date. The Spin-off was completed pursuant to the
Distribution Agreement, dated as of October 25, 2011 (the “Distribution Agreement”), among ITT, Exelis Inc.
(“Exelis”) and Xylem. After the Distribution Date, ITT did not beneficially own any shares of Xylem common
stock and, following such date, financial results of Xylem will not be consolidated in ITT’s financial reporting.
Xylem’s Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission (“SEC”)
was declared effective on October 6, 2011. Xylem’s common stock began “regular-way” trading on the New
York Stock Exchange on November 1, 2011 under the symbol “XYL”.

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. References in the notes to the consolidated and
combined financial statements to “ITT” or “parent” refers to ITT Corporation and its consolidated subsidiaries
(other than Xylem Inc.).

Basis of Presentation

The consolidated and combined financial statements reflect our financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the United States of America
(“GAAP”). All intracompany transactions between our businesses have been eliminated. On and prior to
October 31, 2011, our financial position, results of operations and cash flows consisted of the water equipment
and services businesses of ITT Corporation (“WaterCo”) and have been derived from ITT’s historical
accounting records and are presented on a carve-out basis through our Distribution Date, while our financial
results for Xylem post Spin-off are prepared on a stand-alone basis. As such, our Consolidated and Combined
Statements of Income and Cash Flows for the twelve months ended December 31, 2011 consist of the
consolidated results of Xylem on a stand-alone basis for two months of November and December and the
combined results of operations of WaterCo for ten months on a carve-out basis. The twelve months ended
December 31, 2010 and 2009 consist entirely of the combined results of WaterCo on a carve-out basis.

For periods prior to the Spin-off, our consolidated and combined financial statements include expense
allocations for (i) certain corporate functions historically provided by ITT, including, but not limited to, finance,
legal, information technology, human resources, communications, ethics and compliance, and shared services,
(ii) employee benefits and incentives, and (iii) share-based compensation. These expenses have been
allocated to us on the basis of direct usage when identifiable, with the remainder allocated on the basis of
revenue, headcount or other measures.

57

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Both we and ITT consider the basis on which the expenses have been allocated to be a reasonable reflection
of the utilization of services provided to or the benefit received by us during the periods presented. The
allocations may not, however, reflect the expense we would have incurred as an independent, publicly traded
company for the periods presented. Actual costs that may have been incurred if we had been a stand-alone
company would depend on a number of factors, including the chosen organizational structure, what functions
were outsourced or performed by employees and strategic decisions made in areas such as information
technology and infrastructure. Following the Spin-off, we will perform these functions using our own resources
or purchased services, certain of which may be provided by ITT under the Transition Services Agreement that
is expected to extend for a period of 3 to 24 months from the Distribution Date in most circumstances.

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, postretirement obligations and assets, revenue recognition,
income tax contingency accruals and valuation allowances, goodwill impairment testing and contingent
liabilities. 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 in companies over which we have
the ability to exercise significant influence but do not hold a controlling interest under the equity method, and
we record our proportionate share of income or losses in the Consolidated and Combined 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 and cash flows. If the actual results of operations or cash flows 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 shareholders’
equity. Net gains or losses from foreign currency transactions are reported currently in selling, general and
administrative expenses.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable,
collectability is reasonably assured and delivery has occurred or services have been rendered. For product
sales, other than long-term construction-type contracts, we recognize revenue at the time title and risks and
rewards of ownership pass, which is generally when products are shipped. Certain contracts with customers
require delivery, installation, testing, certification or other acceptance provisions to be satisfied before revenue
is recognized. We recognize revenue on product sales to channel partners, including resellers, distributors or
value-added solution providers at the time of sale when the channel partners have economic substance apart
from Xylem and Xylem has completed its obligations related to the sale. Revenue from the rental of equipment
is recognized over the rental period. Service revenue is recognized as services are performed.

58

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

For agreements that contain multiple deliverables, we recognize revenue based on the relative selling price if
the deliverable has stand-alone value to the customer and, in arrangements that include a general right of
return relative to the delivered element, performance of the undelivered element is considered probable and
substantially in the Company’s control. The selling price for a deliverable is based on vendor-specific objective
evidence of selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”), if VSOE is not
available, or best estimated selling price (“BESP”), if neither VSOE nor TPE is available.

The deliverables in our arrangements with multiple elements include various products and may include related
services, such as installation and start-up services. We allocate arrangement consideration based on the
relative selling prices of the separate units of accounting determined in accordance with the hierarchy
described above. For deliverables that are sold separately, we establish VSOE based on the price when the
deliverable is sold separately. We establish TPE, generally for services, based on prices similarly situated
customers pay for similar services from third-party vendors. For those deliverables for which we are unable to
establish VSOE or TPE, we estimate the selling price considering various factors including market and pricing
trends, geography, product customization, and profit objectives. Revenue for multiple element arrangements is
recognized when the appropriate revenue recognition criteria for the individual deliverable have been satisfied.

Certain businesses enter into long-term construction-type sales contracts for which revenue is recognized
under the percentage-of-completion method based upon percentage of costs incurred to total estimated costs.

Shipping and Handling Costs

Shipping and handling costs are recorded as a component of costs of sales.

Share-Based Compensation

Share-based awards issued to employees include non-qualified stock options, restricted stock awards and
certain liability-based 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 awards is determined using the closing price of our common stock
on date of grant. The fair value of certain liability-based awards is remeasured at the end of each reporting
period.

Research and Development

We conduct research and development activities, which consists primarily of the development of new products,
product applications, and manufacturing processes. These 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 strategically position ourselves 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, such as lease termination 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

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XYLEM INC. AND SUBSIDIARIES

liability recognized as adjustments in the period of change. We recognized restructuring expense of $2 million,
$15 million, and $31 million for 2011, 2010 and 2009, respectively, related to severance and certain other
charges. The 2009 charge relates to severance charges associated with an action to reduce headcount across
our businesses in response to declining economic conditions. The charges by segment were: Water
Infrastructure $15 million, Applied Water $15 million, and Corporate and other $1 million. As of December 31,
2011, we consider these restructuring initiatives to be substantially completed, with a remaining liability of $1
million.

Deferred Financing Costs

Deferred financing costs represent costs incurred in conjunction with our debt financing activities and are
capitalized in other assets and amortized over the life of the related financing arrangements. If the debt is
retired early, the related unamortized deferred financing costs are written off in the period the debt is retired
and are recorded in the statement of operations under the caption “other non-operating income, net.”

Income Taxes

Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are
determined based on the estimated future tax effects of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities, as measured by the current enacted tax rates.

We maintain valuation allowances when it is more likely than not that all or a portion of a deferred asset will not
be realized. The valuation allowance is intended in part to provide for the uncertainty regarding the ultimate
utilization of our U.S. capital loss carryforwards, U.S. foreign tax credit carryovers, and foreign net operating
loss carryforwards. 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. In the event that 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 which could materially impact our business, financial
condition and results of operations.

Our effective tax rate reflects the impact of certain undistributed foreign earnings for which we have not
provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan
foreign earnings remittance amounts based on projected cash flow needs, as well as the working capital and
long-term investment requirements of our foreign subsidiaries and our domestic operations. Based on these
assumptions, we estimate the amount we will distribute to the United States and provide the U.S. federal taxes
due on these amounts. Material changes in our estimates of cash, working capital and long-term investment
requirements in the various jurisdictions in which we do business could impact our effective tax rate.

Tax benefits are recognized for an uncertain tax position when, in management’s judgment, it is more likely
than not that the position will be sustained upon examination by a taxing authority. 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 entirely 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. Interest and penalties recognized on the liability for unrecognized tax
benefits are recorded as income tax expense.

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XYLEM INC. AND SUBSIDIARIES

Earnings Per Share

We present two calculations of earnings per share (“EPS”). “Basic” earnings per share equals net income
divided by weighted average shares outstanding during the period. “Diluted” earnings per share 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 net earnings per
share.

Basic and Diluted EPS for all periods prior to the Spin-off reflect the number of distributed shares on the
Distribution Date, or 184.6 million shares. For our 2011 year to date calculations, these shares are treated as
issued and outstanding from January 1, 2011 for purposes of calculating historical basic EPS. At the time of
the Spin-off, ITT stock options and restricted stock awards were converted to awards of Xylem, and therefore
there were no dilutive securities outstanding for historical periods. For 2011, the Company determined our
weighted average dilutive share outstanding assuming that the date of our separation from ITT was the
beginning of the period.

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

(in thousands)

Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . .
Add: Participating securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding — Basic . . . . . . . . . . . . . . . .
Plus incremental shares from assumed conversions: (b)

Dilutive effect of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011

2010

2009

184,574
485
185,059

184,570
—
184,570

184,570
—
184,570

63
202

—
—

—
—

Weighted average common shares outstanding — Diluted . . . . . . . . . . . . . . .

185,324

184,570

184,570

(a) Restricted stock awards containing rights to non-forfeitable dividends which participate in undistributed earnings with common

shareholders are considered participating securities for purposes of computing earnings per share.

(b)

Incremental shares from stock options and restricted stock are computed by the treasury stock method. The 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 because they were 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 awards, reduced by the
repurchase of shares with the proceeds from the exercise, unrecognized compensation expense for those awards and the
estimated tax benefit of the assumed exercises.

(in millions)

2011

2010

2009

Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.4
0.7

—
—

—
—

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 Doubtful Accounts and Cash Discounts

Trade receivables primarily comprise uncollected amounts owed to us from transactions with customers and
are presented net of allowances for doubtful accounts and cash discounts.

We determine our allowance for doubtful accounts using a combination of factors to reduce our trade
receivable balances to their estimated net realizable amount. We maintain an allowance for doubtful accounts

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XYLEM INC. AND SUBSIDIARIES

based on a variety of factors, including the length of time receivables are past due, macroeconomic trends and
conditions, significant one-time events, historical experience and the financial condition of customers. We
record a specific reserve 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 cash 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 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. As of
December 31, 2011 and 2010 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 either the lower of cost or
market using either the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method. Certain
inventories are accounted under the LIFO method primarily because this method was elected for tax purposes.
Inventories valued under the LIFO method represent 9% and 8% of total 2011 and 2010 inventories,
respectively. If inventories valued using the LIFO method had been valued under the FIFO method, they would
have been higher by $7 million and $6 million for December 31, 2011 and 2010, respectively. 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:

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

Estimated Life

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

We assess our property, plant and equipment to be held and used for impairment when indicators are present
that the carrying value may not be recoverable. Should projected undiscounted future cash flows be less than
the carrying amount of the asset or asset group, an impairment charge reducing the carrying amount to fair
value is required.

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 and other intangible assets. Intangible assets with a finite life are

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XYLEM INC. AND SUBSIDIARIES

amortized on a straight-line basis over an estimated economic useful life which ranges from 10 to 40 years and
is included in selling, general and administrative expense. Certain of our intangible assets have an indefinite
life and are not amortized, namely certain brands and trademarks.

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 climate or an adverse action or assessment by a regulator). We conduct our
annual impairment testing on the first day of our fourth quarter. For goodwill, the impairment test is a two-step
test. In the first step, 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 and the second step of the impairment test is not performed. If the carrying value of the
reporting unit exceeds its estimated fair value, then the second step of the impairment test is performed in
order to measure the impairment loss to be recorded, if any. If the carrying value of a reporting unit’s goodwill
exceeds its implied fair value, then we record an impairment loss equal to the difference. We estimate the fair
value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income
approach, we estimate fair value based on the present value of estimated future cash flows.

Product 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 sales. 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 assess the adequacy of our recorded
warranty liabilities quarterly and adjust amounts as necessary.

Postretirement Benefit Plans

The determination of defined benefit pension and postretirement 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, termination, 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 postretirement cost, the calculation of the
expected long-term rate of return on plan assets is generally derived using a market-related value of plan
assets 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 estimated
remaining service period of active participants, or for plans with all or substantially all inactive active

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XYLEM INC. AND SUBSIDIARIES

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. See Note 12, “Postretirement Benefit Plans,”
for further information.

Business Combinations

We allocate the purchase price of acquisitions to the tangible and intangible assets acquired, liabilities
assumed, and non-controlling interests acquired based on their estimated fair value at the acquisition date.
Changes to the acquisition date 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.
Changes to the acquisition date fair values after expiration of the measurement period are recorded in
earnings. The excess of the acquisition price over those estimated fair values is recorded as goodwill.
Acquisition-related expenses and restructuring costs, if any, are recognized separately from the business
combination and are expensed as incurred.

Commitments and Contingencies

We record accruals for commitments and loss contingencies for those which are both probable and 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 and exclude claims for
recoveries from insurance companies or other third parties.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of
cash and cash equivalents, 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, 2011 and
2010 were uninsured. Foreign cash balances at December 31, 2011 and 2010 were $279 million and $131
million, respectively.

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XYLEM INC. AND SUBSIDIARIES

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. The fair value
hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1),
then to quoted market prices for similar assets or liabilities in active markets (Level 2) and gives the lowest
priority to unobservable inputs (Level 3).

Note 2. Recently Issued Accounting Pronouncements

Recently Adopted Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued additional guidance applicable
to the testing of goodwill for potential impairment. Specifically, for reporting units with zero or negative carrying
amounts, an entity is required to perform the second step of the goodwill impairment test (a comparison
between the carrying amount of a reporting unit’s goodwill to its implied fair value) if it is more likely than not
that a goodwill impairment exists, considering any adverse qualitative factors. This guidance is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. As of the date of our
most recent goodwill impairment test, none of our reporting units would have been affected by the application
of this guidance as each reporting unit had a carrying amount that exceeded zero.

In April 2010, the FASB issued authoritative guidance permitting use of the milestone method of revenue
recognition for research or development arrangements that contain payment provisions or consideration
contingent on the achievement of specified events. On January 1, 2011, we adopted the new guidance on a
prospective basis. The adoption of this guidance did not have a material impact on our financial condition,
results of operations or cash flows.

In October 2009, the FASB issued amended guidance on the accounting for revenue arrangements that
contain multiple elements by eliminating the criteria that objective and reliable evidence of fair value for
undelivered products or services needs to exist in order to be able to account separately for deliverables and
eliminating the use of the residual method of allocating arrangement consideration. The amendments establish
a hierarchy for determining the selling price of a deliverable and will allow for the separation of products and
services in more instances than previously permitted.

We adopted the new multiple element guidance effective January 1, 2011 for new arrangements entered into
or arrangements materially modified on or after that date on a prospective basis. In connection with the
adoption of the revised multiple element arrangement guidance, we revised our revenue recognition
accounting policies. For multiple deliverable arrangements entered into or materially modified on or after
January 1, 2011, we recognize revenue for a delivered element based on the relative selling price if the
deliverable has stand-alone value to the customer and, in arrangements that include a general right of return
relative to the delivered element, performance of the undelivered element is considered probable and
substantially in the Company’s control. The selling price for a deliverable is based on vendor-specific objective
evidence of selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”), if VSOE is not
available, or best estimated selling price (“BESP”), if neither VSOE nor TPE is available.

The deliverables in our arrangements with multiple elements include various products and may include related
services, such as installation and start-up services. For multiple element arrangements entered into or
materially modified after adoption of the revised multiple element arrangement guidance, we allocate
arrangement consideration based on the relative selling prices of the separate units of accounting determined
in accordance with the hierarchy described above. For deliverables that are sold separately, we establish
VSOE based on the price when the deliverable is sold separately. We establish TPE, generally for services,
based on prices similarly situated customers pay for similar services from third-party vendors. For those

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XYLEM INC. AND SUBSIDIARIES

deliverables for which we are unable to establish VSOE or TPE, we estimate the selling price considering
various factors including market and pricing trends, geography, product customization, and profit objectives.
Revenue allocated to products and services is generally recognized as the products are delivered and the
services are performed, provided all other revenue recognition criteria have been satisfied. The adoption of the
new multiple element guidance did not result in a material change in either the units of accounting or the
pattern or timing of revenue recognition. Additionally, the adoption of the revised multiple element arrangement
guidance did not have a material impact on our financial condition, results of operations or cash flows.

Pronouncements Not Yet Adopted

In September 2011, the FASB provided companies with the option to make an initial qualitative evaluation,
based on the entity’s events and circumstances, to determine the likelihood of goodwill impairment. The results
of this qualitative assessment determine whether it is necessary to perform the currently required two-step
impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
a company would be required to perform the two-step impairment test. This guidance is effective for annual
and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early
adoption permitted. The Company could apply the option to any goodwill impairment test performed after
December 31, 2011. The amendments are not expected to have any effect on the Company’s consolidated
and combined financial statements.

In May 2011, the FASB issued guidance intended to achieve common fair value measurements and related
disclosures between U.S. GAAP and international accounting standards. The amendments primarily clarify
existing fair value guidance and are not intended to change the application of existing fair value measurement
guidance. However, the amendments include certain instances where a particular principle or requirement for
measuring fair value or disclosing information about fair value measurements has changed. This guidance is
effective for the periods beginning after December 15, 2011 and early application is prohibited. We will adopt
these amendments effective January 1, 2012; however, the requirements are not expected to have a material
effect on the Company’s consolidated and combined financial statements.

Note 3. Acquisitions

2011 Acquisitions

YSI Corporation

On September 1, 2011, we acquired 100% of the outstanding shares of YSI Incorporated (“YSI”) for a
purchase price of $309 million, net of cash acquired. YSI, which reported 2010 revenue of $101 million, is a
leading developer and manufacturer of sensors, instruments, software, and data collection platforms for
environmental water monitoring. YSI employs 390 people at facilities in the United States, Europe and Asia.
Our financial statements include YSI’s results of operations and cash flows prospectively from September 1,
2011 within the Water Infrastructure segment; however, the acquisition was not material to results of
operations and accordingly, pro forma results of operations reflecting YSI’s results prior to acquisition have not
been presented.

The purchase price for YSI was allocated to the net tangible and intangible assets acquired and liabilities
assumed based on their fair values as of September 1, 2011. The excess of the purchase price over the assets
acquired and liabilities assumed was recorded as goodwill. A charge in the amount of $3 million is included in
selling, general and administrative expense related to acquisition-related costs.

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XYLEM INC. AND SUBSIDIARIES

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed,
based on their fair values (in millions):

Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets acquired and liabilities assumed:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15
15
9
190
125
17
(62)

$309

$309

Goodwill of $190 million arising from the acquisition consists largely of the planned expansion of YSI to new
geographic markets, synergies and economies of scale. The goodwill related to this acquisition has been
assigned to our Water Infrastructure segment and is not expected to be deductible for income tax purposes. In
addition, of the $125 million that was allocated to intangible assets, $41 million was assigned to customer
relationships and will be amortized on a straight line basis over the estimated useful life of 16 years; $35 million
was assigned to proprietary technology and will be amortized on a straight line basis over the weighted
average useful life of 16 years; and the remaining $49 million of acquired intangible assets was assigned to
trademarks, which is not subject to amortization as they were determined to have indefinite useful lives.

2010 Acquisitions

During 2010, we spent an aggregate of approximately $1 billion, net of cash acquired, primarily on the
acquisitions of Godwin Pumps of America, Inc. and Godwin Holdings Limited (collectively referred to as
Godwin) and Nova Analytics Corporation (Nova). The results of operations and cash flows from our 2010
acquisitions have been included in our consolidated and combined financial statements prospectively from their
date of acquisition. With the exception of Godwin, pro forma results of operations for acquisitions completed in
2010 and 2009 have not been presented because they are not significant, either individually or in the
aggregate. Due to the significant nature of the Godwin acquisition, pro forma results of operations are
presented below as if Godwin was acquired on January 1, 2009.

Godwin Pumps

On August 3, 2010, we acquired 100% of the privately held stock of Godwin for a purchase price of $580
million, net of cash acquired. Godwin is a supplier and servicer of automatic self-priming and on-demand
pumping solutions serving the global industrial, construction, mining, municipal, oil and gas and dewatering
markets.

67

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed,
based on their fair values (in millions):

Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets acquired and liabilities assumed: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44
56
82
1
252
167
7
(29)

$580

$580

Goodwill of $252 million arising from the acquisition consists largely of the value expected to be obtained from
the ability to be more competitive through the offering of a more complete dewatering pumps portfolio and from
leveraging our current sales, distribution and service network. The goodwill related to this acquisition is
recorded in the Water Infrastructure segment, a significant portion of which is expected to be deductible for
income tax purposes. In addition, of the $167 million that was allocated to intangible assets, $107 million was
assigned to customer relationships and will be amortized on a straight line basis over the estimated useful life
of 10 years; $14 million was assigned to proprietary technology and will be amortized on a straight line basis
over the weighted average useful life of 20 years; and the remaining $46 million of acquired intangible assets
was assigned to trademarks, which is not subject to amortization as they were determined to have indefinite
useful lives.

Godwin generated approximately $145 million and $26 million in revenue and pre-tax operating income,
respectively, from January 1 through August 2, 2010. Subsequent to our acquisition of Godwin in August 2010,
the revenue and expenses of Godwin have been included in our Consolidated and Combined Income
Statements. Our 2010 results of operations include revenue and pre-tax operating income from Godwin of
$125 million and $16 million, respectively. The following unaudited pro-forma information assumes that the
acquisition of Godwin was completed as of January 1, 2009 (in millions):

2009

As Reported

Pre-Acquisition
Godwin
Operations (a)

Incremental
Depreciation and
Amortization
Expense (b)

Transaction
Costs
(c)

Income
Taxes (d) Pro Forma

Revenue . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . .

$2,849
263

197
50

(16)

—

(15)

$3,046
282

2010

As Reported

Pre-Acquisition
Godwin
Operations (a)

Incremental
Depreciation and
Amortization
Expense (b)

Transaction
Costs
(c)

Income
Taxes (d) Pro Forma

Revenue . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . .

$3,202
329

145
25

(10)

3

(6)

$3,347
341

(a) Godwin recognized revenue of $197 million and $270 million during 2009 and 2010, respectively.

(b)

Incremental depreciation and amortization expense associated with the purchase price allocation to plant, property and
equipment and finite-lived intangible assets recognized as a result of the acquisition.

(c) Reflects the reversal of transaction costs directly related to the acquisition of Godwin.

(d) Reflects income tax impact of pro-forma adjustments and change in income tax status of Godwin Pumps of America, Inc.

68

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Nova Analytics

On March 23, 2010, we acquired 100% of the outstanding stock of Nova, for a purchase price of $385 million,
net of cash acquired. Nova provides us with analytical instrumentation brands and technologies, which when
combined within our Water Infrastructure segment, provide our customers the ability to procure, from a single
source, a full suite of transport, treatment and testing products and solutions.

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed,
based on their fair values (in millions):

Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets acquired and liabilities assumed: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16
29
14
232
164
6
(53)
(23)

$385

$385

Goodwill of $232 million arising from the acquisition consists largely of the planned expansion of the Nova
footprint to new geographic markets, synergies and economies of scale. The goodwill related to this acquisition
has been assigned to our Water Infrastructure segment and is not expected to be deductible for income tax
purposes. In addition, of the $164 million that was allocated to intangible assets, $112 million was assigned to
distributor relationships and will be amortized on a straight line basis over the estimated useful life of 20 years;
$10 million was assigned to proprietary technology and will be amortized on a straight line basis over the
weighted average useful life of 10 years; and the remaining $42 million of acquired intangible assets was
assigned to trademarks, which is not subject to amortization as they were determined to have indefinite useful
lives.

2009 Acquisitions

During 2009, we spent $33 million, net of cash acquired, on acquisitions that were not material individually or in
the aggregate to our results of operations or financial position. The most significant of these acquisitions was
Laing GmbH (Laing), which we acquired in May of 2009. Laing, a privately-held producer of energy-efficient
circulator pumps primarily used in residential and commercial plumbing and heating, ventilating and air
conditioning systems, was fully integrated into the Applied Water segment during 2009.

69

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Note 4. Separation Costs

We had non-recurring pre-tax separation costs of $87 million, or $72 million after tax, during 2011. The
components of separation costs incurred during these periods is presented below (in millions).

IT costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19
18
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Employee retention and hiring costs . . . . . . . . . . . . . . . . . . .
13
Rebranding and marketing costs . . . . . . . . . . . . . . . . . . . . . .
10
Lease termination and other real estate costs . . . . . . . . . . .
8
. . . . . . . . . . . . . . . . . . . . . .
Non-cash asset impairments (a)
5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total separation costs in operating income . . . . . . . . . . . . . . . .
Tax-related separation costs . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

87
6
(21)

Total separation costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . $ 72

(a) During the third quarter, we recorded an impairment charge of $8 million on one of our facilities in China within our Applied

Water segment. Prior to the separation this was a shared facility among certain Xylem and ITT businesses and in connection
with the separation, the removal of certain ITT operations triggered an impairment evaluation. The fair value of the applicable
assets was calculated using the cost approach.

Note 5. Inventories

(in millions)

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total inventories, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 6. Property, Plant and Equipment

(in millions)

Land, buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment held for lease or rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011

$168
31
227

$426

2010

$166
32
191

$389

2011

2010

$ 237
598
152
86
53
21

1,147
684

$ 220
567
129
81
51
15

1,063
609

Total property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 463

$ 454

Depreciation expense was $93 million, $63 million, and $51 million for 2011, 2010, and 2009, respectively.

70

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Note 7. Goodwill and other Intangible Assets

Changes in the carrying value of goodwill by operating segment during the years ended December 31, 2011
and 2010 are as follows (in millions):

Water

Infrastructure Applied Water

Total

Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 389

$581

$ 970

Activity in 2010

Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency and other
Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Activity in 2011

Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency and other
Balance as of December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

493
(9)
$ 873

190
(9)
$1,054

—
(17)
$564

—
(8)
$556

493
(26)
$1,437

190
(17)
$1,610

In connection with the YSI acquisition, the excess of the preliminary purchase price over the fair value of net
assets acquired was $190 million (which is not expected to be deductible for income tax purposes). The
goodwill arising from the acquisition consists largely of the planned expansion of the YSI footprint to new
geographic markets, synergies and economies of scale. Goodwill acquired during 2010 primarily relates to the
Godwin and Nova acquisitions.

Based on the results of our annual impairment tests, we determined that no impairment of goodwill existed as
of the measurement date in 2011 or 2010. 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.

Other Intangible Assets

Information regarding our other intangible assets is as follows:

(in millions)

December 31, 2011

December 31, 2010

Carrying
Amount

Accumulated
Amortization

Net
Intangibles

Carrying
Amount

Accumulated
Amortization

Net
Intangibles

Customer and distributor

relationships . . . . . . . . . . . . . . . .
Proprietary technology . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . .
Patents and other . . . . . . . . . . . . . .
Indefinite-lived intangibles . . . . . . .

$ 309
102
32
21
141

Other intangibles . . . . . . . . . . . . . . . . .

$ 605

$ (51)
(23)
(11)
(15)
—

$ (100)

$ 258
79
21
6
141

$ 270
68
33
21
93

$ 505

$ 485

$ (29)
(18)
(9)
(13)
—

$ (69)

$ 241
50
24
8
93

$ 416

Based on the results of our annual impairment tests, we determined that no impairment of the indefinite-lived
intangibles existed as of the measurement date in 2011 or 2010. However, 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.

Customer and distributor relationships, proprietary technology, trademarks, patents and other are amortized
over weighted average lives of approximately 14 years, 19 years, 16 years and 10 years, respectively.

Total amortization expense for intangible assets was $31 million, $21 million, and $10 million for 2011, 2010
and 2009, respectively.

71

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Estimated amortization expense for each of the five succeeding years is as follows (in millions):

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33
33
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 8. Credit Facilities and Long-Term Debt

Total debt outstanding is summarized as follows:

(in millions)

2011

Short-term borrowings and current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . $

5

3.55% Senior Notes due 2016 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.875% Senior Notes due 2021 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discount (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

600
600
2
(1)

Long-term debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,201

Total Debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,206

2010

$ —

—
—
4
—

$ 4

$ 4

(a) The fair value of our Senior Notes was primarily determined using prices for the identical security obtained from an external

pricing service, which is considered a Level 2 input. As of December 31, 2011, the fair value of our Senior Notes due 2016 was
$625 million and the fair value of our Senior Notes due 2021 was $642 million.

(b) The unamortized discount is recognized as a reduction in the carrying value of the Senior Notes in the Consolidated and

Combined Balance Sheets and is being amortized to interest expense in our Consolidated and Combined Income Statements
over the expected remaining terms of the Senior Notes.

Deferred Financing Costs

We had deferred financing costs of $10 million as of December 31, 2011 related to our revolving credit facility
and Senior Notes. Scheduled amortization for future years, assuming no further prepayments of principal, are
$2 million in 2012, $2 million in 2013, $2 million in 2014, $1 million in 2015, $1 million in 2016 and $2 million
thereafter.

Senior Notes

On September 20, 2011, we issued 3.55% Senior Notes of $600 million aggregate principal amount due
September 2016 (the “2016 Notes”) and 4.875% Senior Notes of $600 million aggregate principal amount due
October 2021 (the “2021 Notes” and together with the 2016 Notes, the “Senior Notes”). The issuance resulted
in gross proceeds of $1.2 billion, offset by $9 million in debt issuance costs which were capitalized and are
included within other assets. The Senior Notes include covenants which restrict our ability, subject to
exceptions, to incur debt secured by liens and engage in sale and lease-back transactions, as well as provide
for customary events of default (subject, in certain cases, to receipt of notice of default and/or customary grace
and cure periods), including but not limited to, (i) failure to pay interest for 30 days, (ii) failure to pay principal
when due, (iii) failure to perform any other covenant for 90 days after receipt of notice from the trustee or from
holders of 25% of the outstanding principal amount and (iv) certain events of bankruptcy, insolvency or
reorganization. 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. As of December 31, 2011, we were in compliance with all covenants. If a change of control of Xylem
triggering event 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.

72

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Interest on the Senior Notes accrues from September 20, 2011. Interest on the 2016 Notes is payable on
March 20 and September 20 of each year, commencing on March 20, 2012. Interest on the 2021 Notes is
payable on April 1 and October 1 of each year, commencing on April 1, 2012.

The net proceeds received from the offering of the Senior Notes was used to pay a special cash dividend to
ITT, to repay indebtedness incurred to fund the Company’s acquisition of YSI and for general corporate
purposes.

On September 20, 2011, ITT, Xylem and the initial purchasers of the Senior Notes entered into a registration
rights agreement with respect to the Senior Notes (“Registration Rights Agreement”). Xylem agreed to (i) file a
registration statement on an appropriate registration form with respect to a registered offer to exchange the
Senior Notes for new notes, with terms substantially identical in all material respects and (ii) cause the
registration statement to be declared effective under the Securities Act.

If the exchange offer is not completed within 365 days after the issue date, we will use our reasonable best
efforts to file and to have declared effective a shelf registration statement relating to the resale of the Senior
Notes.

If we fail to satisfy this obligation (a registration default) under the Registration Rights Agreement, the annual
interest rate on the Senior Notes will increase by 0.25% and increase by an additional 0.25% for each
subsequent 90-day period during which the registration default continues, up to a maximum additional interest
rate of 1.00% per year. If the registration default is corrected, the applicable interest rate will revert to the
original level.

In the event that we must pay additional interest, it will be paid to the holders of the Senior Notes in cash on the
same dates that it makes other interest payments on the Senior Notes until the registration default is corrected.

Four Year Competitive Advance and Revolving Credit Facility

Effective October 31, 2011, Xylem and its subsidiaries entered into a Four Year Competitive Advance and
Revolving Credit Facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A., as agent, and a syndicate of
lenders. The credit facility provides for an aggregate principal amount of up to $600 million of (i) a competitive
advance borrowing option which will be provided on an uncommitted competitive advance basis through an
auction mechanism (the “competitive loans”), (ii) revolving extensions of credit (the “revolving loans”)
outstanding at any time and (iii) the issuance of letters of credits in a face amount not in excess of $100 million
outstanding at any time.

At our election, the interest rate per annum applicable to the competitive advances will be based on either (i) a
Eurodollar rate determined by reference to LIBOR, plus an applicable margin offered by the lender making
such loans and accepted by us or (ii) a fixed percentage rate per annum specified by the lender making such
loans. At our election, interest rate per annum applicable to the revolving loans will be based on either (i) a
Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an
applicable margin or (ii) a fluctuating rate of interest determined by reference to the greatest of (a) the prime
rate of JPMorgan Chase Bank, N.A., (b) the U.S. Federal Funds effective rate plus half of 1% or (c) the
Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, in each case,
plus an applicable margin.

In accordance with the terms, we may not exceed a maximum leverage ratio of 3.50 (based on a ratio of total
debt to EBITDA) throughout the term. The Credit Facility also contains limitations on, among other things,
incurring debt, granting liens, and entering sale and leaseback transactions. In addition, the Credit Facility
contains other terms and conditions such as customary representations and warranties, additional covenants
and customary events of default.

73

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Note 9. Accrued and other current liabilities

(in millions)

2011

2010

Compensation and other employee-benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 211
Customer-related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
Deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99

$ 175
37
38
21
12
57

Total accrued and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 490

$ 340

We have adjusted certain balances in the above table as of December 31, 2010 by immaterial amounts to
reflect them within the appropriate categories.

Note 10. Comprehensive Income

The following table provides the components of comprehensive income, net of tax, for 2011, 2010 and 2009.

(in millions)

2011

2010

2009

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 279 $ 329 $ 263
Foreign currency translation adjustment
81
Postretirement benefit plans:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(31)

(61)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost from plan amendment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial gain (loss), net
Reclassification adjustment for recognition of prior period amounts . . . . . . . . . . .

—
(59)
2

(2)
(4)
2

(1)
(3)
1

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161 $ 294 $ 341

Accumulated other comprehensive income is comprised of the following:

(in millions)

2011

2010

Cumulative foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 288 $ 73
(36)
Postretirement benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(166)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122 $ 37

Note 11. Stock-Based Compensation Plans

Our stock-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 stock-based compensation program in connection with their service on our
board. Share-based awards issued to employees include non-qualified stock options, restricted stock awards
and certain liability-based 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. Under the 2011 Omnibus Incentive Plan, the number of
shares initially available for awards was 9.2 million. At December 31, 2011, there were an aggregate of
1.9 million shares of options or restricted stock grants issued, net of forfeitures, and 7.3 million shares of
common stock available for future grants.

We measure the cost of employee services received in exchange for an award of equity instruments based on
the grant-date fair value of the award. 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

74

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The fair
value of restricted stock awards is determined using the closing price on date of grant. The fair value of certain
liability-based awards is remeasured at the end of each reporting period. Forfeitures are estimated at 7.1% for
employees and 5.3% for executives and Board members, respectively, based on evaluation of historical and
expected future turnover.

Total share-based compensation costs recognized for 2011, 2010 and 2009 were $13 million, $7 million and $9
million, respectively. A significant component of these charges related to costs allocated to Xylem for ITT
Corporate employees as well as other ITT employees not solely dedicated to Xylem. As of December 31, 2010
and 2009 there were approximately 1.0 million and 1.1 million of ITT stock options and restricted stock shares,
respectively, outstanding related to Xylem specific employees. These awards and related amounts are not
necessarily indicative of awards and amounts that would have been granted if we were an independent,
publicly traded company for the periods presented. The following table provides further detail related to share-
based compensation expense (in millions).

Compensation Cost

2011

Other
Employee
Allocations

Xylem
Employees

2011
Total

Xylem
Employees

2010

Other
Employee
Allocations

2010
Total

Xylem
Employees

2009

Other
Employee
Allocations

Equity — based awards . . . .
Liability — based awards . . .

Total . . . . . . . . . . . . . . . . . . . .

$ 6
—

$ 6

$ 7
—

$ 7

$ 13
—

$ 13

$ 4
—

$ 4

$ 5
(2)

$ 3

$ 9
(2)

$ 7

$ 4
—

$ 4

$ 5
—

$ 5

2009
Total

$ 9
—

$ 9

The unamortized compensation expense related to our stock options and restricted shares was $13 million and
$23 million, respectively, at December 31, 2011 and is expected to be recognized over a weighted average
period of 2.6 and 2.2 years, respectively.

The amount of cash received from the exercise of stock options was $1 million for 2011 with a tax benefit of
$0.1 million realized associated with stock option exercises and lapses of restricted stock. We classify as a
financing activity the cash flows attributable to excess tax benefits arising from stock option exercises and
restricted stock lapses.

Stock Option Grants

Options are awarded with a contractual term of ten years and generally vest over or at the conclusion of a three-
year period and are exercisable in seven to ten-year periods, except in certain instances of death, retirement or
disability. The exercise price per share is the fair market value of the underlying common stock on the date each
option is granted. At December 31, 2011, there were options to purchase an aggregate of 4.6 million shares of
common stock. The following is a summary of the changes in outstanding stock options for 2011:

(in thousands, except for per share amounts)

Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Converted (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercisable at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .

Shares

—
3,354
1,298
(62)
4,590
2,182

Weighted
Average
Exercise
Price / Share

Weighted Average
Remaining
Contractual
Term (Years)

—
$26.15
$24.58
$16.85
$25.83
$25.62

—
3.5
9.9
0.1
5.4
1.8

75

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

(a) Upon consummation of the Spin-off, Xylem converted into Xylem securities awards held by ITT employees that joined Xylem

with the number and exercise price systematically determined to preserve the intrinsic value of the previously held securities of
ITT as of the Spin-off date. Approximately 1.3 million stock options held by ITT Board members were converted to an equivalent
number of Xylem securities. These modifications resulted in an increase in the fair value of the share based awards of $4
million of which $2 million was recognized immediately as a part of separation costs and $2 million which will be recognized as
compensation expense over the awards’ remaining vesting period.

The aggregate intrinsic value of all outstanding stock options as of December 31, 2011 was $4 million. 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 2011 was $0.5 million.

Stock Option Fair Value

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 for 2011.

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.51%
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36.3%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.50%
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4
Weighted-average fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.88

2011

Expected volatility is calculated based on an analysis of historic and implied volatility measures for a set of
peer companies. 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 expected term provided above represents the weighted average of expected behavior for
certain groups of employees who have historically exhibited different behavior. The risk-free rate is based on
the U.S. Treasury yield curve in effect at the time of option grant.

Restricted Stock Grants

As part of the 2011 Omnibus Incentive Plan, we are authorized to issue shares of restricted and/or performance-
based stock to eligible employees and directors. Restricted shares granted to employees become fully vested
upon the third anniversary of the date of grant, and certain liability-based restricted shares to international
employees settle in cash. Prior to the time a restricted share becomes fully vested or a performance share is
issued, the awardees cannot transfer, pledge, hypothecate or encumber such shares. Prior to the time a
restricted share is fully vested, the awardees have certain rights of a stockholder and may include the right to
vote and receive dividends. If an employee leaves prior to vesting, whether through resignation or termination for
cause, the restricted stock and related accrued dividends is forfeited. If an employee retires or is terminated
other than for cause, a pro rata portion of the restricted stock may vest. Restricted shares granted to Board
members become fully vested upon the first anniversary of the date of grant.

76

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Our restricted stock activity was as follows for 2011:

(in thousands, except per share amounts)

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Converted (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2011

Weighted Average
Grant Date Fair
Value Per Share

$
—
$ 26.50
$ 24.58
$ 26.58
$ 26.24
$ 25.93

Shares

—
1,064
442
(6)
(12)
1,488

(a) Upon consummation of the Spin-off, Xylem converted into Xylem securities awards held by ITT employees that joined Xylem

with the number and exercise price systematically determined to preserve the intrinsic value of the previously held securities of
ITT as of the Spin-off date. Approximately 65 thousand restricted stock units held by ITT Board members were converted to an
equivalent number of Xylem securities.

Note 12. Postretirement Benefit Plans

Defined contribution plans – Prior to the Spin-off, employees who met certain eligibility requirements
participated in various defined contribution plans administered by ITT. In connection with the Spin-off, we
entered into a Benefit and Compensation Matters Agreement with ITT whereby Xylem agreed to replicate
certain ITT defined contribution plans to allow for continuation of those benefits. Under this agreement, assets
attributable to Xylem specific employees were transferred from ITT to our domestic and international qualified
defined contribution plans. The assets transferred into Xylem were $144 million in 29 different investment
options, including the Xylem Stock Fund. Xylem’s U.S. plan also provides for transition credits for eligible U.S.
employees for the first five years of the plan to supplement retirement benefits in the absence of a defined
benefit plan. Age plus years of eligible service greater than or equal to 60, entitles an employee to transition
credits. The liability for transition credits is approximately $1 million at December 31, 2011.

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 base pay. Matching obligations, the majority of which were
funded in cash in connection with the plans, are as follows:

(in millions)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 28
21
4

Defined Contribution

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 552 thousand shares of Xylem common stock in the Xylem Stock Fund at
December 31, 2011.

Defined benefit pension plans and other postretirement plans – We historically have maintained qualified
and nonqualified 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 postretirement benefit plans are all unfunded U.S. plans.

77

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Prior to the Spin-off, employees who met certain eligibility requirements participated in various defined benefit
pension plans and other postretirement benefit plans administered and sponsored by ITT. These plans were
accounted for under a multi-employer plan and as such, we recorded expense of $49 million, $24 million and
$14 million in 2011, 2010 and 2009, respectively, to reflect our allocation of pension and other postretirement
benefit costs related to shared plans.

Pursuant to the Benefit and Compensation Matters Agreement, the assets and liabilities of certain defined
benefit plans and other post retirement benefit plans, allocable to Xylem employees, were transferred to Xylem.
Assets of $337 million, projected obligation of $400 million and $105 million of other comprehensive income
($73 million net of tax) were recorded for the plans transferred by ITT. In the U.S., the new Xylem Investment
Master Trust (U.S. Master Trust) was created at the time of the Spin-off and $45 million of assets were
transferred from the ITT Master Trust related to the Xylem U.S. defined benefit pension plans for hourly
employees.

Benefits accrued for Xylem specific participants under the ITT Salaried Retirement Plan ceased on October 31,
2011. As a result a curtailment was recorded by ITT during the third quarter of 2011, of which we were
allocated a charge of $1 million. As of December 31, 2011 and 2010, there were no required contributions
outstanding. The Company does not offer a defined benefit plan for salaried employees in the United States.

The ITT Industries General Pension Plan (UK) for salaried employees was amended, effective December 31,
2011, to eliminate the crediting of future benefits relating to service. A curtailment was recorded during the
quarter ended September 30, 2011. As a result the applicable plan assets and obligations were remeasured. The
remeasurement included a $9 million ($6 million net of tax) increase in deferred losses within accumulated other
comprehensive income and a corresponding decrease to the funded status of the plan, as well as updated asset
values, and a change in the discount rate from 6.00% to 5.75%. In addition, all participants were reclassified as
inactive for benefit plan purposes and actuarial gains and losses will be amortized over the expected weighted-
average remaining lives of plan participants (27 years).

Amounts recognized in the Consolidated and Combined Balance Sheets for pension and other employee-
related benefit plans (collectively, postretirement plans) reflect the funded status of the postretirement benefit
plans. The following table provides a summary of the funded status of our postretirement plans, the
presentation of such balances and a summary of amounts recorded within accumulated other comprehensive
income.

(in millions)

December 31, 2011
Other

Pension

Total

Pension

December 31, 2010
Other

Total

Fair value of plan assets . . . . . . . . . . . . . . . . . . . .
Projected benefit obligation . . . . . . . . . . . . . . . . . .

$ 417
(670)

$ — $ 417
(716)

(46)

$

78
(233)

$ — $
(13)

78
(246)

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (253)

$ (46)

$ (299) $ (155)

$ (13)

$ (168)

Amounts recognized in the balance sheet
Other non-current assets . . . . . . . . . . . . . . . . . . .
Accrued and other current liabilities . . . . . . . . . . .
Accrued postretirement benefits . . . . . . . . . . . . . .

$

28
(9)
$ (272)

$ — $
(2)
$ (44)

28
(11)

— $ — $
(4)
$ (316) $ (151)

(1)
$ (12)

—
(5)
$ (163)

$

Net amount recognized . . . . . . . . . . . . . . . . . . .

$ (253)

$ (46)

$ (299) $ (155)

$ (13)

$ (168)

Accumulated other comprehensive income:

Net actuarial losses . . . . . . . . . . . . . . . . . . . . . .
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . .

$ 211
5

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 216

$ 11
—

$ 11

$ 222
5

$ 227

$

$

47
4

51

$ — $
—

$ — $

47
4

51

78

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

The unrecognized amounts recorded in accumulated other comprehensive income will be subsequently
recognized as expense on a straight line basis 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 prior service cost and net actuarial losses included in accumulated other comprehensive income at the
end of 2011 and expected to be recognized in net periodic benefit cost during 2012 are $0.6 million and
$10 million ($0.4 million and $7 million, net of tax), respectively.

The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated
and combined financial statements for our defined benefit domestic and international pension plans, as of and
for the years ended December 31, 2011 and 2010, were:

(in millions)

Change in benefit obligation:

Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special termination benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain)
Liabilities from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed from Spin-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in plan assets:

Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets received from Spin-off
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded (unfunded) status of the plans . . . . . . . . . . . . . . . . . . . . . . . . . .

Domestic Plans
2010

2011

International Plans

2011

2010

$ 61
2
3
—
—
(3)
8
—
—
—
$ 71

$ 43
6
(2)
(3)
—
—
$ 44
$(27)

$ 58
2
3
2
—
(3)
(1)
—
—
—
$ 61

41
—
5
(3)
—
—
$ 43
$(18)

$ 172
6
12
—
1
(8)
48
—
371
(3)
$ 599

$ 35
9
—
(8)
—
337
$ 373
$(226)

$ 125
3
7
—
—
9
(5)
29
—
4
$ 172

$

9
2
3
—
21
—
$ 35
$(137)

The following table provides a rollforward of the projected benefit obligation for the U.S. based other
postretirement employee benefit plans for the years ended December 31, 2011 and 2010:

(in millions)

Change in benefit obligation:

2011

2010

Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Liabilities assumed from Spin-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29

$ 11
—
1
2
(1)
—

Benefit Obligation at the end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46

$ 13

79

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

The accumulated benefit obligation (“ABO”) for all the defined benefit pension plans was $634 million and $213
million at December 31, 2011 and 2010, respectively. For defined benefit pension plans in which the
accumulated benefit obligation was in excess of the fair value of the plans’ assets, the projected benefit
obligation (“PBO”), ABO and fair value of the plans’ assets as of December 31, 2011 and 2010 were as follows:

(in millions)

2011

2010

Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448 $ 209
192
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

412
167

The components of net periodic benefit cost and other amounts recognized in other comprehensive income for
our domestic and international defined benefit pension plans are as follows:

(in millions)

Domestic defined benefit pension plans
Net periodic benefit cost:

2011

2010 (a)

2009 (a)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost

$ 2
3
(4)
1

Net periodic benefit cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

$ 2
3
(4)
1

2

$ 2
3
(4)
1

2

Other changes in plan assets and benefit obligations recognized in other

comprehensive income
Net loss (gain)
Prior service cost
Amortization of prior service cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14
0
(1)

(2)
2
(1)

(1)
0
(1)

Change recognized in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13

$ (1)

$ (2)

International defined benefit pension plans:
Net Periodic Benefit Cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special termination benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6
12
(6)
2
1

Net periodic benefit cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15

Other changes in plan assets and benefit obligations recognized in other

comprehensive income
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$57
(2)

Change recognized in other comprehensive income(b) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$55

Totals:

Net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total recognized in comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$17
$68

$85

$ 3
7
(1)
1
—

$ 10

$ 6
(1)

$ 5

$ 12
$ 4

$ 16

$ 3
6
(1)
1
—

$ 9

$ 6
(1)

$ 5

$ 11
$ 3

$ 14

(a) Represents pre Spin-off from ITT and does not include plans transferred from ITT upon Spin-off.
(b) Excludes $97 million ($68 million net of tax) deferred losses assumed from Spin-off in 2011.

80

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

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.

2011

2010

2009

U.S.

Int’l

U.S.

Int’l

U.S.

Int’l

Benefit Obligation Assumptions

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.87% 4.76% 5.83% 5.18% 6.00% 5.55%
Rate of future compensation increase . . . . . . . . . . . . . . . . . . . 4.50% 3.58% 4.00% 3.40% 4.00% 3.48%

Net Periodic Benefit Cost Assumptions

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.83% 5.53% 6.00% 5.55% 6.25% 5.79%
Expected long-term return on plan assets . . . . . . . . . . . . . . . . 9.00% 7.34% 9.00% 7.20% 9.00% 6.97%
Rate of future compensation increase . . . . . . . . . . . . . . . . . . . 4.50% 3.37% 4.00% 3.41% 4.00% 3.48%

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; estimate future returns based on independent estimates of asset class returns; and
evaluate historical broad market returns over long-term timeframes based on our asset allocation range. For
the new U.S. Master Trust, 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
on assets for all plan assets effective January 1, 2012 is estimated at 7.42%.

The table below provides the weighted average actual rate of return generated on plan assets during each of
the years presented as compared to the weighted average expected long-term rates of return utilized in
calculating the net periodic benefit costs.

Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.63%
7.52% 8.20%
(1.40)% 15.34% 33.96%

(a) Represents pre Spin-off from ITT and does not include returns on plans transferred from ITT upon Spin-off.

2011

2010 (a)

2009 (a)

The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.4%
for 2012, decreasing ratably to 5% in 2019. An increase or decrease in the health care trend rates by one
percent per year would not have a material effect on the benefit obligation or the aggregate annual service and
interest components. To the extent that actual experience differs from these assumptions, the effect will be
amortized over the average future service of the covered active employees.

The determination of the assumptions related to postretirement benefit plans are based on the provisions of the
applicable accounting pronouncements, the review of various market data and discussion with our actuaries.

81

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Investment Policy

The investment strategy for managing worldwide postretirement 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, 2011 and 2010,
and the related asset target allocation ranges by asset category.

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.2% 53.8%
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.5% 11.5%
8.9% 10.3%
Hedge funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.8% 16.7%
Private equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.7%
Cash and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.6%

(a) Represents pre Spin-off from ITT and does not include plans transferred from ITT upon Spin-off.

2011

2010 (a)

Target
Allocation
Ranges

40-60%
35-45%
0-20%
0-20%
0-10%

Fair Value of Plan Assets

In measuring plan assets at fair value, a fair value hierarchy is applied which categorizes and prioritizes the
inputs used to estimate fair value into three levels. 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. The three levels of the fair value hierarchy are 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.

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 net
asset value (NAV). Additionally, in certain circumstances, the NAV reported by an asset manager may be
adjusted when sufficient evidence indicates NAV is not representative of fair value.

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,

closed end mutual funds and exchange traded 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
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 are
generally classified within Level 2 of the hierarchy.

•

Fixed income — United States government securities are generally valued using quoted prices of securities
with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g.
discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed
income securities are generally classified in Level 2 of the fair value hierarchy, however, bond funds listed
on active markets are classified in Level 1.

82

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

• Absolute return (hedge funds) — The valuation of limited partnership interests in hedge funds may require

significant management judgment. The NAV reported by the asset manager is adjusted when it is
determined that NAV is not representative of fair value. In making such an assessment, a variety of factors
are reviewed, including, but not limited to, the timeliness of NAV as reported by the asset manager and
changes in general economic and market conditions subsequent to the last NAV reported by the asset
manager. Depending on how these investments can be redeemed and the extent of any adjustments to
NAV, hedge funds are classified within either Level 2 (redeemable within 90 days) or Level 3 (redeemable
beyond 90 days) of the fair value hierarchy.

• Private equity — The valuation of limited partnership interests in private equity funds may require significant
management judgment. The NAV reported by the asset manager is adjusted when it is determined that
NAV is not representative of fair value. In making such an assessment, a variety of factors are reviewed,
including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in
general economic and market conditions subsequent to the last NAV reported by the asset manager. These
funds are generally classified within Level 3 of the fair value hierarchy.

The following table provides the fair value of plan assets held by our pension benefit plans, at December 31,
2011 and 2010, by asset class.

(in millions)

Asset Category

Equity securities

2011

2010 (c)

Total

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Global stock funds/securities . . . . . . . . $ 131
Index funds . . . . . . . . . . . . . . . . . . . . . .
38
Emerging markets funds . . . . . . . . . . . .
8

$ 109
—
8

$ 20
38
—

$ 2
—
—

$ 30
—
12

$ 24
—
8

$ 5
—
3

$ 1
—
1

Fixed income

Corporate bonds . . . . . . . . . . . . . . . . . .
Government bonds . . . . . . . . . . . . . . . .
Absolute return (hedge funds) (a) . . . . . .
Private equity (b) . . . . . . . . . . . . . . . . . . . .
Insurance contracts and other . . . . . . . . .

167
5
37
24
7

51
—
—
—
3

116
5
—
—
—

—
—
37
24
4

9
—
8
13
6

—
—
—
—
1

8
—
3
2
5

1
—
5
11
—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 417

$ 171

$ 179

$ 67

$ 78

$ 33

$ 26

$ 19

(a) Absolute return hedge funds primarily include funds of funds that invest in a diversified portfolio of other hedge funds that
employ a range of investment strategies and fixed income/multi-strategy absolute return funds, which invest in multiple
investment strategies with the intent of diversifying risk and reducing volatility. Strategies include event driven, tactical trading,
credit driven, interest rate driven and equity long-short trading.

(b) Private equity includes a diversified range of strategies, including buyout funds, distressed funds, venture and growth equity

funds and mezzanine funds.

(c) Represents pre Spin-off from ITT and does not include plans assets transferred from ITT upon Spin-off.

83

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

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)

Equity
Securities

Balance, December 31, 2009 . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2
—
—

Balance, December 31, 2010 . . . . . . . . . . . . . . . . . . . .
Purchases, sales, settlements . . . . . . . . . . . . . . . . . .
Assets received from Spin-off . . . . . . . . . . . . . . . . . .
Unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2
(2)
—
—
—
2

Private
Equity

$ 11
1
(1)

11
(12)
24
—
1
—

Absolute
Return

$

5
—
—

5
(5)
38
(1)
—
—

Other

$ 1
—
—

1
(1)
—
—
—
4

Total

$ 19
1
(1)

19
(20)
62
(1)
1
6

Balance, December 31, 2011 . . . . . . . . . . . . . . . . . . .

$ 2

$ 24

$ 37

$ 4

$ 67

Contributions and Estimated Future Benefit Payments

Funding requirements under Internal Revenue Service rules are a major consideration in making contributions
to our postretirement plans. We made contributions of $15 million and $2 million to pension plans during 2011
and 2010, respectively. We currently anticipate making contributions to our pension plans in the range of $30
million to $40 million during 2012, of which $8 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

29
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years 2017 – 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179

$

2
2
2
3
3
$ 15

Note 13. Other Non-Operating Income, Net

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

(in millions)

2011

2010

2009

Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) – net

$ 3
4
(2)

$ — $ —
—
1

2
(2)

Total other non-operating income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5

$ — $

1

Note 14. Income Taxes

Prior to the Spin-off, Xylem was a member of ITT’s consolidated federal and state tax returns, and therefore
current and deferred tax expense has been computed for the Company on a separate return basis.
Subsequent to the Spin-off the Company files its own consolidated federal and state tax returns.

84

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

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

(in millions)

Income components:

2011

2010

2009

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total pre-tax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Current:

Domestic – federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic – state and local
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred:

Domestic – federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Domestic – state and local
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

$

46
337

383

20
5
71

96

21
3
(16)

8

65
323

388

$

23
254

$ 277

29
3
58

90

(41)
—
10

(31)

$

$

(2)
—
52

50

(44)
1
7

(36)

Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

104

$

59

$

14

Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27.4%

15.2%

5.0%

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:

Tax provision at U.S. statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in tax rate resulting from:

2011

2010

2009

35.0% 35.0% 35.0%

Foreign restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements of tax examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt interest
Foreign tax rate differential
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repatriation of foreign earnings, net of foreign tax credits . . . . . . . . . . . . . . . . . . . . . .
Non-deductible separation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other – net

1.5
1.3
(4.7)
4.7
(14.6)
(4.6)
3.7
2.6
2.5

— (20.8)
0.4
0.8
(0.7)
(0.3)
(3.2)
(0.8)
(2.2)
(5.7)
(4.7)
(5.1)
0.2
(8.8)
—
—
1.0
0.1

Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27.4% 15.2% 5.0%

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.

85

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

The following is a summary of the components of the net deferred tax assets and liabilities recognized in the
accompanying consolidated balance sheets:

(in millions)

Deferred tax assets:

2011

2010

Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132 $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6
199
5
17
4

33
24
76
3
51
4

$ 363 $ 191

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(195)

(68)

Net deferred tax asset

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168 $ 123

Deferred tax liabilities:

Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 172 $ 122
—
Investment in foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15
12
21

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220 $ 135

Management assesses the available positive and negative evidence to estimate if sufficient future taxable
income will be generated to realize existing deferred tax assets. On the basis of this evaluation, as of
December 31, 2011, a valuation allowance of approximately $195 million has been established to reduce the
deferred income tax asset related to certain U.S. and foreign net operating losses and U.S. capital loss
carryforwards. During 2011, the valuation allowance increased by $154 million as a result of losses from
certain foreign operations, decreased by $93 million as a result of the utilization of certain operating losses and
increased by $66 million as a result of net operating losses contributed by ITT.

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

(in millions)

2011

2010

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45 $ 47
52
76
(12)
(8)
(99)
(165)

Total deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

(52) $ (12)

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

(in millions)

Amount

First Year of Expiration

U.S. net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28 December 31, 2023
65 December 31, 2012
16 December 31, 2020
693 December 31, 2013

As of December 31, 2011, we have provided a deferred tax liability of $15 million on the excess of $100 million
of financial reporting over the tax basis of investments in certain foreign subsidiaries that has not been
permanently reinvested. In addition, we have not provided for deferred taxes on the excess of financial

86

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

reporting over the tax basis of investments in certain foreign subsidiaries in the amount of $1.5 billion because
we plan to reinvest such amounts indefinitely outside the U.S. The determination of the amount of federal and
state income taxes is not practicable because of complexities of the hypothetical calculation.

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, 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 settlement. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

2011

2010

2009

Unrecognized tax benefits — January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43 $ 19 $ 20
Additions for:
Current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for:
Assumption by ITT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(24)
(14)

—
(1)

20
5

—
—

1
—

—
(2)

Unrecognized tax benefits — December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

5 $ 43 $ 19

During 2011, the amount of unrecognized tax benefits decreased by $24 million as a result of the spin-off from
ITT and the associated Tax Matters Agreement, as described below, which provides that ITT assumes all
consolidated tax liabilities and related interest and penalties for the pre-spin period.

The amount of unrecognized tax benefits at December 31, 2011, includes $5 million of unrecognized tax
benefits which, if ultimately recognized, will reduce our annual effective tax rate. We do not believe that the
unrecognized tax benefits will significantly change within the next twelve months.

In many cases, unrecognized tax benefits are related to tax years that remain subject to examination by the
relevant taxing authorities. By virtue of previously filed separate company and consolidated tax returns with
ITT, we are routinely under audit by federal, state, local and foreign taxing authorities. These audits include
questioning the timing and the amount of deductions and the allocation of income among various tax
jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result
from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ
from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by
the company are recorded in the period they become known. Under the Tax Matters Agreement, as discussed
below, ITT assumes all consolidated tax liabilities and related interest and penalties for the pre-spin period.
The following table summarizes the earliest open tax years by major jurisdiction:

Jurisdiction

Earliest
Open Year

Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008
2008
2005
2007
2008
2006
2008
2007

87

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

We classify interest relating to unrecognized tax benefits as a component of other non-operating income, net
and tax penalties as a component of income tax expense in our Consolidated and Combined Income
Statements. During 2011, interest was reduced by $4 million from the assumption by ITT of $2 million and
recognition of net interest income of $2 million. As of December 31, 2011, 2010, and 2009, we had less than
$1 million, $5 million, and $4 million of interest accrued for unrecognized tax benefits, respectively.

In connection with the Spin-off, Xylem, ITT and Exelis entered into a Tax Matters Agreement. Under the
agreement, we may be obligated to make payments to ITT and Exelis under certain conditions. These
conditions include a payment to ITT in the event audit settlement payments exceed amounts specified in the
agreement. We also may be obligated to make payments in the event the Spin-off is determined to be taxable.
Finally, we are obligated to share in the cost of preparing certain tax returns.

Tax Matters Agreement

The Tax Matters Agreement governs the respective rights, responsibilities and obligations of ITT, Xylem and
the other Spincos (members of the ITT group that were spun-off, including Xylem are collectively referred to as
“Spincos”) with respect to taxes for periods ending on or before the spin-off. In general, pursuant to the Tax
Matters Agreement, ITT will prepare and file the consolidated federal income tax return, and any other tax
returns that include ITT (or any of its subsidiaries) and Xylem (or any of its subsidiaries) for all taxable periods
ending on or prior to, or including, October 31, 2011, with the appropriate tax authorities, and, except as
otherwise set forth below, ITT will pay any taxes relating thereto to the relevant tax authority. In connection with
any audit adjustments with respect to such returns, we have agreed to indemnify ITT for a portion of such tax
liability to the extent it exceeds an agreed threshold.

We will file all tax returns that include solely Xylem and/or its subsidiaries and any separate company tax
returns for Xylem and/or its subsidiaries for all taxable periods ending on or prior to, or including, October 31,
2011, and will pay all taxes due with respect to such tax returns (including any taxes attributable to an audit
adjustment with respect to such returns). In general, ITT controls all audits and administrative matters and
other tax proceedings relating to the consolidated federal income tax return of the ITT group and any other tax
returns for which the ITT group is responsible.

Under the Tax Matters Agreement, we have agreed not to enter into any transaction involving an acquisition
(including issuance) of Xylem common stock or any other transaction (or, to the extent we have the right to
prohibit it, to permit any such transaction) that could cause the Spin-off to be taxable to ITT. We have also
agreed to indemnify ITT for any tax resulting from any such transactions. Generally, ITT will recognize taxable
gain on the Spin-off if there are one or more acquisitions (including issuances) of our capital stock, directly or
indirectly, representing 50% or more, measured by vote or value, of our then-outstanding capital stock, and the
acquisitions or issuances are deemed to be part of a plan or series of related transactions that include the
Spin-off. Any such shares of our common stock acquired, directly or indirectly, within two years before or after
the Spin-off (with exceptions, including public trading by less-than-5% shareholders and certain compensatory
stock issuances) will generally be presumed to be part of such a plan unless that presumption is rebutted. As a
result, our obligations may discourage, delay or prevent a change of control of our company.

Notwithstanding the receipt of any such IRS ruling, tax opinion or officer’s certificate, generally Xylem and each
other Spinco must indemnify ITT and each other Spinco for any taxes and related losses resulting from (i) any
act or failure to act by such Spinco described in the covenants above, (ii) any acquisition of equity securities or
assets of such Spinco or any member of its group, and (iii) any breach by such Spinco or any member of its
group of any representation or covenant contained in the separation documents or the documents relating to
the IRS private letter ruling or tax opinion concerning the spin-off of such Spinco.

Under U.S. federal income tax law, ITT and the Spincos are severally liable for all of ITT’s federal income taxes
attributable to periods prior to and including the current taxable year of ITT, which ends on December 31, 2011.

88

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Thus, if ITT failed to pay the federal income taxes attributable to it under the Tax Matters Agreement for
periods prior to and including the current taxable year of ITT, the Spincos would be severally liable for such
taxes. In the event a Spinco is required to make a payment in respect of a spin-off related tax liability of the ITT
consolidated federal income tax return group under these rules for which such Spinco is not responsible under
the Tax Matters Agreement and full indemnification cannot be obtained from the Spinco responsible for such
payment under the Tax Matters Agreement, ITT will indemnify the Spinco that was required to make the
payment from and against the portion of such liability for which full indemnification cannot be obtained from the
Spinco responsible for such payment under the Tax Matters Agreement.

The Tax Matters Agreement also contains provisions regarding the apportionment of tax attributes of the ITT
consolidated federal income tax return group, authority to make tax elections, cooperation, and other
customary matters.

Note 15. Industry Segment and Geographic Data

Our business is organized into two segments: Water Infrastructure and Applied Water. The Water
Infrastructure segment, comprising our Water Solutions (f/k/a Water & Wastewater) and Analytics operating
units, focuses on the transportation, treatment and testing of water, offering a range of products including water
and wastewater pumps, treatment and testing equipment, and controls and systems. The Applied Water
segment, comprising of our Residential & Commercial Water and Flow Control operating units, encompasses
the uses of water and focuses on the residential, commercial, industrial and agricultural markets offering a wide
range of products including pumps valves and heat exchangers. 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 the Spin-off transaction and environmental matters that are
managed at a corporate level and are not included in the business segments in evaluating performance or
allocating resources.

89

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

The accounting policies of each segment are the same as those described in the summary of significant
accounting policies (see Note 1). The following tables contain financial information for each reportable segment
for 2011, 2010 and 2009 (in millions):

2011

2010

2009

Revenue:

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,416
1,444
(57)

$1,930
1,327
(55)

$1,651
1,254
(56)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,803

$3,202

$2,849

Operating income:

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 343
160
(108)

$ 395
5
17

$ 276
158
(46)

$ 227
109
(60)

388
—
—

276
1
—

Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 383

$ 388

$ 277

Depreciation and amortization:

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 104
31
2

$ 137

Capital expenditures:

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applied Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

91
31
4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 126

$

$

$

$

60
30
2

92

55
38
1

94

$

$

$

$

38
30
2

70

33
27
2

62

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

(in millions)

2011

2010

2009

Pumps, accessories, parts and service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,093
710

$2,671
531

$2,376
473

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,803

$3,202

$2,849

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

The following table contains the total assets for each reportable segment as of December 31, 2011 and 2010.

(in millions)

Total Assets

2011

2010

Water Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applied Water
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other

$2,745
1,234
414

$2,377
1,209
149

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,393

$3,735

90

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Corporate and other consists of items pertaining to our corporate headquarters function, which principally
consist of deferred tax assets and certain property, plant and equipment.

Geographical Information

Revenues are attributed to countries based upon the location of the customer. Property, Plant & Equipment, as
of December 31, is attributed to countries based upon the location of the assets.

(in millions)

Revenues
2010

2009

2011

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,363 $1,125 $ 956
1,217
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
269
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
407
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,262
343
472

1,422
426
592

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,803 $3,202 $2,849

(in millions)

Property, Plant & Equipment
2010

2009

2011

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$178
209
57
19

$463

$168
219
49
18

$454

$ 73
196
46
19

$334

Note 16. Related Party Transactions and Parent Company Equity

Net transfers from/(to) parent are included within parent company investment on the Consolidated and
Combined Statements of Changes in Stockholders’ Equity and Comprehensive Income. The components of
the net transfers from/(to) parent for 2011, 2010 and 2009 are as follows:

December 31,
2010

2011

2009

(In millions)

Intercompany sales and purchases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
Intercompany dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash pooling and general financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash transfers for acquisitions, divestitures and investments . . . . . . . . . . . . . . . . . . .
Corporate allocations including income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution of assets and liabilities upon spin-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(180)
(257)
— 1,012
162
—

(87)
(1,355)

182
20

1 $

5
(110)
(339)
29
125
—

Total net transfers from/(to) parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,240) $ 738 $(290)

For periods prior to October 31, 2011, cash and cash equivalents held by ITT at the corporate level were not
specifically identifiable to Xylem and therefore were not allocated to us for any of the periods presented. As
such, cash and cash equivalents at December 31, 2010 primarily represent cash held locally by entities
included in the consolidated and combined financial statements. Transfers of cash to and from ITT’s cash
management system are reflected as a component of parent company investment on the Consolidated and
Combined Balance Sheets.

91

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

All significant intercompany transactions between us and ITT have been included in these consolidated and
combined financial statements and are considered to be effectively settled for cash at the time the transaction is
recorded, when the underlying transaction is to be settled in cash by ITT. The total net effect of the settlement of
these intercompany transactions is reflected in the Consolidated and Combined Statements of Cash Flow as a
financing activity and in the Consolidated and Combined Balance Sheets as parent company investment.

During 2011, 2010 and 2009 we sold inventory to other ITT business in the aggregate amount of $10 million,
$11 million and $10 million, respectively, which is included in revenue in our consolidated and combined
financial statements. In addition, we recognized cost of sales from the inventory purchased from other ITT
businesses of $10 million, $12 million and $15 million for 2011, 2010 and 2009, respectively.

The consolidated and combined financial statements include expense allocations for certain functions provided
by ITT as well as other ITT employees not solely dedicated to Xylem, including, but not limited to, general
corporate expenses related to finance, legal, information technology, human resources, communications,
ethics and compliance, shared services, employee benefits and incentives, and share-based compensation.
These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder
allocated on the basis of revenue, headcount or other measure. We were allocated $129 million, which
includes $44 million of separation costs, of general corporate expenses incurred by ITT which is included within
selling, general and administrative expenses in the Consolidated and Combined Income Statements for 2011,
and $108 million and $105 million for 2010 and 2009, respectively.

The expense allocations have been determined on a basis that we consider to be a reasonable reflection of the
utilization of services provided or the benefit received by us during the periods presented. The allocations may
not, however, reflect the expense we would have incurred as an independent, publicly traded company for the
periods presented. Actual costs that may have been incurred if we had been a standalone company would
depend on a number of factors, including the chosen organizational structure, what functions were outsourced
or performed by employees and strategic decisions made in areas such as information technology and
infrastructure.

We recorded sales to unconsolidated affiliates during 2011, 2010, and 2009 totaling $14 million, $14 million
and $12 million, respectively. Additionally, we purchased $21 million, $22 million and $15 million of products
from unconsolidated affiliates during 2011, 2010 and 2009, respectively.

During the fourth quarter of 2011 we determined that certain historical foreign currency translation adjustment
balances that had been allocated to Xylem as part of the preparation of Xylem’s combined financial statements
needed to be adjusted. The applicable adjustments impacted “Accumulated other comprehensive income,”
“Parent company investment” and “Comprehensive income.” The adjustments did not impact the Combined
and Consolidated Income Statements, the Combined and Consolidated Statements of Cash Flows or Parent
Company Equity.

The adjustments, which have been reflected in Xylem’s consolidated and combined financial statements, are
as follows (in millions):

Summary of Adjustments – Increase / (Decrease)

Accumulated
Other
Comprehensive
Income

Parent
Company
Investment

Comprehensive
Income

December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2010 Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(343)

(343)

22

$343

343

(22)

$ —

—

22

December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(321)

$321

92

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Although not presented herein, Accumulated Other Comprehensive Income, Parent Company Investment and
Comprehensive Income for the period ended September 30, 2011 have also been adjusted by $(266) million,
$266 million and $55 million, respectively.

We believe that the adjustments are not material to previously issued financial statements; however, we
decided to correct the historical amounts.

Note 17. Commitments and Contingencies

General

From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses.
Some of these proceedings seek remedies relating to environmental matters, intellectual property matters,
product liability and personal injury claims, employment and pension matters, government contract issues and
commercial or contractual disputes, sometimes related to acquisitions or divestitures. Although we cannot
predict the outcome of these and other proceedings with certainty, we believe that they will not have a material
adverse effect on our consolidated financial position, results of operations or cash flows.

On December 20, 2011, the Ad Hoc Committee of ITT Bondholders filed a Complaint in New York State court
alleging that ITT breached the early redemption provisions of certain bonds issued in 2009. In 2009, ITT issued
$500 million in bonds with a 10-year maturity date in 2019 and an interest rate of 6.125%. The documents
governing the bonds contained certain provisions governing early redemptions. On September 20, 2011, ITT
notified the holders of the debt that it intended to redeem the bonds on October 20, 2011 in accordance with
the terms of the governing documents. On October 18, 2011, the redemption price was disclosed. The
Plaintiffs contend that ITT used an inappropriate discount rate in calculating the redemption price and
otherwise failed to comply with required redemption procedures. If the plaintiffs’ claims are sustained, ITT could
have to pay over $5 million in additional redemption fees and interest. Costs associated with this matter, if any,
are shared with the Company and Exelis, in accordance with the Distribution Agreement.

While very few claims have been asserted against Xylem alleging injury caused by any of our products
resulting from asbestos exposure, it is possible that additional claims could be filed in the future. We believe
there are numerous legal defenses available for such claims and would defend ourselves vigorously. Pursuant
to the Distribution Agreement, ITT will indemnify Xylem for asbestos product liability matters, including
settlements, judgments, and legal defense costs associated with all pending and future claims that may arise
from past sales of ITT’s legacy products. We believe ITT remains a substantial entity with sufficient financial
resources to honor its obligations to us.

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 expect that any asserted
or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on
our cash flow, results of operations, or financial condition.

Indemnifications

As part of the Spin-off, ITT, Exelis and Xylem will indemnify each of the other parties with respect to such
parties’ assumed or retained liabilities under the Distribution Agreement and breaches of the Distribution
Agreement or related spin agreements. ITT’s indemnification obligations include asserted and unasserted
asbestos and silica liability claims that relate to the presence or alleged presence of asbestos or silica in
products manufactured, repaired or sold prior to the Distribution Date, subject to limited exceptions with respect
to certain employee claims, or in the structure or material of any building or facility, subject to exceptions with
respect to employee claims relating to Xylem buildings or facilities. The indemnification associated with
pending and future asbestos claims does not expire. Xylem has not recorded a liability for matters for which we
will be indemnified by ITT or Exelis through the Distribution Agreement and we are not aware of any claims or
other circumstances that would give rise to material payments from us under such indemnifications.

93

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

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 the best estimates related to the
investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well
as related legal fees. 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 $15
million and $8 million as of December 31, 2011 and 2010, 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. In our opinion, the total amount accrued is reasonable based on existing facts and
circumstances.

Operating Leases

We lease certain offices, manufacturing buildings, machinery, computers and other equipment. Such leases
expire at various dates through 2047 and may include renewal and payment escalation clauses. We often pay
maintenance, insurance and tax expense related to leased assets. Total rent expense for the three years
ended December 31, 2011 was as follows (in millions):

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

$99
54
47

At December 31, 2011, we are obligated to make minimum rental payments under operating leases which are
as follows (in millions):

Minimum rental payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $139 $126

$92

$62

$55

$211

2012

2013

2014

2015

2016

Thereafter

94

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

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 $35 million, $30 million, and $20 million for 2011, 2010
and 2009, respectively. The table below provides changes in the product warranty accrual over each period.

Warranty accrual – January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes for product warranties in the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of warranty claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Warranty accrual – December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011

2010

(in millions)

$ 38
35
(32)
1

$ 42

$ 34
30
(28)
2

$ 38

Note 18. Supplemental Information

(in millions)

Balance at
beginning of
year

Additions
charged to
expense

Deductions

Balance at
end of year

Allowance for Doubtful Accounts:
Year Ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . .

Inventory Valuation:
Year Ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . .

$25
$24
$16

$40
$50
$39

$11
$ 6
$11

$17
$ 9
$18

$ (7)
$ (5)
$ (3)

$(11)
$(19)
$ (7)

$29
$25
$24

$46
$40
$50

95

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

XYLEM INC. AND SUBSIDIARIES

Note 19. Quarterly Financial Data (Unaudited)

2011 Quarter Ended (1)

Dec. 31

Sept. 30

June 30

Mar. 31

(In millions, except per share amounts)

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,003
380
100
52

$

$ 939
365
79
$ 77

Earnings per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 0.28
$ 0.28

$0.42
$0.42

$ 971
379
116
$ 72

$0.39
$0.39

$ 890
337
100
$ 78

$0.42
$0.42

2010 Quarter Ended (1)

Dec. 31

Sept. 30

June 30

Mar. 31

(In millions, except per share amounts)

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 935
359
111
$ 97

Earnings per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$0.53
$0.53

$ 806
309
107
$ 91

$0.49
$0.49

$ 775
291
101
$ 85

$0.46
$0.46

$ 686
255
69
$ 56

$0.30
$0.30

(1) The Spin-off was completed on October 31, 2011, and we issued 184.6 million shares of common stock. This initial share

amount is being utilized to calculate earnings per share for all periods prior to the Spin-off.

96

ITEM 9.

None.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

This annual report does not include a report of management’s assessment regarding internal control over
financial reporting or an attestation report of the company’s registered public accounting firm due to a transition
period established by the rules of the Securities and Exchange Commission for newly public companies. Under
the rules and regulations of the Securities and Exchange Commission, we are not required to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until we file our Annual Report on Form 10-K
for our fiscal year ending December 31, 2012, so long as we continue to meet the definition of a
non-accelerated filer. In our Annual Report on Form 10-K for the year ending December 31, 2012,
management and our independent registered public accounting firm will be required to provide an assessment
as to the effectiveness of our internal controls over financial reporting as of December 31, 2012.

Evaluation of Disclosure Controls and Procedures.

Our management, with the Chief Executive Officer and Chief Financial Officer of the Company, have evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report. Any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. Based on such evaluation, such officers have concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and procedures are effective at the reasonable
assurance level.

Changes in Internal Control Over Financial Reporting.

Before the Spin-off, the Company relied on certain financial information and resources of ITT to manage
certain aspects of the Company’s business and report results. These included investor relations, corporate
communications, accounting, tax, legal, human resources, benefit plan administration, benefit plan reporting,
general management, real estate, treasury, insurance and risk management, and oversight functions, such as
Board of Directors and internal audit which includes Sarbanes Oxley compliance. In conjunction with the
Company’s separation from ITT, the Company enhanced its own financial, administrative, and other support
systems. The Company expanded its internal accounting, reporting, legal, and internal audit departments and
reformed its policies and systems, as needed, to meet all regulatory requirements on a stand-alone basis.
While, most of these changes in staffing, policies and systems were accomplished prior to December 31, 2011,
we continue to review, document and test our internal controls over financial reporting, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our
business. These efforts may lead to changes in our internal control over financial reporting.

Other than those noted above, there were no changes in the Company’s internal control over financial
reporting during the year ended December 31, 2011 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

97

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the information in our Definitive
Proxy Statement to be filed with the SEC in connection with our 2012 Annual Meeting of Stockholders (the
“2012 Proxy Statement”) set forth under the captions “Election of Directors,” “Management Information,”
“Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

The information called for by Item 10 with respect to executive officers is set forth above in Part I under the
caption “Executive Officers of the Registrant.”

We have adopted corporate governance principles and charters for each of our standing committees. The
principles address director qualification standards, responsibilities, access to management and independent
advisors, compensation, orientation and continuing education, management succession principles and board
and committee self-evaluation. The corporate governance principles and charters are available on the
company’s website at http://investors.xyleminc.com. A copy of the corporate governance principles and
charters is also available to any shareholder who requests a copy from the Company’s corporate secretary.

We have also adopted a written code of ethics, the “Code of Conduct,” which is applicable to all our directors,
officers and employees, including the Company’s Chief Executive Officer, Chief Financial Officer, and Chief
Accounting Officer and other executive officers identified pursuant to this Item 10 (collectively, the “Selected
Officers”). In accordance with the SEC’s rules and regulations, a copy of the code has been posted to our
website and a copy of the code is also available to any shareholder who requests it. We intend to disclose any
changes in our code of ethics by posting a revised version on our website at www.xyleminc.com.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the information in our 2012 Proxy
Statement set forth under captions “Corporate Governance,” “Executive Compensation and Related
Information” and “Leadership Development & Compensation Committee Report.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated herein by reference to the information in our 2012 Proxy
Statement set forth under the captions “Executive Compensation and Related Information” and “Security
Ownership of Certain Beneficial Owners and Management.”

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

The information required by this Item is incorporated herein by reference to the information in our 2012 Proxy
Statement set forth under the captions “Corporate Governance” and “Executive Compensation and Related
Information.”

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the information in our 2012 Proxy
Statement set forth under the captions “Audit and Non-Audit Fees.”

98

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

PART IV

(a)

(1)

The Index to Consolidated and Combined Financial Statements of the Registrant under
Item 8 of this Report is incorporated herein by reference as the list of Financial Statements
required as part of this Report.

(2)

(3)

Financial Statement Schedules — All financial statement schedules have been omitted
because they are not applicable or the required information is shown in the financial
statements or notes thereto.

Exhibits — The exhibit list in the Exhibit Index is incorporated by reference as the list of
exhibits required as part of this Report.

99

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

XYLEM INC.
(Registrant)

/s/ John P. Connolly
John P. Connolly
Vice President and Chief Accounting Officer
(Principal Accounting Officer)

February 28, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

February 28, 2012

February 28, 2012

/s/ Gretchen W. McClain
Gretchen W. McClain
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Michael T. Speetzen
Michael T. Speetzen
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

February 28, 2012

/s/ Markos I. Tambakeras

Markos I. Tambakeras, Chairman

February 28, 2012

/s/ Curtis J. Crawford

February 28, 2012

Curtis J. Crawford, Director

/s/ John J. Hamre

John J. Hamre, Director

February 28, 2012

/s/ Victoria D. Harker

Victoria D. Harker, Director

February 28, 2012

/s/ Sten E. Jakobsson

Sten E. Jakobsson, Director

February 28, 2012

/s/ Steven R. Loranger

Steven R. Loranger, Director

February 28, 2012

/s/ Edward J. Ludwig

Edward J. Ludwig, Director

February 28, 2012

/s/ Surya N. Mohapatra

Surya N. Mohapatra, Director

100

Exhibit
Number

(3.1)

Amended and Restated Articles of Incorporation
of Xylem Inc.

Description

Location

Incorporated by reference to Exhibit 3.1 of
Xylem Inc.’s Form 8-K Current Report filed on
October 13, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 3.2 of
Xylem Inc.’s Form 8-K Current Report filed on
October 13, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 4.2 of ITT
Corporation’s Form 8-K Current Report filed on
September 21, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 4.5 of ITT
Corporation’s Form 8-K Current Report filed on
September 21, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 4.6 of ITT
Corporation’s Form 8-K Current Report filed on
September 21, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 4.8 of ITT
Corporation’s Form 8-K Current Report filed on
September 21, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 10.1 of ITT
Corporation’s Form 10-Q Quarterly Report filed
on October 28, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 10.2 of ITT
Corporation’s Form 10-Q Quarterly Report filed
on October 28, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 10.3 of ITT
Corporation’s Form 10-Q Quarterly Report filed
on October 28, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 10.4 of ITT
Corporation’s Form 10-Q Quarterly Report filed
on October 28, 2011 (CIK No. 216228, File
No. 1-5672).

Incorporated by reference to Exhibit 10.5 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

(3.2)

By-laws of Xylem Inc.

(4.1)

Indenture, dated as of September 20, 2011,
between Xylem Inc., ITT Corporation, as initial
guarantor, and Union Bank, N.A., as trustee

(4.2)

Form of Xylem Inc. 3.550% Senior Notes due
2016

(4.3)

Form of Xylem Inc. 4.875% Senior Notes due
2021

(4.4)

(10.1)

(10.2)

(10.3)

(10.4)

(10.5)

Registration Rights Agreement, dated as of
September 20, 2011, between Xylem Inc., ITT
Corporation and J.P. Morgan Securities LLC,
RBS Securities Inc. and Wells Fargo Securities,
LLC as representatives of the Initial Purchasers

Distribution Agreement, dated as of October 25,
2011, among ITT Corporation, Exelis Inc. and
Xylem Inc.

Benefits and Compensation Matters Agreement,
dated as of October 25, 2011, among ITT
Corporation, Exelis Inc. and Xylem Inc.

Tax Matters Agreement, dated as of October
25, 2011, among ITT Corporation, Exelis Inc.
and Xylem Inc.

Master Transition Services Agreement, dated as
of October 25, 2011, among ITT Corporation,
Exelis Inc. and Xylem Inc.

Four-Year Competitive Advance and Revolving
Credit Facility Agreement, dated as of
October 25, 2011, among Xylem Inc., the
Lenders Named Therein, J.P. Morgan Chase
Bank, N.A., as Administrative Agent and
Citibank, N.A., as Syndication Agent.

101

Exhibit
Number

Description

Location

(10.6)

Xylem 2011 Omnibus Incentive Plan

(10.7)

Xylem 1997 Long-Term Incentive Plan

(10.8)

Xylem 1997 Annual Incentive Plan

(10.9)

Xylem Annual Incentive Plan for Executive
Officers

(10.10)

Xylem Retirement Savings Plan for Salaried
Employees

(10.11)

Xylem Supplemental Retirement Savings Plan
for Salaried Employees

(10.12)

Xylem Deferred Compensation Plan

(10.13)

Xylem Deferred Compensation Plan for
Non-Employee Directors

(10.14)

Xylem Enhanced Severance Pay Plan

(10.15)

Xylem Special Senior Executive Severance Pay
Plan

(10.16)

Xylem Senior Executive Severance Pay Plan

(10.17)

Form of Xylem 2011 Omnibus Incentive Plan
2011 Non-Qualified Stock Option Award
Agreement — Founders Grant

102

Incorporated by reference to Exhibit 4.3 of
Xylem Inc.’s Registration Statement on Form
S-8 filed on October 28, 2011 (CIK
No. 1524472, File No. 333-177607).

Incorporated by reference to Exhibit 10.7 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.8 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.9 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 4.4 of
Xylem Inc.’s Registration Statement on
Form S-8 filed on October 28, 2011 (CIK
No. 1524472, File No. 333-177607).

Incorporated by reference to Exhibit 10.11 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 4.5 of
Xylem Inc.’s Registration Statement on
Form S-8 filed on October 28, 2011 (CIK
No. 1524472, File No. 333-177607).

Incorporated by reference to Exhibit 10.13 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.14 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.15 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.16 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.17 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Description

Location

Exhibit
Number

(10.18)

(10.19)

(10.20)

(10.21)

(10.22)

(10.23)

Form of Xylem 2011 Omnibus Incentive Plan
Non-Qualified Stock Option Award
Agreement — General Grant

Form of Xylem 2011 Omnibus Incentive Plan
Restricted Stock Unit Agreement — 2010 TSR
Replacement

Form of Xylem 2011 Omnibus Incentive Plan
Restricted Stock Unit Agreement — 2011 TSR
Replacement

Form of Xylem 2011 Omnibus Incentive Plan
Restricted Stock Unit Agreement — Founders
Grant

Form of Xylem 2011 Omnibus Incentive Plan
Restricted Stock Unit Agreement — General
Grant

Form of Xylem 2011 Omnibus Incentive Plan
Restricted Stock Unit Award Agreement — Non-
Employee Director

(10.24)

Form of Director’s Indemnification Agreement

Incorporated by reference to Exhibit 10.18 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.19 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.20 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.21 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.22 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.23 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

Incorporated by reference to Exhibit 10.24 of
Xylem Inc.’s Form 10-Q Quarterly Report filed
on November 11, 2011 (CIK No. 1524472, File
No. 1-35229).

(10.25)

(10.26)

(10.27)

Form of Xylem 2011 Omnibus Incentive Plan
2012 Restricted Stock Unit Agreement

Form of Xylem 2011 Omnibus Incentive Plan
2012 Restricted Stock Unit Award Agreement —
Non-Employee Director

Form of Xylem 2011 Omnibus Incentive Plan
2012 Non-Qualified Stock Option Award
Agreement

Filed herewith.

Filed herewith.

Filed herewith.

(11)

Statement re computation of per share earnings

Information required to be presented in Exhibit
11 is provided under "Earnings Per Share" in
Note 1 to the consolidated financial statements
in Part II, Item 8. “Financial Statements and
Supplementary Data” of this Annual Report on
Form 10-K in accordance with the provisions of
Financial Accounting Standards Board
Accounting Standards Codification 260,
Earnings Per Share.

(12)

(21)

(23)

Statements re computation of ratios

Not required to be filed herewith.

Subsidiaries of the Registrant

Consent of Independent Registered Public
Accounting Firm

Filed herewith.

Filed herewith.

103

Exhibit
Number

(31.1)

(31.2)

Description

Location

Certification pursuant to Rule 13a-14(a)/15d-
14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

Certification pursuant to Rule 13a-14(a)/15d-
14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

Filed herewith.

Filed herewith.

This Exhibit is intended to be furnished in
accordance with Regulation S-K Item 601(b)
(32) (ii) and shall not be deemed to be filed for
purposes of Section 18 of the Securities
Exchange Act of 1934 or incorporated by
reference into any filing under the Securities Act
of 1933 or the Securities Exchange Act of 1934,
except as shall be expressly set forth by specific
reference.

This Exhibit is intended to be furnished in
accordance with Regulation S-K Item 601(b)
(32) (ii) and shall not be deemed to be filed for
purposes of Section 18 of the Securities
Exchange Act of 1934 or incorporated by
reference into any filing under the Securities Act
of 1933 or the Securities Exchange Act of 1934,
except as shall be expressly set forth by specific
reference.

Submitted electronically with this report.

(32.1)

Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

(32.2)

Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

(101)

The following materials from Xylem Inc.’s
Annual Report on Form 10-K for the year ended
December 31, 2011, formatted in XBRL
(Extensible Business Reporting Language): (i)
Combined Condensed Income Statements, (ii)
Combined Condensed Statements of
Comprehensive Income, (iii) Combined
Condensed Balance Sheets, (iv) Combined
Condensed Statements of Cash Flows and (v)
Notes to Combined Condensed Financial
Statements

104

SUBSIDIARIES OF THE REGISTRANT*

Exhibit 21

Name

Aanderaa Data Instruments AS

Aanderaa Data Instruments Espana S.L.

Aanderaa Data Instruments, Inc.

AC Custom Pumps Division

Alcon Division

Anadolu Flygt Pompa Pazarlama Ve Ticaret AS

ASE AS

Bell & Gossett Division

Bellingham & Stanley Ltd.

Bellingham & Stanley, Inc.

Bombas Flygt de Venezuela

Brightbanner Limited

Canada Investments Company

CMS Research Corporation

Design Analysis Associates

EBRO Electronics GmbH

Electronic Headquarters Division

Evolutionary Concepts Inc.

Faradyne Motors (Suzhou) Co. Ltd

Faradyne Motors LLC

Flojet Division

Flow Control Division

Flow Control LLC

Flowtronex PSI, LLC

Fluid Handling, LLC

Flygt Australia PTY LTD.

Flygt Lowara Italia S.R.L.

FTC Headquarters Division

Global Water Instrumentation, Inc.

Godwin Holdings Ltd.

Godwin Pumps Ltd.

Gould Pumps Ireland Ltd.

Goulds Pumps (Philippines), Inc.

Goulds Pumps Ireland LTD

Jurisdiction of
Organization

Name Under Which
Doing Business

Norway

Spain

Massachusetts

N/A

United Kingdom

Turkey

Norway

N/A

United Kingdom

Georgia

Venezuela

United Kingdom

Canada

Alabama

Utah

Germany

N/A

California

China

Delaware

N/A

N/A

Delaware

Nevada

Delaware

Australia

Italy

N/A

Xylem Fluid Handling LLC

California

United Kingdom

United Kingdom

Ireland

Philippines

Ireland

Goulds

Goulds

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted
because, considered in the aggregate, they would not constitute a significant subsidiary as of the end of the
year covered by this report

Name

Grindex AB

Grindex Pumps Division

Grindex Pumps LLC

ITT (Nanjing) Co. LTD

ITT Flygt AS

ITT PCI Membranes Sp. Z.o.o.

Jurisdiction of
Organization

Name Under Which
Doing Business

Sweden

N/A

Delaware

China

Norway

Poland

Goulds

ITT Water & Wastewater Alphen B.V.

Netherlands

ITT Water & Wastewater Hungary KFT

ITT Water & Wastewater Ireland Ltd.

ITT Water & Wastewater Lituanica

Hungary

Ireland

Lithuania

ITT Water & Wastewater Mexico S. de R.L. de C.V.

Mexico

ITT Water & Wastewater Treatment (Shenyang) Co Ltd. China

Flygt

ITT Water Technology Mexico S. de R.L. de C.V.

Jabsco Costa Mesa Division

Jabsco GmbH

Jabsco Marine Italia s.r.l.

LFK

LLC Flygt and Lowara Water Technology

Lowara Ireland Ltd.

Lowara Nederlands BV

Lowara Pump Corporation

Lowara s.r.l.

Lowara UK Limited

Lowara Vogel Polska SP ZOO

Marlow Division

McDonnell & Miller Division

Midland Division

NHK Jabsco Co, Ltd.

Nova Analytics Europe LLC

O.I. Corporation

PCI Membrane Systems, Inc.

Portacel Inc.

Rule Division

Sanitaire Division

Sarcoid S.A.

Scibase, Inc.

Mexico

N/A

Germany

Italy

Hungary

Russia

Ireland

Netherlands

Lowara

Japan

Italy

United Kingdom

Poland

N/A

N/A

United Kingdom

Japan

Delaware

Oklahoma

Delaware

Delaware

N/A

N/A

Portugal

Ohio

Lowara

Lowara

Santaire

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted
because, considered in the aggregate, they would not constitute a significant subsidiary as of the end of the
year covered by this report

Name

Secomam S.A.

Sensortechnik Meinsberg GmbH

SI analytics GmbH

SMS

SRP Acquisition Corp

Standard Division

Jurisdiction of
Organization

Name Under Which
Doing Business

France

Germany

Germany

Hungary

Delaware

N/A

TEC Electrical Componets Ltd.

United Kingdom

Texas Turbine LLC

Totton Holdings Limited

Totton Pumps Limited

Water Asset Management, Inc.

Water Company Limited

Water Process Holdings Limited

Water Process Limited

Delaware

Xylem Texas Turbine LLC

United Kingdom

United Kingdom

Nevada

United Kingdom

United Kingdom

United Kingdom

Water Technology Philippines Holding, Inc.

Massachusetts

Wedeco AVP PTY Ltd.

Wedeco GmbH

Weissenschaftich Technische Warskatte GmbH

WTW Measurement Systems Inc.

Xylem (China) Company Limited

Xylem (Hong Kong) Limited

Xylem Analytics Germany GmbH

Xylem Analytics LLC

Xylem Brasil Soluções para Água Ltda.

Xylem Canada Company

Xylem Canada LP

Xylem Delaware, Inc.

Xylem Dewatering Solutions, Inc

Xylem Flow Control Limited

Xylem Germany GmbH

Xylem Holdings France SAS

Xylem Holdings Sarl

Xylem Industriebeteiligungen GmbH

Xylem Industries Sarl

Xylem International Sarl

Australia

Switzerland

Germany

Delaware

China

China

Germany

Delaware

Brazil

Canada

Canada

Delaware

New Jersey

United Kingdom

Germany

France

Luxembourg

Germany

Luxembourg

Luxembourg

Godwin Pumps of America

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted
because, considered in the aggregate, they would not constitute a significant subsidiary as of the end of the
year covered by this report

Name

Xylem IP Holdings LLC

Xylem Luxembourg Sarl

Xylem Management GmbH

Xylem Water Solutions (Hong Kong) Limited

Xylem Water Solutions AB

Xylem Water Solutions Argentina S.A.

Xylem Water Solutions Australia Limited

Xylem Water Solutions Austria Gmbh

Xylem Water Solutions Belgium BVBA

Xylem Water Solutions Chile SA

Xylem Water Solutions Colombia Ltd

Xylem Water Solutions Denmark ApS

Xylem Water Solutions Deutschland GmbH

Xylem Water Solutions Espana SA

Xylem Water Solutions Florida LLC

Xylem Water Solutions France SAS

Xylem Water Solutions Herford GmbH

Xylem Water Solutions India Pvt. Ltd.

Xylem Water Solutions Indiana LLC

Xylem Water Solutions Italia s.r.l.

Xylem Water Solutions Korea Co., Ltd.

Xylem Water Solutions Malyasia SDN BHD

Xylem Water Solutions Metz SAS

Xylem Water Solutions Nederland BV

Xylem Water Solutions New Zealand Limited

Xylem Water Solutions Norge AS

Xylem Water Solutions Panama s.r.l.

Xylem Water Solutions Peru S.A.

Xylem Water Solutions Polska Sp.z.o.o

Jurisdiction of
Organization

Delaware

Luxembourg

Germany

China

Sweden

Argentina

Australia

Austria

Belgium

Chile

Colombia

Denmark

Germany

Spain

Delaware

France

Germany

India

Delaware

Italy

Korea

Malaysia

France

Netherlands

New Zealand

Norway

Panama

Peru

Poland

Name Under Which
Doing Business

Flygt

Flygt

Flygt

Xylem Water Solutions Portugal, Unipessoa Lda

Portugal

Xylem Water Solutions Rugby Limited

United Kingdom

Xylem Water Solutions Singapore PTE Ltd.

Xylem Water Solutions South Africa Pty Ltd.

Xylem Water Solutions Suomi Oy

Xylem Water Solutions Sweden Holdings AB

Xylem Water Solutions U.S.A., Inc.

Singapore

South Africa

Finland

Sweden

Delaware

Water Solutions U.S.A., Inc.

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted
because, considered in the aggregate, they would not constitute a significant subsidiary as of the end of the
year covered by this report

Name

Jurisdiction of
Organization

Name Under Which
Doing Business

Xylem Water Solutions UK Holdings Limited

United Kingdom

Xylem Water Solutions UK Ltd.

United Kingdom

Lowara

ITT Water Technology LLC

Xylem Water Solutions Zelienople LLC

Xylem Water Systems (California), Inc.

Xylem Water Systems Australia PTY Ltd.

Xylem Water Systems Deutschland GmbH

Xylem Water Systems Hungary KFT

Xylem Water Systems International, Inc.

Xylem Water Systems Texas Holdings LLC

Xylem Water Systems U.S.A., LLC

YSI (Beijing) Co., Ltd.

YSI (China) Limited

YSI (Hong Kong) Ltd.

YSI (UK) Limited

YSI Australia Pty Ltd.

YSI Environmental Ltd.

Delaware

California

Australia

Germany

Hungary

Delaware

Delaware

Delaware

China

Hong Kong

Hong Kong

United Kingdom

Australia

United Kingdom

YSI Environmental South Asia Private Ltd.

India

YSI Hydrodata Limited

YSI Incorporated

YSI Instrumentos E Servicos Ambientais Ltda.

YSI Instruments, Ltd.

YSI International, Inc.

YSI Nanotech

YSI Sensors LLC

YSI Trading (Shanghai) Company, Ltd.

United Kingdom

Ohio

Brazil

Japan

Ohio

Japan

Ohio

China

* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted
because, considered in the aggregate, they would not constitute a significant subsidiary as of the end of the
year covered by this report

[THIS PAGE INTENTIONALLY LEFT BLANK]

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-177607 on Form S-8 of our
report dated February 28, 2012, relating to the financial statements of Xylem Inc. (which report expresses an
unqualified opinion and includes an explanatory paragraph regarding the fact that prior to October 31, 2011 the
financial statements were derived from the accounting records of the water equipment and services businesses
of ITT Corporation, and that for the period prior to October 31, 2011, the financial statements include expense
allocations for certain corporate functions historically provided by ITT Corporation and that these allocations
may not be reflective of the actual expenses which would have been incurred had the Company operated as a
separate entity apart from ITT Corporation and that included in Note 16 to the consolidated and combined
financial statements is a summary of transactions with related parties) appearing in this Annual Report on
Form 10-K of Xylem Inc. for the year ended December 31, 2011.

/s/ Deloitte & Touche LLP

Stamford, Connecticut
February 28, 2012

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

EXHIBIT 31.1

I, Gretchen W. McClain, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Xylem Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and

c)

disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2012

/s/ Gretchen W. McClain
Gretchen W. McClain
President and Chief Executive Officer

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

EXHIBIT 31.2

I, Michael T. Speetzen, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Xylem Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and

c)

disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2012

/s/ Michael T. Speetzen
Michael T. Speetzen
Senior Vice President and
Chief Financial Officer

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

EXHIBIT 32.1

In connection with the Annual Report on Form 10-K of Xylem Inc. (the “Company”) for the year ended
December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Gretchen W. McClain, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act

of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of the Company.

/s/ Gretchen W. McClain
Gretchen W. McClain
President and Chief Executive Officer
February 28, 2012

A signed original of this written statement required by Section 906 has been provided to Xylem Inc. and will be
retained by Xylem Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

EXHIBIT 32.2

In connection with the Annual Report on Form 10-K of Xylem Inc. (the “Company”) for the year ended
December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Michael T. Speetzen, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to
Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my
knowledge, that:

(3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act

of 1934, as amended; and

(4) The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of the Company.

/s/ Michael T. Speetzen
Michael T. Speetzen
Senior Vice President and Chief Financial Officer
February 28, 2012

A signed original of this written statement required by Section 906 has been provided to Xylem Inc. and will be
retained by Xylem Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

[THIS PAGE INTENTIONALLY LEFT BLANK]

Xylem Global Headquarters: 
1133 Westchester Avenue
Suite N200
White Plains, NY 10604
T: +1.914.323.5700
F: +1.914.323.5800
www.xyleminc.com

Transfer Agent and Registrar for Common Stock:
Computershare Trust Company, N.A.
United States and Canada: +1.866.416.8481
International Inquiries: +1.201.680.6578
Hearing Impaired (TDD): +1.800.231.5469

Address shareholder inquiries to:
Computershare
P.O. Box 358035
Pittsburgh, PA 15252-8035

2012 Annual Meeting:
Thursday, May 10, 2012
Doral Arrowwood
975 Anderson Hill Road
Rye Brook, NY 10573

Independent Public Accountant:
Deloitte & Touche LLP
Stamford Harbor Park
333 Ludlow Street
Stamford, CT 06902
+1.203.708.4000

Investor Relations:
Phil De Sousa
+1.914.323.5930
phil.desousa@xyleminc.com

Janice Tedesco
+1.914.323.5931
janice.tedesco@xyleminc.com

The word Xylem is derived from classical Greek 
and is the name for the tissue that transports
water in plants. Our name, Xylem, highlights 
the engineering efﬁciency of our water-centric
business by linking it with the best water trans-
portation of all  – that which occurs in nature.

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