Xylem
Annual Report 2018

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(Mark One)þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 or ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-35229Xylem Inc.(Exact name of registrant as specified in its charter)Indiana 45-2080495(State or other jurisdiction of incorporation ororganization) (I.R.S. Employer Identification No.) 1 International Drive, Rye Brook, NY 10573(address of principal executive offices and zip code)(914) 323-5700(Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, par value $0.01 per share New York Stock Exchange2.250% Senior Notes due 2023 New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨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 þIndicate 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 duringthe 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 requirementsfor the past 90 days. Yes þ No ¨Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation 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 suchfiles). Yes þ 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 bestof 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 Form10-K. þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" inRule 12b-2 of the Exchange Act. (Check one):Large Accelerated Filer þ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller reporting company ¨ Emerging growth company ¨If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þThe aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of June 30, 2018 was approximately $12.0 billion.As of February 15, 2019, there were 179,552,698 outstanding shares of the registrant’s common stock, par value $0.01 per share.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for its 2019 Annual Meeting of Shareowners, to be held in May 2019, are incorporated by reference intoPart II and Part III of this Report.Xylem Inc.ANNUAL REPORT ON FORM 10-KFor the fiscal year ended December 31, 2018Table of Contents ITEMPAGEPART I 1Business31A.Risk Factors111B.Unresolved Staff Comments212Properties223Legal Proceedings224Mine Safety Disclosures23*Executive Officers of the Registrant23 Board of Directors24 PART II 5Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities256Selected Financial Data277Management’s Discussion and Analysis of Financial Condition and Results of Operations287A.Quantitative and Qualitative Disclosures About Market Risk558Financial Statements and Supplementary Data569Changes In and Disagreements With Accountants on Accounting and Financial Disclosure1109A.Controls and Procedures1109B.Other Information111 PART III 10Directors, Executive Officers and Corporate Governance11411Executive Compensation11412Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters11413Certain Relationships and Related Transactions, and Director Independence11414Principal Accounting Fees and Services114 PART IV 15Exhibits, Financial Statement Schedules11516Form 10-K Summary119 Signatures119 *Included pursuant to Instruction 3 of Item 401(b) of Regulation S-K.2PART IThe following discussion should be read in conjunction with the consolidated financial statements, including the notes, included elsewhere in thisAnnual Report on Form 10-K (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 in the consolidated financial statements to "ITT" or the "former parent" refer toITT Corporation (now ITT LLC) and its consolidated subsidiaries (other than Xylem Inc.) as of the applicable periods.Forward-Looking StatementsThis Report contains information that may constitute “forward-looking statements" within the meaning of the Private Securities Litigation Act of1995. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Generally, the words “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” “believe,” “target,” “will,” “could,” “would,” “should” and similar expressions identify forward-looking statements. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. Theseforward-looking statements include any statements that are not historical in nature, including any statements about the capitalization of theCompany, the Company’s restructuring and realignment, future strategic plans and other statements that describe the Company’s businessstrategy, outlook, objectives, plans, intentions or goals. All statements that address operating or financial performance, events or developmentsthat we expect or anticipate will occur in the future - including statements relating to orders, revenues, operating margins and earnings per sharegrowth, and statements expressing general views about future operating results - are forward-looking statements. Forward-looking statementsinvolve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from thoseexpressed or implied in, or reasonably inferred from, such forward-looking statements.Factors that could cause results to differ materially from those anticipated include: overall economic and business conditions, political and otherrisks associated with our international operations, including military actions, economic sanctions or trade barriers including tariffs and embargoesthat could affect customer markets, and non-compliance with laws, including foreign corrupt practice laws, export and import laws and competitionlaws; potential for unexpected cancellations or delays of customer orders in our reported backlog; our exposure to fluctuations in foreign currencyexchange rates; competition and pricing pressures in the markets we serve; the strength of housing and related markets; weather conditions;ability to retain and attract talent and key members of management; our relationship with and the performance of our channel partners; our abilityto successfully identify, complete and integrate acquisitions; our ability to borrow or to refinance our existing indebtedness and availability ofliquidity sufficient to meet our needs; changes in the value of goodwill or intangible assets; risks relating to product defects, product liability andrecalls; claims or investigations by governmental or regulatory bodies; security breaches or other disruptions of our information technologysystems; litigation and contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” and in subsequent filings we make with theSecurities and Exchange Commission (“SEC”).All forward-looking statements made herein are based on information currently available to the Company as of the date of this Report. TheCompany undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, futureevents or otherwise, except as required by law.ITEM 1. BUSINESSBusiness OverviewXylem, with 2018 revenue of $5.2 billion and approximately 17,000 employees, is a leading global water technology company. We design,manufacture and service highly engineered products and solutions ranging across a wide variety of critical applications primarily in the watersector, but also in electric and gas. Our broad portfolio of products, services and solutions addresses customer needs across the water cycle,from the delivery, measurement and use of drinking water to the collection, test and treatment of wastewater to the return of water to theenvironment.We have differentiated market positions in core application areas including transport, treatment, test, smart metering, smart infrastructureanalytics, digital solutions, condition assessment and leak detection, building services and industrial processing. Setting us apart is a unique setof global assets that include:3•Fortress brands with leading positions, some of which have been in use for more than 100 years•Far-reaching global distribution networks consisting of direct sales forces and independent channel partners that collectively serve adiverse customer base in approximately 150 countries•A substantial installed base that provides for steady recurring revenue•A strong financial position and cash generation profile that enables us to fund strategic organic and inorganic growth initiatives, andconsistently return capital to shareholdersKey pillars of our long-term strategy include: (1) accelerate profitable growth; (2) increase profitability by driving continuous improvement initiatives;(3) leadership and talent development; (4) focus on execution and accountability; and (5) create social value in everything we do.Company History and Certain RelationshipsOn October 31, 2011 (the "Distribution Date"), ITT Corporation ("ITT") completed the Spin-off (the “Spin-off”) of Xylem, formerly ITT’s waterequipment and services businesses. The Spin-off was completed pursuant to a Distribution Agreement, dated as of October 25, 2011 (the“Distribution Agreement”), among ITT (now ITT LLC), Exelis Inc., acquired by Harris Inc. on May 29, 2015 (“Exelis”), and Xylem.Our IndustryOur planet faces serious water challenges. Less than 1% of the total water available on earth is fresh water, and these supplies are under threatdue to factors such as the draining of aquifers, increased pollution and the effects of climate change. Demand for fresh water is rising rapidly dueto population growth, industrial expansion, and increased agricultural development, with consumption estimated to double every 20 years. By 2025,more than 30% of the world’s population is expected to live in areas without adequate water supply. Even in developed countries with sufficientclean water supply, existing water supply infrastructure is aging and inadequately funded. In the United States, deteriorating pipe systems, theft orinaccurate meters result in approximately one out of every six gallons of water being lost between the treatment plant and the end customer. Thisproblem of "non-revenue" water is a major financial challenge of many utilities globally, especially in developing markets where non-revenue watercan represent 15% to 60% or more of net water produced. These and other challenges create opportunities for growth in the global water industry.We estimate the total addressable market size to be approximately $550 billion.We compete in areas that are pivotal to improving water productivity, water quality and resilience. Water productivity refers to the more efficientdelivery and use of clean water. Water quality refers to the efficient and effective management of wastewater. Resilience refers to themanagement of water-related risks and the resilience of water infrastructure. Our customers often face all three of these challenges, ranging frominefficient and aging water distribution networks (which require improvements in “water productivity”); energy-intensive or unreliable wastewatermanagement systems (which require improvements in “water quality”); or exposure to natural disasters such as floods or droughts (which requireimprovements in “resilience”). Additionally, through the acquisition of Sensus, we also provide solutions to enhance communications andefficiency, improve safety and conserve resources to customers in the water, electric, gas, and lighting sectors. Delivering value in these areascreates significant opportunity for the Company. We estimate our total served market size to be approximately $57 billion.The Global Water Industry Value ChainThe water industry value chain includes Equipment and Services companies, like Xylem, which address the unique challenges and demands of adiverse customer base. This customer base includes water and wastewater utilities that supply and treat clean water or transport and treatwastewater or storm water through an infrastructure network, and engineering, procurement and construction or (EPC) firms, which work withutilities to design and build water and wastewater infrastructure networks, as depicted below. Utilities and EPC customers require products,solutions, services, technology and application expertise from their Equipment and Services providers to address trends such as rising pollution,stricter regulations, increasing operational costs and the increased outsourcing of process knowledge. In addition to utilities and EPC customers,Equipment and Service providers also provide distinct technologies to a wide array of entities, including farms, mines, power plants, industrialfacilities and residential and commercial customers seeking to address similar trends.4Water Industry Supply ChainBusiness StrategyOur strategy is to enhance shareholder value by providing distinctive solutions for our customers' most important water productivity, quality andresilience challenges, enabling us to grow revenue, organically and through strategic acquisitions, as we streamline our cost structure. Keyelements of our strategy are summarized below:•Accelerate Profitable Growth. To accelerate growth, we continue to focus on several priorities:•Emerging Markets - We seek to accelerate our growth in priority emerging markets through increased focus on productlocalization and channel development.▪Innovation & Technology - We seek to enhance our innovation efforts with increased focus on smart, digitally enabledtechnologies and innovation that can significantly improve customers’ productivity, quality and resilience.•Commercial Leadership - We are strengthening our capabilities by simplifying our commercial processes and supportinginformation technology systems.•Mergers and Acquisitions - We continue to evaluate and, where appropriate, will act upon attractive acquisition candidates toaccelerate our growth, including into adjacent markets.•Drive Continuous Improvement. We seek to embed continuous improvement into our culture and simplify our organization to make theCompany more agile, more profitable and create room to reinvest in growth. To accomplish this, we will continue to strengthen our lean sixsigma and global procurement capabilities, while also continuing to optimize our cost structure through business simplification, which aimsto eliminate structural, process and product complexity.•Leadership and Talent Development. We seek to continue to invest in attracting, developing and retaining world-class talent with anincreased focus on leadership and talent development programs. We will continue to align individual performance with the objectives of theCompany and its shareholders.•Focus on Execution and Accountability. We seek to ensure the impact of these strategic focus areas by holding our peopleaccountable and streamlining our performance management and goal deployment systems.•Create social value in everything we do. We seek to have a positive impact on communities through the combination of corporate socialresponsibility and employee, customer, and stakeholder engagement.5Business Segments, Distribution and Competitive LandscapeWe have three reportable business segments that are aligned around the critical market applications they provide: Water Infrastructure, AppliedWater, and Measurement & Control Solutions. See Note 21, “Segment and Geographic Data,” in our consolidated financial statements forfinancial information about segments and geographic areas.The table and descriptions below provide an overview of our business segments. MarketApplications 2018 Revenue(in millions) %Revenue Major Products Primary BrandsWaterInfrastructure Transport $1,779 82% • Water and wastewaterpumps• Filtration, disinfection andbiological treatmentequipment• Mobile dewateringequipment • Flygt• Godwin• Leopold• Sanitaire• Wedeco Treatment 397 18% $2,176 100% AppliedWater Industrial Water $706 46% • Pumps• Valves• Heat exchangers• Controls• Dispensingequipment systems • A-C Fire Pump• Bell & Gossett• Flojet• Goulds WaterTechnology• Jabsco• Lowara• Standard Xchange Commercial BuildingServices 596 39% Residential BuildingServices 232 15% $1,534 100% Measurement &ControlSolutions Water $692 46% • Smart meters• Networked communicationdevices• Data analytics• Test equipment• Controls• Sensor devices• Software & managedservices• Critical infrastructureservices • EmNet• Pure• Sensus• Smith Blair• Valor Water• Visenti• WTW• YSI Test 344 23% Gas 195 13% Electric 143 10% Software as aService/Other 123 8% $1,497 100% Water InfrastructureOur Water Infrastructure segment supports the process that collects water from a source, treats it and distributes it to users, and then treats andreturns the wastewater responsibly to the environment through two closely linked applications: Transport and Treatment. The Transport applicationalso includes sales and rental of specialty dewatering pumps and related equipment and services, which provide the safe removal or draining ofgroundwater and surface water from riverbeds and construction sites or other industrial sites and bypass pumping for the repair of aging utilityinfrastructure, as well as emergency water transport and removal during severe weather events.The customer base consists of two primary end markets: utility and industrial. The utility market includes public, private and public-private entitiesthat support water, wastewater and storm water networks. The industrial market includes customers who require similar water and wastewaterinfrastructure networks to support various industrial operations.Water Infrastructure provides the majority of its sales through direct channels with remaining sales through indirect channels and servicecapabilities. Both utility and industrial facility customers increasingly require our teams’ global but locally proficient expertise to use our equipmentin their specific applications. Several trends are increasing demand for this application expertise: (i) the increase in both the type and amount ofcontaminants6found in the water supply, (ii) increasing environmental regulations, (iii) the need to increase system efficiencies to optimize energy and otheroperational costs, (iv) the retirement of a largely aging water industry workforce that has not been systematically replaced at utilities and other end-user customers, and (v) the build-out of water infrastructure in the emerging markets. We estimate our served market size in this sector to beapproximately $17 billion.Given the highly fragmented nature of the water industry, the Water Infrastructure segment competes with a large number of businesses. Wedifferentiate ourselves in the market by focusing on product and service performance, quality and reliability, innovation, speed to market with newor disruptive technologies, application expertise, brand reputation, energy efficiency, product life-cycle cost, timeliness of delivery, proximity ofservice centers, effectiveness of our distribution channels and price. In the sale or rental of products and provision of services, we benefit from ourlarge installed base, which requires maintenance, repair and replacement parts due to the critical application and nature of the products and theconditions under which they operate. Timeliness of delivery, quality and the proximity of service centers are important customer considerationswhen selecting a provider for after-market products and services as well as equipment rentals. In geographic regions where we are locallypositioned to provide a quick response, customers have historically relied on us, rather than our competitors, for after-market products relating toour highly engineered and customized solutions. Our key competitors within the Water Infrastructure segment include KSB Inc., Sulzer Ltd.,Evoqua Water Technologies, United Rentals, Danaher Corporation and Grundfos.Applied WaterApplied Water encompasses the uses of water and serves a diverse set of end markets including: residential, commercial and industrial.Residential consumers represent the end users in the residential market, while owners and managers of properties such as apartment buildings,retail stores, institutional buildings, restaurants, schools, hospitals and hotels are examples of end users in the commercial market. The industrialmarket includes OEMs, exploration and production firms, and developers and managers of industrial facilities, such as electrical power generators,chemical manufacturers, machine shops, clothing manufacturers, beverage dispensing and food processing firms and car washes.In the Applied Water segment, end markets vary widely and, as a result, specialized distribution partners are often preferred. As such, the AppliedWater segment provides the majority of its sales through strong indirect channels with the remaining sales going through our global direct saleschannels. We have long-standing relationships with many of the leading independent distributors in the markets we serve and we provideincentives to distributors, such as specialized loyalty and training programs.We estimate our served market size in this sector to be approximately $19 billion. Population growth, urbanization and regulatory requirements aremacro growth drivers of these markets, driving the need for housing, food, community services and retail goods within growing city centers.Competition in the Applied Water segment focuses on brand equity, application expertise, product delivery and performance and energy efficiency,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 todeliver innovative product offerings has enabled us to compete effectively, to cultivate and maintain customer relationships and to serve andexpand into many niche and new markets. Our key competitors within the Applied Water segment include Grundfos, Wilo SE, Pentair plc andFranklin Electric Co., Inc.Measurement & Control SolutionsMeasurement & Control Solutions develops advanced technology solutions that enable intelligent use and conservation of critical water and energyresources. The segment delivers communications, smart metering, measurement and control technologies and critical infrastructure technologiesthat allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water,electricity and natural gas. We also provide analytical instrumentation used to measure water quality, flow and level in clean water, wastewater,surface water and coastal environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and datamanagement, leak detection, condition assessment, asset management and pressure monitoring solutions. We also offer smart lighting solutionsthat improve efficiency and public safety efforts across communities.At the heart of our leading technologies is automation, data management and decision support. Communications networks automate and optimizemeter reading, monitor flow rates and detect and enable rapid response to7changing and unsafe conditions. In short, they provide insight into operations and enable our customers to manage the entire scope of theiroperations remotely through their networks. At the center of our offering is the FlexNet communication network, which provides a commoncommunications platform and infrastructure for essential services. This two-way communication technology remotely connects a wide variety ofsmart points in a given network with protocols, frequently on FCC licensed spectrum in the U.S., that enable reliable, resilient and securetransmissions. These technologies allow our customers to remotely and continuously monitor infrastructure, prioritize and manage maintenanceand use data to optimize all aspects of their networks. Our advanced infrastructure analytics complement these offerings with intelligent solutionsthat help utility decision-makers manage their networks more effectively in real time.The majority of our sales in the U.S. is conducted through strong, long-standing relationships with leading distributors and dedicated channelpartners for water, gas and electric markets. Internationally, direct sales are often made in markets without established distribution channels;however, some distribution channels are used in more developed markets. A more direct sales approach, with key account management, isemployed for large utilities and government programs.We estimate our served market size in this sector to be approximately $21 billion. Macro growth drivers include increasing regulation, aginginfrastructure and worldwide movement towards smart grid implementation. Water scarcity and conservation, as well as the need to preventrevenue loss (via inaccurate meter readings, leaks or theft) are among the drivers of smart meter and leak detection technologies.Our Sensus-branded meters are well positioned in the smart metering sector, the fastest growing sector of the global meter industry. We setourselves apart in the industry by focusing on our communication network, innovation, new product development and service offerings that delivertangible savings of non-revenue water through improved meter accuracy, reduced theft and identification of leaks. Pure Technologies’ equipmentand services are also well positioned in the leak detection sector which is attracting considerable attention as aging infrastructure and increasedregulatory scrutiny exert pressure on operating budgets. Our key competitors within the Measurement & Control Solutions segment include Itron,Badger Meter, Landis+Gyr, Neptune (Roper), Elster (Honeywell), Mueller Water Products, Danaher Corporation, Hach and Teledyne.Geographic ProfileThe table below illustrates the annual revenue and percentage of revenue by geographic area for each of the three years ended December 31. Revenue(in millions)2018 2017 2016 $ Amount % of Total $ Amount % of Total $ Amount % of TotalUnited States$2,424 47% $2,161 46% $1,574 42%Europe1,449 28% 1,335 28% 1,195 31%Asia Pacific660 13% 611 13% 518 14%Other674 12% 600 13% 484 13%Total$5,207 $4,707 $3,771 In addition to the traditional markets of the United States and western Europe, opportunities in emerging markets within Asia Pacific, easternEurope, Latin America and other countries are growing. Revenue derived from emerging markets comprised approximately 20% of our revenue ineach of the last three years.Supply and SeasonalityWe have a global manufacturing footprint, with production facilities in Europe, North America, Latin America, and Asia. Our inventory managementand distribution practices seek to minimize inventory holding periods by striving to take delivery of the inventory and manufacturing as close aspossible to the sale or distribution of products to our customers. All of our businesses require various parts and raw materials, of which theavailability and prices may fluctuate. Parts and raw materials commonly used in our products include motors, fabricated parts, castings, bearings,seals, batteries, PCBs and electronic components as well as steel, brass, nickel, copper, aluminum and plastics. While we may recover somecost increases through operational improvements, we are still exposed to some pricing risk, including increased pricing risk due to duty and tariffassessments by the United States on foreign imports. We attempt to control costs through fixed-priced contracts with suppliers and various otherprograms, such as our global procurement initiative.8Our business relies on third-party suppliers, contract manufacturing and commodity markets to secure raw materials, parts and components usedin our products. We typically acquire materials and components through a combination of blanket and scheduled purchase orders to support ourmaterials requirements. For many of our products we have existing alternate sources of supply, or such sources may be readily available.We may experience price volatility or supply constraints for materials that are not available from multiple sources. From time to time, we acquirecertain inventory in anticipation of supply constraints or enter into longer-term pricing commitments with suppliers to improve the priority, price andavailability of supply. There have been no raw material shortages in the past several years that have had a significant adverse impact on ourbusiness as a whole.Our business segments experience a modest level of seasonality in their business. This seasonality is dependent on factors such as capitalspending of customers as well as weather conditions, including heavy flooding, droughts and fluctuations in temperatures, all of which canpositively or negatively impact portions of our business.CustomersOur business is not dependent on any single customer or a few customers the loss of which would have a material adverse effect on ourCompany. No individual customer accounted for more than 10% of our consolidated 2018, 2017 or 2016 revenue.BacklogBacklog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer tocustomer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contractadjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deploymentschedules and delays can occur from time to time. Total backlog was $1,689 million at December 31, 2018 and $1,513 million at December 31,2017. We anticipate that approximately 65% of the backlog at December 31, 2018 will be recognized as revenue during 2019.Research and DevelopmentResearch and development (“R&D”) is a key foundation of our growth strategy and we focus on the design and development of products andapplication know-how that anticipate customer needs and emerging trends. Our engineers are involved in new product development as well asimprovement of existing products to increase customer value. Our businesses invest substantial resources into R&D. We anticipate we willcontinue to develop and invest in our R&D capabilities to promote a steady flow of innovative, high-quality and reliable products and integratedsolutions to further strengthen our position in the markets we serve. In addition to investments made in software development, which werecapitalized, we incurred $189 million, $181 million, and $110 million as a result of R&D investment spending in 2018, 2017 and 2016, respectively.We have R&D and product development capabilities around the world. R&D activities are initially conducted in our technology centers, located inconjunction with some of our major manufacturing facilities to ensure an efficient and robust development process. We have several globaltechnical centers and local development teams around the world where we are supporting global needs and accelerating the customization of ourproducts and solutions to address local needs. In some cases, our R&D activities are conducted at our piloting and testing facilities and atstrategic customer sites. These piloting and testing facilities enable us to serve our strategic markets globally. As part of expanding our bandwidthand to increase our access to technology, we have built innovation eco-system partnerships with academic institutions, start-up accelerators andventure capitalist organizations.Capitalized SoftwareWe capitalize software developed for sale to external customers, which is included within "Other intangible assets, net" on our ConsolidatedBalance Sheets. As of December 31, 2018 and 2017 we had net capitalized software for sale to external customers of $128 million and $89million, respectively.Intellectual PropertyWe generally seek patent protection for those inventions and improvements that we believe will improve our competitive position. We believe thatour patents and applications are important for maintaining the competitive differentiation of our products and improving our return on research anddevelopment investments. While we own, control or license a significant number of patents, trade secrets, proprietary information, trademarks,trade names,9copyrights and other intellectual property rights which, in the aggregate, are of material importance to our business, management believes that ourbusiness, as a whole, as well as each of our core business segments, is not materially dependent on any one intellectual property right or relatedgroup 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 specificpatent to have a material adverse effect on our financial position or results of operations.Environmental Matters and RegulationOur global operations are subject to various laws and regulations governing the environment, including the discharge of pollutants and themanagement and disposal of hazardous substances. While environmental laws and regulations are subject to change, such changes can bedifficult to predict reliably and the timing of potential changes is uncertain. Management does not believe, based on current circumstances, thatcompliance costs pursuant to such regulations will have a material adverse effect on our financial position or results of operations. However, theeffect of future legislative or regulatory changes could be material to our financial condition or results of operations.We continue to be dedicated to environmental and sustainability programs to minimize the use of natural resources, and reduce the utilization andgeneration of hazardous materials from our processes and to remediate identified environmental concerns. As to the latter, we are currentlyengaged in site investigations and remediation activities to address environmental cleanup from past operations at current and formermanufacturing facilities. We do not anticipate these liabilities will have a material adverse effect on our consolidated financial position or results ofoperations. At December 31, 2018, we had estimated and accrued $4 million related to environmental matters.Environmental SustainabilityAt Xylem, sustainability is at the very center of who we are and what we do. As a leading global water technology company, we address one of theworld’s most urgent sustainability challenges on a daily basis - responsible stewardship of our shared water resources. Technology is playing anincreasingly important role in helping the world solve water issues. We have a long history of innovation, but today, we are focusing more than everon the powerful capabilities of smart technology, integrated management and big data. These solutions will allow us to transport, treat, test anduse water smarter and more sustainably than in the past, and enable our customers to realize greater water and energy efficiencies. Our link toglobal water and environmental challenges informs how we think about sustainability and drives us to become a more sustainable company. Our approach to climate-related issues is informed by Xylem’s Climate Change Policy, which defines our climate change approach across productdevelopment, operations, employees and external engagement. For example, in the past two years, we have completed several acquisitions tobuild out our Measurement & Control Solutions portfolio around systems intelligence, bringing best-in-class advanced metering infrastructure,advanced data analytics and software development capabilities to our portfolio. These technologies have enhanced our ability to help customersfacing water scarcity, storm water overflows and other climate-related issues. We are also focused on increasing our capabilities in the areas ofadvanced industrial water treatment and industrial water services. We are committed to sustainability through our own operations as well, as weare reducing our environmental footprint by decreasing our water intensity, greenhouse gas emissions and waste sent to landfills.EmployeesAs of December 31, 2018, Xylem had approximately 17,000 employees worldwide. We have approximately 5,900 employees in the United States,of whom approximately 16% are represented by labor unions. In certain foreign countries, our employees are represented by work councils. Webelieve that our facilities are in favorable labor markets with ready access to adequate numbers of workers and believe our relations with ouremployees are good.Available InformationWe are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports are available free of charge onour website www.xylem.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. Theinformation on our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the SEC.In addition, the public may read or copy any materials filed with the SEC, free of charge, at www.sec.gov.10ITEM 1A. RISK FACTORSIn evaluating our business, each of the following risks should be carefully considered, along with all of the other information in this Report and inour other filings with the SEC. Should any of these risks and uncertainties develop into actual events, our business, financial condition or resultsof operations could be materially and adversely affected. The risks and uncertainties described below are those that we have identified as materialbut are not the only risks and uncertainties we face and therefore may not be exhaustive. We operate in a continually changing business,economic and geopolitical environment and as a result new risk factors may emerge from time to time. We can neither predict with certainty thesenew risk factors nor assess the extent to which any new factor, or combination of factors, may adversely impact our business or results ofoperations.Risks Related to Operational and External FactorsFailure to compete successfully in our markets and disruptive technologies could adversely affect our business.We offer our products and services in competitive markets. We believe the principal points of competition in our markets are product and serviceperformance, quality and reliability, innovation, speed to market with new or disruptive technologies, application expertise, brand reputation, energyefficiency, product life cycle cost, timeliness of delivery, proximity of service centers, effectiveness of our distribution channels and price.Maintaining and improving our competitive position will require successful management of these factors, including continued investment by us inmanufacturing, technology and innovation, research and development, engineering, marketing, customer service and support, and our distributionnetworks. Our future growth rate depends upon a number of factors, including our ability to (i) identify emerging technological trends in our targetend-markets, (ii) develop and maintain competitive products, services and business models and defend our market share against an ever-expanding number of competitors including many new and non-traditional competitors, (iii) enhance our products and services offerings by addinginnovative features or disruptive technologies that differentiate them from those of our competitors and prevent commoditization, (iv) develop,manufacture and bring compelling new products and services to market quickly and cost-effectively, and (v) attract, develop and retain individualswith the requisite technical expertise and understanding of customers’ needs to develop new technologies and introduce new products andservices.We may not be successful in maintaining our competitive position. Our competitors or third parties from outside of our industry may developdisruptive technologies or products and services that are superior to ours, may develop more efficient or effective methods of providing productsand services or may adapt more quickly than we do to new or disruptive technologies or evolving customer requirements. The failure of ourtechnologies, products or services to maintain and gain market acceptance due to more attractive offerings could significantly reduce our revenuesor market share and adversely affect our competitive standing and prospects. Pricing pressures also could cause us to adjust the prices of certainproducts to stay competitive, which could adversely affect our market share and financial performance. Failure to continue competing successfullyor to win large contracts could adversely affect our business, financial condition or results of operations.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 2018, 47%, 25% and 20% of our total revenue was from customerslocated in the United States, western Europe and emerging markets, respectively. We expect revenue from these markets to be significant for theforeseeable future. Important factors impacting our businesses include the overall strength of these economies and our customers’ confidence inboth local and global macro-economic conditions; industrial and private sector spending, federal, state, local and municipal governmental fiscaland trade policies; the strength of the residential and commercial real estate markets; interest rates; availability of commercial financing for ourcustomers and end-users; the availability of funding for our public sector customers; and unemployment rates. A slowdown or prolonged downturnin our markets could have a material adverse effect on our business, financial condition and results of operations.Economic and other risks associated with international sales and operations could adversely affect our business.In 2018, 53% of our total revenue was from customers outside the United States, with 20% of total revenue generated in emerging markets. Weexpect our sales from international operations and export sales to continue to be a significant portion of our revenue. We have placed a particularemphasis on increasing our growth and presence in emerging markets. Many of our manufacturing operations, employees and suppliers arelocated11outside of the United States. Both our international operations and sales are subject, in varying degrees, to risks inherent in doing businessoutside the United States. These risks include the following:•changes in trade protection measures, including embargoes, tariffs and other trade barriers, and import and export regulations andlicensing requirements;•instability and uncertainties arising from the global geopolitical environment, such as economic nationalism, populism, protectionism andanti-global sentiment;•changes in tax laws and potential negative consequences from the interpretation, application and enforcement by governmental taxauthorities of tax laws and policies;•unanticipated changes in other laws and regulations or in how such provisions are interpreted or administered;•potential disruptions in our global supply chain;•possibility of unfavorable circumstances arising from host country laws or regulations, including those related to infrastructure and datatransmission, security and privacy;•currency exchange rate fluctuations and restrictions on currency repatriation; •disruption of operations from labor and political disturbances;•regional safety and security considerations;•increased costs and risks in developing, staffing and simultaneously managing a number of global operations as a result of distance aswell as language and cultural differences; and•outbreak or escalation of insurrection, armed conflict, terrorism or war.Changes in the geopolitical or economic environments in the countries in which we operate could have a material adverse effect on our financialcondition, results of operations or cash flows. For example, changes in U.S. policy regarding international trade, including import and exportregulation and international trade agreements, could also negatively impact our business. In 2018, the U.S. imposed tariffs on certain goodsimported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Additional tariffs imposed bythe U.S. on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could result in anincrease in supply chain costs that we may not be able to offset or may otherwise adversely impact our financial condition and results ofoperations.Additionally, we continue to monitor Brexit and its potential impacts on our results of operations and financial condition. Volatility in foreigncurrencies is expected to continue as the United Kingdom executes its exit from the European Union. If the United Kingdom's membership in theEuropean Union terminates without an agreement (referred to as a “hard Brexit”), there could be increased costs from re-imposition of tariffs ontrade between the United Kingdom and European Union, increased transportation costs, shipping delays because of the need for customsinspections and procedures and shortages of certain goods. The United Kingdom will also need to negotiate its own tax and trade treaties withcountries all over the world, which could take years to complete. In the case of a “hard Brexit”, our exposure to disruptions to our supply chain,increased costs, the imposition of tariffs and currency devaluation in the United Kingdom could result in a material impact to our consolidatedrevenue, earnings and cash flow.Further, any payment of distributions, loans or advances to us by our foreign subsidiaries could be subject to restrictions on, or taxation of,dividends on repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in thejurisdictions in which our subsidiaries operate. In addition to the general risks that we face outside the United States, our operations in emergingmarkets could involve additional uncertainties for us, including risks that governments may impose withholding or other taxes on remittances andother payments to us, or the amount of any such taxes may increase; governments may seek to nationalize our assets; or governments mayimpose or increase investment barriers or other restrictions affecting our business. In addition, emerging markets pose other uncertainties,including the difficulty of enforcing agreements, challenges collecting receivables, protection of our intellectual property and other assets, pressureon the pricing of our products and services, higher business conduct risks, ability to hire and retain qualified talent and risks of political instability.We cannot predict the impact such events might have on our business, financial condition and results of operations.12Our business could be adversely affected by cyber threats or other interruptions in information technology, communications networksand operations.Our business operations rely on information technology and communications networks, including those operated by third parties, to process,transmit and store our electronic information or our customers’ electronic information, and manage or support a variety of business processes oractivities. Regardless of protection measures, essentially all systems are susceptible to disruption due to cybersecurity attacks including denial-of-service, computer viruses and security breaches, insider risk, equipment or system failure, vandalism, natural disasters, power outages,shutdown, telecommunication or utility failure and other events. In addition, we have designed products and services that connect to and are partof the “Internet of Things.” While we attempt to provide adequate security measures to safeguard our products from cyber threats, the potential foran attack remains. A successful attack may result in inappropriate access to our or our customers' information or an inability for our products andservices to function properly.We, and some of our third party vendors, have experienced cybersecurity attacks in the past and may experience them in the future, likely withmore frequency and involving a broader range of devices. To date, none have resulted in any material adverse impact to our business oroperations. We have adopted measures designed to mitigate potential risks associated with information technology disruptions and cybersecuritythreats, however, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to productiondowntimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, thecompromise of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improperuse of our systems or networks, financial losses from remedial actions, loss of business, liability to others, regulatory enforcement actions, and/ordamage to our reputation. We also have or operate through a concentration of operations on certain sites, such as production and shared servicescenters, where business interruptions could cause material damage and costs. Transport of goods from suppliers and to customers could also behampered for the reasons stated above. Disruption to any of the information technology and communications networks on which we rely, or anattack on our IoT products and services, could interfere with our operations, disrupt service to our customers, interrupt production and shipments,damage customer relationships and negatively impact our reputation, any of which could have a material adverse effect on our competitiveposition, results of operations, cash flows or financial condition.Although we continue to assess these risks, implement controls and perform business continuity and disaster recovery planning, we cannot besure that interruptions with material adverse effects will not occur.A material disruption to any of our facilities or operations, or that of third parties upon which we rely, may adversely affect our business.If our facilities or operations, or that of third parties upon which we rely in our supply chain and critical business operations, were to be disrupted asa result of a significant equipment or system failure, natural disaster, power, water or communications outage, fire, explosion, critical supplyfailure, terrorism, cyber-based attack, political disruption, labor dispute, work stoppage or slowdown, adverse weather conditions or other reason,our financial performance could be adversely affected. Interruptions could cause an inability to meet customer demand, increase our costs, reduceour sales, and impact our business processes and activities. We also have or operate through a concentration of operations on certain sites, suchas production and shared services centers, where business interruptions could cause material damage and costs. Any interruption in capabilitymay be lengthy and have lasting effects, require a significant amount of management and other employees' time and focus, and require us tomake substantial expenditures to remedy the situation, which could negatively affect our profitability and financial condition. Any recovery underour insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which couldadversely affect our business, financial condition and results of operations.We may not achieve some or all of the expected benefits of our restructuring and transformation plans and our restructuring mayadversely affect our business.In recent fiscal years, we have initiated restructuring, realignment and transformation plans in an effort to optimize our cost structure and improveour operational efficiency and effectiveness. In 2017, we undertook steps to advance a multi-year effort to transform many of our support functionsand related technologies, including Finance, Human Resources and Procurement. We may not be able to obtain the cost savings and benefits thatwere initially anticipated in connection with our restructuring and transformation plans. Implementing planned restructuring13activities could be delayed resulting in delayed realization of the operational and financial benefits from such actions. Additionally, as a result ofthese plans, we may experience a loss of continuity, loss of accumulated knowledge or inefficiency during transitional periods. Transformation,realignment and restructuring can require a significant amount of management and other employees' time and focus, which may divert attentionfrom operating and growing our business.The successful implementation and execution of our restructuring, realignment and transformation actions are critical to achieving our expectedcost savings as well as effectively competing in the marketplace and positioning us for future growth. Factors that may impede a successfulimplementation include the retention of key employees, the impact of regulatory matters including tax, matters involving certain third party serviceproviders selected to assist us including their compliance with the Company's internal controls over financial reporting, and adverse economicmarket conditions. If our restructuring actions are not executed successfully, it could have a material adverse effect on our competitive position,business, financial condition and results of operations.Our strategy includes acquisitions, and we may not be able to execute acquisitions of suitable candidates or integrate acquisitionssuccessfully.As part of our growth strategy, we plan to pursue the acquisition of other companies, assets, technologies and product lines that eithercomplement or expand our existing business. We may not be able to identify suitable candidates, negotiate appropriate acquisition terms, obtainfinancing that may be needed to consummate acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into ourexisting operations or expand into new markets. In addition, we cannot make assurances that any acquisition, once integrated, will perform asplanned, 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 attentionfrom existing businesses and operations; integration of technology, operations personnel, and financial and other systems; potentially insufficientcybersecurity controls or insufficient internal controls over financial or compliance activities or financial reporting at an acquired entity that couldimpact us on a combined basis; the failure to realize expected synergies; the possibility that we become exposed to substantial undisclosedliabilities or new material risks associated with the acquired businesses; and the loss of key employees of the acquired businesses. Failure tosuccessfully execute our acquisition strategy could adversely affect our competitive position, business, financial condition or results of operations.Failure to comply with laws, regulations and policies, including but not limited to the U.S. Foreign Corrupt Practices Act or otherapplicable anti-corruption legislation and data privacy and security laws, could result in fines, criminal penalties and an adverse effecton our business.We are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and policies, including laws related toanti-corruption, trade regulations, including export and import compliance, anti-trust and money laundering, due to our global operations. The U.S.Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act of 2010 and similar anti-bribery laws in other jurisdictions generally prohibitcompanies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining orretaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that are recognized ashaving governmental and commercial corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with localcustoms and practices. We cannot assure you that our internal control policies and procedures will always protect us from improper conduct of ouremployees or business partners. In the event that we believe or have reason to believe that our employees or business partners have or may haveviolated applicable laws, regulations or policies, including anti-corruption laws, we may be required to investigate or have outside counselinvestigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Anysuch violation could result in substantial fines, sanctions, civil and/or criminal penalties, and curtailment of operations in certain jurisdictions, andmight materially and adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations coulddamage our reputation and ability to do business.Additionally, to conduct our operations, we regularly move data across national borders, and consequently we are subject to a variety ofcontinuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security.The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. Forexample, the European Union’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, greatly increases thejurisdictional reach of European Union law and adds a broad array of requirements for handling personal data, including the public disclosure ofsignificant data breaches. Other countries, such as China, have enacted or are14enacting data localization laws that require data to stay within their borders. All of these evolving compliance and operational requirements imposesignificant costs of compliance that are likely to increase over time. Any such violation could result in substantial fines, sanctions or civilpenalties, damage to our reputation and might materially and adversely affect our business, results of operations or financial condition.Our business could be adversely affected by significant movements in foreign currency exchange rates.We conduct approximately 53% of our business in various locations outside the United States. We are exposed to fluctuations in foreign currencytransaction exchange rates, particularly with respect to the Euro, Swedish Krona, Polish Zloty, Canadian Dollar, British Pound and AustralianDollar. 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 or Eurocould affect our ability to sell products competitively and control our cost structure, which could have a material adverse effect on our business,financial condition and results of operations. Additionally, we are subject to foreign exchange translation risk due to changes in the value of foreigncurrencies in relation to our reporting currency, the U.S. dollar. The translation risk is primarily concentrated in the exchange rate between the U.S.Dollar and the Euro, Chinese Yuan, British Pound, Canadian Dollar, Swedish Krona and Australian Dollar. As the U.S. Dollar fluctuates againstother currencies in which we transact business, revenue and income can be impacted. For instance, our 2018 revenue increased by 0.5% due tofavorable foreign currency impacts. Strengthening of the U.S. Dollar relative to the Euro and the currencies of the other countries in which we dobusiness, could materially and adversely affect our sales growth in future periods. Refer to Item 7A "Quantitative and Qualitative Disclosuresabout Market Risk" for additional information on foreign exchange risk.Failure to retain our existing senior management, engineering, technology, sales and other key personnel or the inability to attractand retain new qualified personnel could negatively impact our ability to operate or grow our business.Our success will continue to depend to a significant extent on our ability to retain or attract a significant number of employees in seniormanagement, engineering, technology, sales and other key personnel. The ability to attract or retain employees will depend on our ability to offercompetitive compensation, benefits, training and development and an attractive culture. We will need to continue to develop a roster of qualifiedtalent to support business growth and replace departing employees. Effective succession planning is also important to our long-term success.Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning andexecution. A failure to retain or attract highly skilled personnel could adversely affect our operating results or ability to operate or grow ourbusiness.Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our business,reputation and financial statements.Manufacturing or design defects in (including in products or components that we source from third parties), unanticipated use of, or inadequatedisclosure of risks relating to the use of our products could create product safety, regulatory or environmental risks, including personal injury,death or property damage. These events could lead to recalls or safety alerts relating to our products, result in the removal of a product from themarket and result in product liability claims being brought against us. Although we have liability insurance, we cannot be certain that this insurancecoverage will continue to be available to us at a reasonable cost or will be adequate to cover any product liability claims. Manufacturing, design,software or service defects or inadequacies may also result in contractual damages or credits being issued, which could impact our profitability.Recalls, removals and product liability and quality claims can result in significant costs, as well as negative publicity and damage to our reputationthat could reduce demand for our products and have a material adverse effect on our business, financial condition and results of operations.Our financial results can be difficult to predict.Our business is impacted by a substantial amount of short cycle, and book-and-bill business, which we have limited insight into, particularly for thebusiness that we transact through our distributors. We are also impacted by large projects, whose timing can change based upon customerrequirements due to a number of factors affecting the project beyond our knowledge or control, such as funding, readiness of the project andregulatory approvals. Accordingly, our financial results for any given period can be difficult to predict.15Changes in our effective tax rates and tax expenses may adversely affect our financial results.We sell our products in approximately 150 countries and 53% of our revenue was generated outside the United States in 2018. Given the globalnature of our business, a number of factors may increase our effective tax rates and tax expense, including:•the geographic mix of jurisdictions in which profits are earned and taxed;•the statutory tax rates and tax laws in the jurisdictions in which we conduct business;•the resolution of tax issues arising from tax examinations by various tax authorities; and•the valuation of our deferred tax assets and liabilities.Xylem is regularly examined by various tax authorities throughout the world and the resolutions of these examinations do not typically have asignificant impact on our effective tax rates and tax expenses but they could. Additionally, in December 2017, the United States enacted taxreform legislation (“Tax Act”). The legislation implements many new U.S. domestic and international tax provisions. Many aspects of the Tax Actremain unclear, and although additional clarifying guidance is expected to be issued (by the Internal Revenue Service (“IRS”), the U.S. TreasuryDepartment or via a technical correction law change), it may not be clarified for some time. In addition, many U.S. states have not yet updatedtheir laws to take into account the new federal legislation. As a result, there may be further impacts of the new law on our results of operationsand financial condition. It is possible that the Tax Act, or interpretations under it, could change and could have an adverse effect on us, and sucheffect could be material.Our business could be adversely affected by inflation, tariffs and other manufacturing and operating cost increases.Our operating costs are subject to fluctuations, particularly due to changes in prices for commodities, parts, raw materials, energy and relatedutilities, freight, and cost of labor which may be driven by prevailing price levels, exchange rates, changes in trade protection measures includingtariffs, and other economic factors. In order to remain competitive, we may not be able to recuperate all or a portion of these higher costs from ourcustomers through product price increases. Further, in a declining price environment, our operating margins may contract because we account forinventory using the first-in, first- out method. Actions we take to mitigate volatility in manufacturing and operating costs may not be successfuland, as a result, our business, financial condition and results of operation could be materially and adversely affected.Our business could be adversely affected by the availability of parts and raw materials or the inability of suppliers to meet deliveryrequirements.Our business relies on third-party suppliers, contract manufacturing and commodity markets to secure raw materials, parts and components usedin our products, and we expect that reliance to increase. Parts and raw materials commonly used in our products include motors, fabricated parts,castings, bearings, seals, batteries, PCBs and electronic components, as well as steel, brass, nickel, copper, aluminum and plastics. We areexposed to the availability of these materials, which may be subject to curtailment or change due to, among other things, interruptions inproduction by suppliers, labor disputes, the impaired financial condition of a particular supplier, suppliers’ allocations to other purchasers, changesin trade protection measures including tariffs, exchange rates and prevailing price levels, ability to meet regulatory requirements, weatheremergencies or acts of war or terrorism. Any delay in our suppliers’ abilities to provide us with necessary materials could impair our ability todeliver products to our customers and, accordingly, could have a material adverse effect on our business, financial condition or results ofoperations.Our indebtedness may affect our business and may restrict our operational flexibility.As of December 31, 2018, our total outstanding indebtedness was $2,308 million as described under “Liquidity and Capital Resources." Ourindebtedness could:•increase our vulnerability to general adverse economic and industry conditions;•limit our ability to obtain additional financing or borrow additional funds;•create uncertainty and complexity in managing debt that uses LIBOR as a reference rate, including as a result of the planned transition awayfrom LIBOR to the Secured Overnight Financing Rate (“SOFR”);•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 our16indebtedness instead of funding working capital, capital expenditures, acquisitions or other general corporate purposes; and•increase the amount of interest expense that we must pay because some of our borrowings are at variable interest rates, which, as interestrates increase, would result in 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 paymentor refinancing of our indebtedness. If we incur additional debt or raise equity through the issuance of preferred stock, the terms of the debt orpreferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in theevent of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations than we currently have.Our ability to make scheduled principal payments of, to pay interest on, or to refinance our indebtedness and to satisfy our other debt obligationswill depend on our future operating performance, which may be affected by factors beyond our control. If we are unable to service ourindebtedness, our business, financial condition and results of operations would be materially adversely affected.We may be negatively impacted by legal and regulatory proceedings.We are subject to various laws, ordinances, regulations and other requirements of government authorities in foreign countries and in the UnitedStates, any violation of which could potentially create substantial liability for us and damage 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 andliabilities.From time to time we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the businessoperations of previously owned entities). These proceedings may seek remedies relating to environmental matters, tax, intellectual property,acquisitions or divestitures, product liability and personal injury claims, privacy, employment, labor and pension matters, government contractissues and commercial or contractual disputes. Our continuing transition to connected or digital technologies and solutions has increased ourexposure to intellectual property litigation and we expect that this risk will continue to increase as we execute on our innovation and technologypriorities.It is not possible to predict with certainty the outcome of claims, investigations, regulatory proceedings and lawsuits, and we could in the futureincur judgments, fines or penalties or enter into settlements and claims that could have an adverse effect on our business, results of operationsand financial condition in any particular period. Additionally, we may be required to change or cease operations at one or more facilities if aregulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our business.The global and diverse nature of our operations, coupled with the increase in regulation and enforcement in many regions of the globe, means thatlegal and compliance risks will continue to exist and additional legal and regulatory proceedings and other contingencies, the outcome of whichcannot be predicted with certainty, will arise from time to time. In addition, subsequent developments in legal and regulatory proceedings mayaffect our assessments and estimates of loss contingencies recorded as a reserve and require us to make payments in excess of our reserves,which could have an adverse effect on our results of operations and financial condition.Weather conditions and climate changes may adversely affect, or cause volatility in, our financial results.Weather conditions, including heavy flooding, droughts and fluctuations in temperatures or weather patterns, including as a result of climatechange, can positively or negatively impact portions of our business. Within the dewatering space, pumps provided through our Godwin and Flygtbrands are used to remove excess or unwanted water. Heavy flooding due to weather conditions drives increased demand for these applications.On the other hand, drought conditions drive higher demand for pumps used in agricultural and turf irrigation applications, such as those provided byour Goulds Water Technology and Lowara brands. Fluctuations to warmer and cooler temperatures result in varying levels of demand for productsused in residential and commercial applications where homes and buildings are heated and cooled with HVAC units such as those provided by ourB&G brand. The unpredictable nature of weather conditions and climate change may result in volatility for certain portions of our business, as wellas the operations of certain of our customers and suppliers.17If we do not or cannot adequately protect our intellectual property, if third parties infringe our intellectual property rights, or if thirdparties claim that we are infringing or misappropriating their intellectual property rights, we may suffer competitive injury, expendsignificant resources enforcing our rights or defending against such claims, or be prevented from selling products or services.We own numerous patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to intellectual property owned byothers, which in the aggregate are important to our business. The intellectual property rights that we obtain, however, may not provide us with asignificant competitive advantage because they may not be sufficiently broad or may be challenged, invalidated, circumvented, independentlydeveloped, or designed-around, particularly in countries where intellectual property rights laws are not highly developed, protected or enforced. Ourfailure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our intellectual property or detect orprevent circumvention or unauthorized use of such property and the cost of enforcing our intellectual property rights could adversely impact ourbusiness, financial condition and results of operations.From time to time, we receive notices from third parties alleging intellectual property infringement or misappropriation. Any dispute or litigationregarding intellectual property could be costly and time-consuming due to the complexity and the uncertainty of intellectual property litigation. Ourintellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement ormisappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights to critical technology, beunable to license critical technology or sell critical products and services, be required to pay substantial damages or license fees with respect tothe infringed rights or be required to redesign our products at substantial cost, any of which could adversely impact our competitive position,financial condition and results of operations. Even if we successfully defend against claims of infringement or misappropriation, we may incursignificant costs and diversion of management attention and resources, which could adversely affect our business, financial condition and resultsof operations.A significant portion of our products and offerings in our Measurement & Control Solutions segment are affected by the availability andregulation of radio spectrum and could be affected by interference with the radio spectrum that we use.A significant portion of the offering in our Measurement & Control Solutions segment use radio spectrum, which is subject to governmentregulation. To the extent we introduce new products designed for use in the United States or another country into a new market, such productsmay require significant modification or redesign in order to meet frequency requirements and other regulatory specifications. In some countries,limitations on frequency availability or the cost of making necessary modifications may preclude us from selling our products in those countries.The regulations that govern our use of the radio spectrum may change and the changes may require us to modify our products or seek newpartnerships, either directly or due to interference caused by new consumer products allowed under the regulations. The inability to modify ourproducts to meet such requirements, the possible delays in completing such modifications, and the cost of such modifications all could have amaterial adverse effect on our business, financial condition, and results of operations. In addition, suitable partners for co-development may notbe able to be secured by us.In the United States, our products are primarily designed to use licensed spectrum in the 900MHz range. If the Federal CommunicationsCommission (“FCC”) did not renew our existing spectrum licenses, our business could be adversely affected. In addition, there may be insufficientavailable frequencies in some markets to sustain or develop our planned operations at a commercially feasible price or at all.Outside of the United States, certain of our products require the use of radio frequency and are subject to regulations. In some jurisdictions, radiostation licenses may be granted for a fixed term and must be periodically renewed. Our advanced and smart metering systems offering transmitsto (and receives information from, if applicable) handheld, mobile, or fixed network reading devices in licensed bands made available to us throughstrategic partnerships and are reliant to some extent on the licensed spectrum continuing to be available through our partners or our customers.We may be unable to find partners or customers that have access to sufficient frequencies in some markets to sustain or develop our plannedoperations or to find partners or customers that have access to sufficient frequencies in the relevant markets at a commercially feasible price or atall.We may incur impairment charges for our goodwill and other indefinite-lived intangible assets which would negatively impact ouroperating results.We have a significant amount of goodwill and purchased intangible assets on our balance sheet as a result of acquisitions we have completed. Asof December 31, 2018, the net carrying value of our goodwill and other indefinite-lived intangible assets totaled approximately $3 billion. Thecarrying value of goodwill represents the fair18value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of indefinite-livedintangible assets represents the fair value of trademarks, trade names and FCC licenses as of the acquisition date. We do not amortize goodwilland indefinite-lived intangible assets that we expect to contribute indefinitely to our cash flows, but instead we evaluate these assets forimpairment at least annually, or more frequently if interim indicators suggest that a potential impairment could exist. A goodwill impairment chargewill be recognized if the fair value of a reporting unit is less than its carrying amount. Significant negative industry or economic trends, disruptionsto our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets,failure of the FCC to renew licenses, divestitures and market capitalization declines may impair our goodwill and other indefinite-lived intangibleassets. Any charges relating to such impairments could adversely affect our results of operations and financial condition.We cannot make assurances that we will pay dividends on our common stock or continue to repurchase our common stock under Boardapproved share repurchase plans, and likewise our indebtedness could limit our ability to pay dividends or make share repurchases.The timing, declaration, amount and payment of future dividends to our shareholders fall within the discretion of our Board of Directors and willdepend on many factors, including our financial condition, results of operations and capital requirements, as well as applicable law, regulatoryconstraints, industry practice and other business considerations that our Board of Directors considers relevant. There can be no assurance that wewill pay a dividend in the future or continue to pay dividends.Further, the timing and amount of the repurchase of our common stock under Board approved share repurchase plans has similar dependencies asthe payment of dividends and accordingly, there can be no assurances that we will repurchase our common stock.Additionally, if we cannot generate sufficient cash flow from operations to meet our debt payment obligations, then our ability to pay dividends, ifso determined by the Board of Directors, or make share repurchases will be impaired and we may be required to attempt to restructure or refinanceour debt, raise additional capital or take other actions such as selling assets, reducing or delaying capital expenditures, reducing our dividend ordelaying or curtailing share repurchases. There can be no assurance, however, that any such actions could be effected on satisfactory terms, if atall, or would be permitted by the terms of our debt or our other credit and contractual arrangements.Developments in environmental laws and regulations could impact our financial condition or results of operations.Our operations, product and service offerings are subject to and affected by many federal, state, local and foreign environmental laws andregulations. In addition, we could be affected by future environmental laws or regulations, including, for example, those imposed in response toclimate change concerns. Compliance with current and future environmental laws and regulations currently requires and is expected to continue torequire operating and capital expenditures.Environmental laws and regulations may authorize substantial fines and criminal sanctions as well as facility shutdowns to address violations, andmay require the installation of costly pollution control equipment or operational changes to limit emissions or discharges. We also incur, andexpect to continue to incur, costs to comply with current environmental laws and regulations.Developments such as the adoption of new environmental laws and regulations, stricter enforcement of existing laws and regulations, violations byus of such laws and regulations, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, ourinability to recover costs associated with any such developments, or financial insolvency of other responsible parties could in the future have amaterial adverse effect on our financial condition and results of operations.The level of returns on postretirement benefit plan assets, changes in interest rates and other factors could affect our earnings and cashflows 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 aresult of macro-economic factors, such as interest rates, that are beyond our control. The cost of our postretirement plans is incurred over longperiods of time and involves factors and uncertainties during those periods which can be volatile and unpredictable, including rates of return onpostretirement 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’19equity) and results of operations could be materially affected by significant changes in key economic indicators, actuarial experience, financialmarket 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-economicfactors discussed above, including the return on postretirement benefit plan assets and the minimum funding requirements established by localgovernment funding or taxing authorities, or established by other agreement, may influence future funding requirements. A significant decline in thefair value of our plan assets, or other adverse changes to our overall pension and other employee-related benefit plans, could require us to makesignificant funding contributions and affect cash flows in future periods.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 onmany 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;•stock repurchases or dividends;•acquisitions and divestitures;•announcements by us or our competitors of significant new business awards;•announcements by us or our competitors of significant acquisitions or divestitures;•changes in accounting standards, policies, guidance, interpretations or principles;•changes in earnings estimates by securities analysts or our ability to meet those estimates;•our ability to execute transformation, restructuring and realignment actions;•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 foreign currency impacts;•fluctuations in the budgets of federal, state and local governmental entities around the world;•results from any material litigation, governmental or regulatory body investigation, or tax examination;•changes in laws and regulations affecting our business; •impact of trade protection measures including tariffs; 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. Thesebroad market fluctuations could adversely affect the trading price of our common stock.Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change in control.Certain provisions of our fourth amended and restated articles of incorporation and our amended and restated by-laws may delay or prevent amerger or acquisition of part or all of our business operations. For example, our articles of incorporation and our by-laws, among other things,require advance notice for shareholder proposals and nominations. In addition, our articles of incorporation authorize our Board of Directors toissue one or more series of preferred stock. These provisions may also discourage acquisition proposals of our business operations or delay orprevent a change in control, which could harm our stock price. Indiana law also imposes some restrictions on mergers and other businesscombinations between any holder of 10% or more of our outstanding common stock and us.20In connection with our Spin-off, ITT (now ITT LLC) and Exelis, acquired by Harris Inc., will indemnify us for certain liabilities and we willindemnify ITT (now ITT LLC) or Exelis for certain liabilities. If we are required to indemnify ITT (now ITT LLC) or Exelis, we may need todivert cash to meet those obligations and our financial results could be negatively impacted. In the case of ITT's or Exelis' 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'sor Exelis' ability to satisfy its indemnification obligations in the future.Pursuant to the Distribution Agreement and certain other agreements with ITT (now ITT LLC) and Exelis, ITT (now ITT LLC) and Exelis agreed toindemnify us from certain liabilities, and we agreed to indemnify ITT (now ITT LLC) and Exelis for certain liabilities. Indemnities that we may berequired to provide ITT (now ITT LLC) and Exelis may be significant and could negatively impact our business. Third parties could also seek tohold us responsible for any of the liabilities that ITT (now ITT LLC) or Exelis has agreed to retain. Further, there can be no assurance that theindemnities from ITT (now ITT LLC) and Exelis will be sufficient to protect us against the full amount of such liabilities, or that ITT (now ITT LLC)and Exelis will be able to fully satisfy their indemnification obligations. Moreover, even if we ultimately were to succeed in recovering from ITT(now ITT LLC) and Exelis any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of theserisks could negatively affect our business, results of operations and financial condition.ITEM 1B. UNRESOLVED STAFF COMMENTS.None.21ITEM 2. PROPERTIESWe have approximately 385 locations in more than 52 countries. These properties total approximately 12.3 million square feet, of which more than345 locations, or approximately 6.6 million square feet, are leased. We consider the offices, plants, warehouses and other properties that we ownor lease to be in good condition and generally suitable for the purposes for which they are used. The following table shows our significant locationsby segment:Location State orCountry Principal Business Activity Approx.SquareFeet Owned or Leased Water Infrastructure Emmaboda Sweden Administration and Manufacturing 1,197,000 OwnedStockholm Sweden Administration and Research & Development 182,000 LeasedBridgeport NJ Administration and Manufacturing 136,000 LeasedShenyang China Manufacturing 125,000 OwnedYellow Springs OH Administration and Manufacturing 112,000 OwnedQuenington UK Manufacturing 86,000 Leased Applied Water Morton Grove IL Administration and Manufacturing 530,000 OwnedMontecchio Italy Administration and Manufacturing 379,000 OwnedNanjing China Manufacturing 363,000 OwnedAuburn NY Manufacturing 273,000 OwnedStockerau Austria Administration 233,000 OwnedLubbock TX Manufacturing 229,000 OwnedStrzelin Poland Manufacturing 185,000 OwnedCheektowaga NY Manufacturing 147,000 Owned Measurement & Control Solutions Ludwigshafen Germany Manufacturing 318,000 OwnedTexarkana AR Manufacturing 254,000 OwnedUniontown PA Manufacturing 240,000 LeasedDuBois PA Manufacturing 197,000 OwnedDurham NC Administration and Research & Development 154,000 LeasedDuBois PA Manufacturing 137,000 Leased Regional Selling Locations Dubai United Arab Emirates Manufacturing 144,000 OwnedNottinghamshire United Kingdom Sales Office 139,000 LeasedNanterre France Sales Office 139,000 LeasedLangenhagen Germany Sales Office 134,000 Leased Corporate Headquarters Rye Brook NY Administration 67,000 LeasedITEM 3. LEGAL PROCEEDINGSFrom time to time we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the businessoperations of previously owned entities). These proceedings may seek remedies relating to environmental matters, tax, intellectual propertymatters, acquisitions or divestitures, product liability and personal injury claims, privacy, employment, labor and pension matters, governmentcontract issues and commercial or contractual disputes. See Note 19, "Commitments and Contingencies", of the consolidated financial statementsincluded in Item 8 of Part II of this 10-K for information regarding certain legal and regulatory proceedings we are involved in.22•ITEM 4. MINE SAFETY DISCLOSURESNot applicable.EXECUTIVE OFFICERS OF THE REGISTRANTThe following information is provided regarding the executive officers of Xylem as of January 31, 2019:NAME AGE CURRENT TITLE OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARSPatrick K. Decker 54 President and Chief Executive Officer(2014) • President and Chief Executive Officer, Harsco Corp.(diversified, worldwide industrial company) (2012) E. Mark Rajkowski 60 Senior VP and Chief Financial Officer(2016) • Senior VP and Chief Financial Officer, MeadWestvacoCorp. (worldwide packaging company) (2004) Tomas Brannemo 47 Senior VP and President, Transport andTreatment (2017) • Senior VP and President, Transport (2014)• VP, Transport (2013) David Flinton 48 Senior VP and President, Dewatering(2015) • VP, Engineering and Marketing, Applied WaterSystems (2013) Pak Steven Leung 62 Senior VP and President, EmergingMarkets (2015) VP, Global Sales, Valves and Controls, Pentair Plc(diversified, worldwide industrial manufacturingcompany) (2013) Kenneth Napolitano 56 Senior VP and President, Applied WaterSystems and Americas CommercialTeam (2017) • Senior VP and President, Applied Water Systems(2012) Colin R. Sabol 51 Senior VP and President, Measurement& Control Solutions (2017) • Senior VP and President, Analytics and Treatment(2015)• Senior VP and President, Dewatering (2013) Paul A. Stellato 44 VP, Controller and Chief AccountingOfficer (2017) • VP, Financial Planning and Analysis (2014)• Director, Financial Planning and Analysis (2011) Kairus Tarapore 57 Senior VP and Chief Human ResourcesOfficer (2015) • Senior VP and Chief Administrative Officer, Babcock& Wilcox Company (energy and environmentaltechnologies and services) (2013) Claudia S. Toussaint 55 Senior VP, General Counsel andCorporate Secretary (2014) • Senior VP, General Counsel and Secretary, BarnesGroup Inc. (international industrial and aerospacemanufacturing) (2012)Note: Date in parentheses indicates the year in which the position was assumed.23BOARD OF DIRECTORSThe following information is provided regarding the Board of Directors of Xylem as of January 31, 2019:NAME TITLEMarkos I. Tambakeras Chairman, Xylem Inc., Former Chairman, President and Chief Executive Officer, Kennametal,Inc. Curtis J. Crawford, Ph.D. President and Chief Executive Officer, XCEO, Inc. Jeanne Beliveau-Dunn Former Vice President and General Manager, Cisco Systems, Inc. Patrick K. Decker President and Chief Executive Officer, Xylem Inc. Robert F. Friel Chairman, President and Chief Executive Officer, PerkinElmer, Inc. Victoria D. Harker Chief Financial Officer, TEGNA, Inc. Sten E. Jakobsson Former President and Chief Executive Officer, ABB AB Steven R. Loranger Former Chairman, President and Chief Executive Officer, ITT Corporation Surya N. Mohapatra, Ph.D. Former Chairman, President and Chief Executive Officer, Quest Diagnostics Incorporated Jerome A. Peribere Former President and Chief Executive Officer, Sealed Air Corporation24PART IIITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket Price and DividendsOur common stock trades publicly on the New York Stock Exchange under the trading symbol “XYL”. As of January 31, 2019, there were 10,898holders 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, financialcondition, capital needs, future prospects and other factors deemed relevant by our Board. Therefore, there can be no assurance as to what levelof dividends, if any, will be paid in the future. In the first quarter of 2019, we declared a dividend of $0.24 per share to be paid on March 14, 2019for shareholders of record on February 14, 2019.There were no unregistered offerings of our common stock during 2018.Fourth Quarter 2018 Share Repurchase ActivityThe following table summarizes our purchases of our common stock for the quarter ended December 31, 2018:(in millions, except per share amounts) Period Total Number of SharesPurchased Average Price Paid per Share(a) Total Number of SharesPurchased as Part of PubliclyAnnounced Plans orPrograms (b) Approximate Dollar Value ofShares That May Yet BePurchased Under the Plans orPrograms (b)10/1/18 - 10/31/18 — — — $36311/1/18 - 11/30/18 — — — $36312/1/18 - 12/31/18 — — — $363(a)Average price paid per share is calculated on a settlement basis.(b)On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy ourcapital in a manner that benefits our shareholders and maintains our focus on growth. There were no shares repurchased under this program during the threemonths ended December 31, 2018. There are up to $363 million in shares that may still be purchased under this plan as of December 31, 2018.25PERFORMANCE GRAPHCUMULATIVE TOTAL RETURNThe following graph compares the relative performance of our common stock, the S&P 500 Index and the S&P 500 Industrials Index. This graphcovers the period from December 31, 2013 through December 31, 2018 and assumes that $100 was invested on December 31, 2013 in ourcommon stock, the S&P 500 and the S&P 500 Industrials with the reinvestment of any dividends. XYL S&P 500 S&P 500IndustrialsIndexDecember 31, 2013100 100 100December 31, 2014112 114 110December 31, 2015109 115 107December 31, 2016150 129 127December 31, 2017209 157 153December 31, 2018206 150 132The 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 SecuritiesExchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.26ITEM 6. SELECTED FINANCIAL DATAThe following table sets forth selected consolidated financial data for the five years ended December 31, 2018. This selected consolidatedfinancial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and the notes thereto included in this Report. Year EndedDecember 31,(in millions, except per share data)2018 (a) 2017 (b) (c) 2016 (b) (c) 2015 (c) 2014 (c)Results of Operations Data: Revenue$5,207 $4,707 $3,771 $3,653 $3,916Gross profit2,026 1,847 1,462 1,407 1,517Gross margin38.9% 39.2% 38.8% 38.5% 38.7%Operating income654 552 408 454 469Operating margin12.6% 11.7% 10.8% 12.4% 12.0%Net income attributable to Xylem549 331 260 340 337Per Share Data: Earnings per share: Basic$3.05 $1.84 $1.45 $1.88 $1.84Diluted3.03 1.83 1.45 1.87 1.83Basic shares outstanding179.8 179.6 179.1 180.9 183.1Diluted shares outstanding181.1 180.9 180.0 181.7 184.2Cash dividends per share$0.8400 $0.7200 $0.6196 $0.5632 $0.5120Balance Sheet Data (at period end): Cash and cash equivalents$296 $414 $308 $680 $663Working capital*988 873 878 810 882Total assets7,222 6,860 6,474 4,657 4,833Total debt2,308 2,200 2,368 1,274 1,284*The Company calculates Working capital as follows: net accounts receivable + inventories - accounts payable - customer advances.(a)The amounts for the year ended December 31, 2018 reflects the acquisitions of both Pure and Sensus. Refer to Note 3 to the Consolidated FinancialStatements for further information regarding acquisitions.(b)The amounts for the years ended December 31, 2017 and December 31, 2016 reflect the acquisition of Sensus. Refer to Note 3 to the ConsolidatedFinancial Statements for further information regarding acquisitions.(c)The amounts for the years ended December 31, 2017, December 31, 2016, December 31, 2015 and December 31, 2014 reflect a re-classificationrelated to prior year pension and post retirement accounting. Refer to Note 2 to the Consolidated Financial Statements for further informationregarding this prior year re-classification.27ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussionsummarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years inthe three-year period ended December 31, 2018. Except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our”and “the Company” refer to Xylem Inc. and its subsidiaries.OverviewXylem is a leading global water technology company. We design, manufacture and service highly engineered products and solutions rangingacross a wide variety of critical applications in utility, industrial, residential and commercial building services settings. Our broad portfolio ofsolutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test andtreatment of wastewater to the return of water to the environment. Our product and service offerings are organized into three reportable segmentsthat are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control Solutions.•Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas;with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move thewastewater to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions inthe treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. Additionally,our offerings use monitoring & control, smart and connected technologies to allow for remote monitoring of performance and enableproducts to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for ourcustomers. In the Water Infrastructure segment, we provide the majority of our sales directly to customers along with strong applicationsexpertise, while the remaining amount is through distribution partners.•Applied Water serves the usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning, andfor fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers andcontrols provide cooling to power plants and manufacturing facilities, circulation for food and beverage processing, as well as boostingsystems for agricultural irrigation. In the Applied Water segment, we provide the majority of our sales through long-standing relationshipswith many of the leading independent distributors in the markets we serve, with the remainder going directly to customers.•Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications,smart metering, measurement and control technologies and critical infrastructure technologies that allow customers to more effectivelyuse their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. Wealso provide analytical instrumentation used to measure water quality, flow and level in clean water, wastewater, surface water and coastalenvironments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leakdetection, condition assessment, asset management and pressure monitoring solutions. We also offer smart lighting solutions thatimprove efficiency and public safety efforts across communities. In the Measurement & Control Solutions segment, we generate our salesthrough a combination of long-standing relationships with leading distributors and dedicated channel partners as well as direct salesdepending on the regional availability of distribution channels and the type of product.28Key Performance Indicators and Non-GAAP MeasuresManagement reviews key performance indicators including revenue, gross margins, segment operating income and margins, orders growth,working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management andinvestors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity andmanagement of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capitalfor deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases anddebt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certainamounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics areconsistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however,are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income,earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the followingnon-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 fluctuations in foreigncurrency translation and contributions from acquisitions and divestitures. Divestitures include sales of insignificant portions of ourbusiness that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreigncurrency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate.•"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and priorperiod activity using the same currency conversion rate. This approach is used for countries whose functional currency is not the U.S.dollar.•"adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share, respectively, adjusted to excluderestructuring and realignment costs, Sensus acquisition related costs, special charges, tax-related special items and gains and lossesfrom the sale of businesses, as applicable. A reconciliation of adjusted net income is provided below.(in millions, except per share data) 2018 2017 2016Net income attributable to Xylem $549 $331 $260Earnings per share - diluted $3.03 $1.83 $1.45Restructuring and realignment, net of tax of $12, $13 and $13, respectively 36 28 34Sensus acquisition related costs, net of tax of $8 and $15, respectively — 14 38Special charges, net of tax of $1, $4 and $7, respectively 12 8 11Tax-related special items (75) 40 21Loss (gain) from sale of businesses, net of tax benefit of $2 — 12 —Adjusted net income $522 $433 $364Adjusted earnings per share $2.88 $2.40 $2.03▪"adjusted operating expenses" and "adjusted gross profit" defined as operating expenses and gross profit, respectively, adjusted to excluderestructuring and realignment costs, Sensus acquisition related costs and special charges.▪"adjusted operating income" defined as operating income, adjusted to exclude "adjusted operating expenses", and "adjusted operatingmargin" defined as adjusted operating income divided by total revenue.▪“realignment costs” defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business,including items such as professional fees, severance, relocation, travel, facility set-up and other costs.▪"Sensus acquisition related costs" defined as costs incurred by the Company associated with the acquisition of Sensus that are beingreported within operating income. These costs include integration costs, acquisition29costs, costs related to the recognition of the backlog intangible asset amortization recorded in purchase accounting.▪“special charges" defined as costs incurred by the Company, such as acquisition and integration related costs not included in "Sensusacquisition related costs", non-cash impairment charges, due diligence costs and other special non-operating items.▪"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law changeimpacts, significant reserves for cash repatriation, excess tax benefits/losses and other discrete tax adjustments.▪"free cash flow" defined as net cash from operating activities less capital expenditures. Free cash flow is further adjusted for othersignificant items that impact current results which management believes are not related to our ongoing operations and performance. Ourdefinition of free cash flow does not consider certain non-discretionary cash payments, such as debt. The following table provides areconciliation of free cash flow.(in millions) 2018 2017 2016Net cash provided by operating activities $586 $686 $497Capital expenditures (237) (170) (124)Free cash flow $349 $516 $373Cash paid for Sensus acquisition related costs 1 28 13Free cash flow, excluding Sensus acquisition related costs $350 $544 $386▪“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustmentto EBITDA to exclude share-based compensation, restructuring and realignment costs, Sensus acquisition related costs, special chargesand gain or loss from sale of businesses.(in millions) 2018 2017 2016Net Income $549 $330 $260Income tax expense 36 136 80Interest expense (Income), net 78 79 68Depreciation 117 109 87Amortization 144 125 64EBITDA $924 $779 $559Share-based compensation 30 21 18Restructuring and realignment 47 41 47Sensus acquisition related costs — 14 46Special charges 12 13 5Loss (gain) from sale of business — 10 —Adjusted EBITDA $1,013 $878 $67530Executive SummaryXylem reported revenue of $5,207 million for 2018, an increase of $500 million, or 10.6%, from $4,707 million reported in 2017. On a constantcurrency basis, revenue increased by $477 million, or 10.1%, primarily consisting of organic revenue growth of $390 million, or 8.3%, driven bygrowth in all end markets, as well as across all major geographic regions. Acquisition revenue of $111 million also contributed to the increase,partially offset by revenue related to divestitures of $24 million.Operating income for 2018 was $654 million, reflecting an increase of $102 million, or 18.5%, compared to $552 million in 2017. Operating marginwas 12.6% for 2018 versus 11.7% for 2017, an increase of 90 basis points. The increase in operating income and margin included favorableimpacts from decreased Sensus acquisition related costs of $22 million, partially offset by an increase in restructuring and realignment costs of $7million and increased special charges of $1 million. Excluding the impact of these items, adjusted operating income was $714 million, with anadjusted operating margin of 13.7% in 2018 as compared to adjusted operating income of $626 million with an adjusted operating margin of 13.3%in 2017. The increase in adjusted operating margin was primarily due to cost reductions from our global procurement and productivity initiatives,favorable volume impacts and price realization, which were partially offset by cost inflation, increased spending on strategic investments andunfavorable mix. Purchase accounting and currency impacts also negatively affected operating margin.Additional financial highlights for 2018 include the following:•Net income attributable to Xylem of $549 million, or $3.03 per diluted share ($522 million or $2.88 per diluted share on an adjusted basis, up20.6% from 2017)•Cash from operating activities of $586 million, and free cash flow, excluding Sensus acquisition related costs, of $350 million down 35.7%from 2017•Orders of $5,437 million, up 11.7% from $4,868 million in 2017 (up 9.3% on an organic basis)•Dividends paid to shareholders increased 17% in 2018.2019 Business OutlookWe anticipate total revenue growth in the range of 2% to 4% in 2019, with organic revenue growth anticipated to be in the range of 4% to 6%. Thefollowing is a summary of our 2018 organic revenue performance and 2019 organic revenue outlook by end market.•Utilities increased approximately 10% for 2018 on an organic basis driven by strength across all regions globally, particularly in NorthAmerica and Asia Pacific. For 2019, we expect organic growth in the mid-single-digit range driven by healthy water and wastewaterspending in the U.S., smart meter and infrastructure analytics growth opportunities and mixed but stable low-single-digit growth in Europe.We also anticipate a healthy infrastructure investment focus in the emerging markets will continue in China and India.•Industrial increased by roughly 6% for 2018 on an organic basis driven by strength in North America, western Europe and Latin America,partially offset by weakness in Asia Pacific. For 2019, we expect organic growth in the low to mid-single-digits driven by continued solidindustrial conditions in the U.S. as the oil and gas markets begin to stabilize after a strong 2018. We also anticipate mixed emergingmarket conditions with strength in India and Latin America, offset by softness in the Middle East and slowing growth in China.•In the commercial markets, organic growth was approximately 11% for 2018 primarily driven by strength in the United States and AsiaPacific. For 2019, we expect organic growth in the low to mid-single-digit range as the overall market will begin to moderate after two yearsof strong performance. Organic growth will be driven by continued strength in the U.S., especially during the first half of the year, and theemerging markets led by initiatives in the China and India building markets.•In residential markets, organic growth was approximately 2% in 2018 primarily driven by strength in western Europe which was partiallyoffset by weakness in Asia Pacific. For 2019, we expect low-single-digit growth primarily driven by continued competition in the U.S.replacement market as the housing market begins to stabilize. We also anticipate stability in Europe and modest growth opportunities inChina and other Asia Pacific countries for secondary clean water sources.We will continue to strategically execute restructuring and realignment actions primarily to reposition our European and North American businessesin an effort to optimize our cost structure and improve our operational efficiency and effectiveness. During 2018, we incurred $20 million and $28million in restructuring and realignment costs,31respectively. We realized approximately $13 million of incremental net savings in 2018 from actions initiated in 2017, and an additional $3 millionof net savings from our 2018 actions. As a result of our 2017 and 2018 actions we expect to realize approximately $8 million of incremental netsavings in 2019 and beyond. During 2019, we currently expect to incur approximately $30 million in restructuring and realignment costs.We plan to continue to take actions and focus spending in 2019 on actions that allow us to make progress on our top strategic priorities. Thepriority of accelerating profitable growth encompasses our initiatives to drive commercial excellence, grow in emerging markets and strengtheninnovation and technology through creation of new centers of excellence, a streamlined approach to product development and strategicacquisitions. The priority of driving continuous improvement is an area where we will continue to work to create new opportunities to unlocksavings by eliminating waste and increasing efficiencies, which is supported by efforts to expand and further deepen our talent pool. We plan tocontinue to deploy capital in smart, disciplined ways to develop and acquire solutions to address our customers’ challenges. Finally, we continueto work to improve cash performance and generate capital to return to our shareholders.32Results of Operations(in millions) 2018 2017 2016 2018 v. 2017 2017 v. 2016Revenue $5,207 $4,707 $3,771 10.6 % 24.8 %Gross profit 2,026 1,847 1,462 9.7 % 26.3 %Gross margin 38.9% 39.2% 38.8% (30)bp 40bpRestructuring and realignment costs 5 3 3 66.7 % — %Sensus acquisition related charges — 8 26 NM (69.2)%Adjusted gross profit 2,0311,8581,491 9.3 % 24.6 %Adjusted gross margin 39.0%39.5%39.5% (50)bp —Total operating expenses 1,372 1,295 1,054 5.9 % 22.9 %Expense to revenue ratio 26.3% 27.5% 28.0% (120)bp (50)bpRestructuring and realignment costs (43) (38) (44) 13.2 % (13.6)%Sensus acquisition related charges — (14) (27) NM (48.1)%Special charges (12) (11) (5) 9.1 % 120.0 %Adjusted operating expenses 1,317 1,232 978 6.9 % 26.0 %Adjusted operating expense to revenue ratio 25.3% 26.2% 25.9% (90)bp 30bpOperating income 654 552 408 18.5 % 35.3 %Operating margin 12.6% 11.7% 10.8% 90bp 90bpInterest and other non-operating expense (income),net 69 76 68 (9.2)% 11.8 %(Loss)/gain from sale of businesses — (10) — NM NMIncome tax expense 36 136 80 (73.5)% 70.0 %Tax rate 6.1% 29.2% 23.5% (2,310)bp 570bpNet income $549 $330 $260 66.4 % 26.9 %NM Not Meaningful2018 versus 2017RevenueRevenue generated for 2018 was $5,207 million, an increase of $500 million, or 10.6%, compared to $4,707 million in 2017. On a constantcurrency basis, revenue grew 10.1% during 2018. This increase in revenue at constant currency was primarily driven by an increase in organicrevenue of $390 million reflecting strong organic growth across all major regions, with the vast majority of growth coming from North America, theemerging markets, particularly in China and Latin America, as well as in western Europe. Acquisition revenue of $111 million also contributed tothe increase, partially offset by a reduction in revenue related to divestitures of $24 million during the period.The following table illustrates the impact on 2018 revenue from organic growth, recent acquisitions and divestitures, and foreign currencytranslation in relation to revenue: Water Infrastructure Applied Water Measurement & ControlSolutions Total Xylem(in millions)$ Change% Change $ Change% Change $ Change% Change $ Change% Change2017 Revenue$2,004 $1,421 $1,282 $4,707 Organic Growth1768.8 % 1138.0 % 1017.9% 3908.3%Acquisitions/(Divestitures)—— % (10)(0.7)% 977.6% 871.8%Constant Currency1768.8 % 1037.2 % 19815.4% 47710.1%Foreign currency translation (a)(4)(0.2)% 100.7 % 171.3% 230.5%Total change in revenue1728.6 % 1138.0 % 21516.8% 50010.6%2018 Revenue$2,176 $1,534 $1,497 $5,207 33(a)Foreign currency translation impact for the year primarily due to strength in the value of the Euro, British Pound, Chinese Yuan and various othercurrencies against the U.S. Dollar. This impact was partially offset by the weakening in value of the Argentine Peso, Indian Rupee, Swedish Kronaand Australian dollar against the U.S. Dollar.Water InfrastructureWater Infrastructure’s revenue increased $172 million, or 8.6%, in 2018 (8.8% increase on a constant currency basis) compared to 2017. Revenuewas negatively impacted by $4 million of foreign currency translation, with the change at constant currency coming entirely from organic growthduring the year of $176 million, or 8.8%. Organic growth for the year was driven by strength in the utility end market across all geographic regions,with particularly strong growth coming from the emerging markets, especially China, as well as from the United States. Organic growth during theyear was also driven by strength in the industrial end market, primarily in North America and Europe, while emerging market industrial strength inLatin America was partially offset by declines in Asia Pacific due to the lapping of a large ozone project delivery in China last year.From an application perspective, organic revenue growth for the year was largely attributable to our transport application. The transport applicationgrew due to strength across all geographic regions. Growth in North America was driven by modest share gains and continued focus by utilitycustomers on improving infrastructure, as well as strong dewatering rental sales and oil and gas growth. Project deliveries in western Europe andproduct localization in China also contributed to the transport application growth during the period with China having 35.6% organic growth for theyear. Organic revenue from our treatment application also contributed significantly to the segment's growth across all regions, particularly fromstrong utility project deliveries in China, with 42.1% growth for the year.Applied WaterApplied Water’s revenue increased $113 million, or 8.0%, in 2018, with revenue benefiting from $10 million of foreign currency translation duringthe year. The revenue growth at constant currency was $103 million, or 7.2%, and consisted of organic growth of $113 million, or 8.0%, partiallyoffset by $10 million of reduction in revenue related to divestitures. Organic growth for the year was driven primarily by strength in the commercialand industrial end markets, primarily in the United States and Asia Pacific, as well as modest growth in the residential end market.From an application perspective, commercial building services revenue was primarily driven by distributor strength and commercial buildingconstruction growth, coupled with price realization, in the United States and project deployments in China and India. Organic revenue growth in theindustrial water application was driven primarily by recovery in large project business and healthy general industrial demand in the United States,as well as strong strength in the emerging markets, particularly China and Latin America. Residential building services also had modest organicgrowth, primarily from strength in western Europe, partially offset by declines in Asia Pacific.Measurement & Control SolutionsMeasurement & Control Solutions revenue increased $215 million, or 16.8%, in 2018 (15.4% increase on a constant currency basis), with revenuebenefiting from $17 million of foreign currency translation during the year. Revenue growth at constant currency consisted of revenue contributedby acquisitions of $111 million and organic revenue growth of $101 million, or 7.9%, which was partially offset by $14 million of reduction inrevenue related to divestitures during the year. Organic revenue growth for the year was primarily driven by strength in the utility end market inNorth America.From an application perspective, organic revenue from the gas application contributed the most organic growth for the segment, driven entirely bylarge project deployments in North America. The water application also drove organic growth, with large project deployments and increased watershipments in the Unites States and Asia Pacific, partially offset by declines in Europe. Software as a service & other also had significant growthfrom large deployments in the United States and the United Kingdom. Additional organic revenue growth came from the test application, which sawgrowth in both the utility and industrial end markets, primarily in western Europe and the United States, partially offset by declines in the emergingmarkets. The electric application also had modest organic growth in North America during the year.34Orders/Backlog Water Infrastructure Applied Water Measurement & ControlSolutions Total Xylem(in millions)$ Change% Change $ Change% Change $ Change% Change $ Change% Change2017 Orders$2,112 $1,476 $1,280 $4,868 Organic Growth1406.6% 835.6 % 23118.0% 4549.3%Acquisitions/(Divestitures)——% (12)(0.8)% 1007.8% 881.8%Constant Currency1406.6% 714.8 % 33125.9% 54211.1%Foreign currency translation(a)30.1% 100.7 % 141.1% 270.6%Total change in revenue1436.8% 815.5 % 34527.0% 56911.7%2018 Orders$2,255 $1,557 $1,625 $5,437(a)Foreign currency translation impact for the year primarily due to strength in the value of the Euro, British Pound, Chinese Yuan and various othercurrencies against the U.S. Dollar. This impact was partially offset by the weakening in value of the Argentine Peso, Indian Rupee, Swedish Kronaand Australian dollar against the U.S. Dollar.Orders received during 2018 increased by $569 million, or 11.7%, to $5,437 million (11.1% increase on a constant currency basis). Order growthwas favorably impacted by $27 million of foreign currency translation during the year. The order increase on a constant currency basis includedorganic order growth of $454 million, or 9.3%, over the prior year. Orders from acquisitions of $115 million also contributed to the growth atconstant currency, partially offset by a reduction in orders related to divestitures of $27 million during the year.Water Infrastructure segment orders increased $143 million, or 6.8%, to $2,255 million (6.6% increase on a constant currency basis). Ordersgrowth for the segment benefited from $3 million of foreign currency translation for the year. The order increase on a constant currency basisconsisted entirely of an increase in organic orders. Organic orders grew in both of the segment applications. The treatment application had verystrong order intake, driven by orders in China, the United States and India. Transport order growth was driven by increased strength in NorthAmerica, primarily from dewatering rental and equipment orders along with overall strong market conditions, and order strength in Europe.Transport order growth during the year was partially offset by custom pump project timing in India.Orders increased in our Applied Water segment by $81 million, or 5.5%, to $1,557 million (4.8% increase on a constant currency basis). Ordersgrowth for the segment benefited from $10 million of foreign currency translation for the year. The order increase on a constant currency basisincluded organic order growth of $83 million, or 5.6%, driven by strong commercial and industrial performance in the United States, as well asmodest strength in Europe and the emerging markets, partially offset by the reduction in orders from divestitures of $12 million.Orders increased in our Measurement & Control Solutions segment by $345 million, or 27.0%, to $1,625 million (25.9% increase on a constantcurrency basis). Orders growth for the segment benefited from $14 million of foreign currency translation for the year. The order increase on aconstant currency basis included orders from recent acquisitions of $115 million, partially offset by the reduction of orders from divestitures of $15million, and organic order growth of $231 million, or 18.0%. Organic order growth primarily driven by orders within the water application in NorthAmerica and a large order in India. The gas and software as a service & other applications also had strong organic order growth in North Americaas well as Asia Pacific, while electric orders were only slightly up for the year.Backlog includes contractual customer commitments as well as orders on hand as of the end of the period. Delivery schedules vary fromcustomer to customer based upon their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customersdue to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues will not equal ending total backlog dueto contract adjustments, foreign currency fluctuations and other factors. Typically, large projects require longer lead production cycles anddeployment schedules, and delays can occur from time to time. Total backlog was $1,689 million at December 31, 2018 and $1,513 million atDecember 31, 2017, an increase of 11.6%. This year over year increase in backlog of $176 million includes approximately $42 million of backlogfrom 2018 acquisitions. We anticipate that approximately 65% of our total backlog at December 31, 2018 will be recognized as revenue during2019.35Gross MarginGross margins as a percentage of consolidated revenue decreased 30 basis points to 38.9% in 2018 as compared to 39.2% in 2017. The grossmargin decrease was primarily driven by the negative impact of cost inflation, unfavorable mix, increased amortization of external sale software,net negative currency impacts and purchase accounting impacts. These unfavorable impacts were partially offset by cost reductions from globalprocurement and productivity improvement initiatives, price realization, and reductions in Sensus acquisition related costs and realignment costs.Operating Expenses(in millions)2018 2017 ChangeSelling, general and administrative expenses ("SG&A")$1,161 $1,089 6.6 %SG&A as a % of revenue22.3% 23.1% (80)bpResearch and development expenses ("R&D")189 181 4.4 %R&D as a % of revenue3.6% 3.8% (20)bpRestructuring and asset impairment charges22 25 (12.0)%Operating expenses$1,372 $1,295 5.9 %Expense to revenue ratio26.3% 27.5% (120)bpSelling, General and Administrative ExpensesSG&A increased by $72 million (increase of 6.6%) to 22.3% of revenue in 2018, as compared to 23.1% of revenue in 2017. The improvement inSG&A as a percent of revenue for the year was primarily driven by favorable volume impacts, partially offset by the absence of Sensus acquisitionrelated charges that did not recur in 2018. Additional SG&A from recent acquisitions also added to the increase in SG&A expenses as comparedto the prior year.Research and Development ExpensesR&D spending was $189 million, or 3.6% of revenue, in 2018 as compared to $181 million, or 3.8% of revenue, in 2017. Additionally, wecapitalized R&D on external sale software of $60 million in 2018 as compared to $46 million in 2017. Our increased spending on R&D is driven byour continued commitment to innovation and technology development.Restructuring Charges and Asset ImpairmentRestructuring ChargesDuring 2018, we incurred restructuring costs of $9 million, $2 million and $9 million in our Water Infrastructure, Applied Water and Measurement &Control Solutions segments, respectively. We incurred these charges related to actions taken in 2018 primarily as a continuation of our efforts toreposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness.The charges included the reduction of headcount and consolidation of facilities within our Measurement & Control Solutions and WaterInfrastructure segments, as well as headcount reductions within our Applied Water segment.During 2017, we recognized restructuring costs of $7 million, $8 million and $5 million in our Water Infrastructure, Applied Water and Measurement& Control Solutions, respectively. These charges were incurred primarily in an effort to realign our organizational structure in Europe and NorthAmerica to optimize our cost structure. The charges included the reduction of headcount and consolidation of facilities within our Applied Waterand Water Infrastructure segments, as well as headcount reductions within our Measurement & Control Solutions segment.36The following table presents expected restructuring spend:(in millions) Water Infrastructure Applied Water Measurement &Control Solutions Corporate TotalActions Commenced in 2018: Total expected costs $9 $1 $7 $— $17Costs incurred during 2018 7 1 7 — 15Total expected costs remaining $2 $— $— $— $2 Actions Commenced in 2017: Total expected costs $18 $12 $3 $— $33Costs incurred during 2017 5 4 2 — 11Costs incurred during 2018 2 1 1 — 4Total expected costs remaining $11 $7 $— $— $18 Actions Commenced in 2016: Total expected costs $13 $14 $10 $2 $39Costs incurred during 2016 11 10 6 2 29Costs incurred during 2017 2 4 3 — 9Costs incurred during 2018 — — 1 — 1Total expected costs remaining $— $— $— $— $—The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2018 consist primarily of severancecharges and are expected to continue through the third quarter of 2019. The Water Infrastructure, Applied Water, and Measurement & ControlSolutions actions commenced in 2017 consist primarily of severance charges and are expected to continue through the second quarter of 2020.The Water Infrastructure, Applied Water, Measurement & Control Solutions and Corporate actions commenced in 2016 consist primarily ofseverance charges and are complete. As a result of the actions initiated in 2018, we achieved savings of approximately $2 million in 2018 andestimate annual future net savings beginning in 2019 of approximately $7 million, resulting in $5 million of incremental savings from the 2018actions.Asset Impairment ChargesDuring the fourth quarter of 2018 we determined that certain software assets within our Water Infrastructure segment were impaired. Accordinglywe recognized an impairment charge of $2 million.During the first quarter of 2017 we determined that certain assets within our Applied Water segment, including a tradename, were impaired.Accordingly we recognized an impairment charge of $5 million. Refer to Note 11, "Goodwill and Other Intangible Assets," for additional information.Operating IncomeWe generated operating income of $654 million (operating margin of 12.6%) for 2018, reflecting an increase of $102 million, or 18.5%, whencompared to operating income of $552 million (operating margin of 11.7%) during the prior year. The increase in operating margin was primarily dueto cost reductions resulting from our global procurement and productivity initiatives, favorable volume impacts and price realization and a decreasein Sensus acquisition related costs. These favorable impacts on operating margin were partially offset by cost inflation increases, increasedspending on strategic investments, unfavorable mix, an increase in restructuring and realignment costs and an increase in special charges.Purchase accounting impacts also negatively affected operating margin.Adjusted operating income was $714 million (adjusted operating margin of 13.7%) for 2018, reflecting an increase of $88 million, or 14.1%, whencompared to adjusted operating income of $626 million (adjusted operating margin of 13.3%) during the prior year. The increase in adjustedoperating margin was mostly due to the same factors impacting operating income, except for the decrease in Sensus acquisition related costs, theincrease in restructuring and realignment costs and the increase in special charges as these costs were not included in adjusted operating income.37The table below provides a reconciliation of total and each segment's operating income to adjusted operating income, and a calculation of thecorresponding adjusted operating margin:(In millions)2018 2017 ChangeWater Infrastructure Operating income$359 $312 15.1%Operating margin16.5% 15.6% 90bpRestructuring and realignment costs20 16 25.0%Special charges2 — NM Adjusted operating income$381 $328 16.2%Adjusted operating margin17.5% 16.4% 110bp Applied Water Operating income$236 $194 21.6%Operating margin15.4% 13.7% 170bpRestructuring and realignment costs10 17 (41.2)%Special charges— 5 (100.0)%Adjusted operating income$246 $216 13.9%Adjusted operating margin16.0% 15.2% 80bpMeasurement & Control Solutions Operating income$118 $110 7.3%Operating margin7.9% 8.6% (70)bpSensus acquisition related costs— 15 (100.0)%Restructuring and realignment costs18 8 125.0%Special charges5 — NM Adjusted operating income$141 $133 6.0%Adjusted operating margin9.4% 10.4% (100)bpCorporate and other Operating loss$(59) $(64) (7.8)%Sensus acquisition related costs— 7 (100.0)%Special charges5 6 (16.7)%Adjusted operating loss$(54) $(51) 5.9%Total Xylem Operating income$654 $552 18.5%Operating margin12.6% 11.7% 90bp Restructuring and realignment costs48 41 17.1%Sensus acquisition related costs— 22 (100.0)%Special charges12 11 9.1%Adjusted operating income$714 $626 14.1%Adjusted operating margin13.7% 13.3% 40bpNM Not Meaningful38Water InfrastructureOperating income for our Water Infrastructure segment increased $47 million, or 15.1%, with operating margin also increasing from 15.6% to16.5%, a 90 basis point increase as compared to the prior year. Operating margin was negatively impacted year over year by increasedrestructuring and realignment costs of $4 million and special charges of $2 million incurred in 2018. Excluding these items, adjusted operatingincome increased $53 million, or 16.2%, with adjusted operating margin increasing from 16.4% to 17.5%, a 110 basis point increase as comparedto the prior year. The increase in adjusted operating margin was primarily due to cost reductions from our global procurement and productivityinitiatives, favorable volume and price realization, which were partially offset by cost inflation, unfavorable mix, increased spending on strategicinvestments and negative currency impacts.Applied WaterOperating income for our Applied Water segment increased $42 million, or 21.6%, with operating margin also increasing from 13.7% to 15.4%, a170 basis point increase as compared to the prior year. Operating margin was positively impacted by special charges of $5 million incurred in 2017that did not recur and decreased restructuring and realignment costs of $7 million in 2018. Excluding these items, adjusted operating incomeincreased $30 million, or 13.9%, with adjusted operating margin increasing from 15.2% to 16.0%, an 80 basis point increase as compared to theprior year. The increase in adjusted operating margin was primarily due to cost reductions from our global procurement and productivity initiatives,favorable volume and price realization, which were partially offset by cost inflation, negative transactional currency impacts and unfavorable mix.Measurement & Control SolutionsOperating income for our Measurement & Control Solutions segment increased $8 million, or 7.3%, with operating margin decreasing from 8.6% to7.9%, a 70 basis point decrease as compared to the prior year. Operating margin was negatively impacted by an increase of $10 million inrestructuring and realignment costs and $5 million in special charges incurred in 2018. This impact was offset by $15 million of Sensus acquisitionrelated costs incurred during the year in 2017 that did not recur. Excluding these items, adjusted operating income increased $8 million, or 6.0%,with adjusted operating margin decreasing from 10.4% to 9.4%, a 100 basis point decrease as compared to the prior year. The decrease inadjusted operating margin was primarily due to increases in cost inflation, spending on strategic investments and unfavorable mix impacts due tolarge energy project deployments. Purchase accounting impacts also negatively affected operating margin. These impacts were partially offset byfavorable volume and price realization and cost reductions from our global procurement and productivity initiatives.Corporate and otherOperating expense for corporate and other decreased $5 million, or 7.8%, compared to the prior year, primarily due to a reduction of Sensusacquisition related costs and special charges. Excluding these costs, adjusted operating expense increased $3 million, or 5.9%, compared to theprior year, mostly driven by an increase in employee related, non-cash share-based compensation costs.Interest ExpenseInterest expense remained constant at $82 million for both 2018 and 2017. See Note 14, "Credit Facilities and Debt" of our consolidated financialstatements for a description of our credit facilities and long-term debt and related interest.Income Tax ExpenseTax ActOn December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TaxAct”). The Tax Act makes broad and complex changes to the U.S. tax code. As noted at 2017 year end, we reasonably estimated certain effectsand, therefore, as permitted by SAB 118, recorded provisional estimates associated with the reduction of U.S. federal corporate tax rate anddeemed repatriation transition tax. Our accounting for the reduction of U.S. federal corporate tax rate is complete. We recorded a provisional taxbenefit for corporate tax rate reduction of $107 million as of December 31, 2017. Upon further analysis of our deferred tax assets and liabilities, werecognized a measurement-period adjustment of $1.5 million as an additional decrease of the net deferred tax liabilities and recorded acorresponding deferred tax benefit of $1.5 million during the period ended December 31, 2018. The effect of this measurement period adjustmenton the 2018 effective tax rate was about 0.3%. A total decrease of the net deferred tax liabilities of $108 million has been recorded for thecorporate rate reduction, with a corresponding deferred tax benefit of $108 million.39Our accounting for the Deemed Repatriation Transition Tax ("Transition Tax") is complete. We made an estimate of the Transition Tax andrecorded a provisional Transition Tax liability of $153 million as of December 31, 2017. On the basis of revised E&P computations that werecompleted and additional guidance, we recognized a measurement-period adjustment of a $9 million decrease to the income tax expense in 2018.The effect of the measurement-period adjustment on the 2018 effective tax rate was approximately 1.6%. A total Transition Tax obligation to dateof $144 million has been recorded, with a corresponding adjustment of $144 million to income tax expense.The income tax provision for 2018 was $36 million at an effective tax rate of 6.1% compared to $136 million at an effective tax rate of 29.2% in2017. The 2018 effective tax rate is lower than 2017 primarily due to the impact of an intercompany sale of assets, the reduction of the TransitionTax and the reduction of the U.S. federal corporate rate in 2018, partially offset by the 2017 benefit from the remeasurement of deferred tax assetsand liabilities.See Note 7, "Income Taxes" of our consolidated financial statements for further discussion of the Tax Act.Other Comprehensive (Loss) IncomeOther comprehensive loss was $111 million in 2018 as compared to income of $108 million in 2017. This decrease was primarily driven byunfavorable foreign currency translation impacts due to the weakening of the Euro, Great British Pound, Canadian Dollar, South African rand,Polish Zloty, Swedish Krona, amongst other various currencies, against the U.S. Dollar in the current year versus strengthening for the sameperiod in the prior year. These decreases were partially offset by the favorable impact from movement in our Euro net investment hedges. The taximpact on the movement in the net investment hedges also contributed to the year over year decrease.2017 versus 2016RevenueRevenue generated for 2017 was $4,707 million, an increase of $936 million, or 24.8%, compared to $3,771 million in 2016. On a constantcurrency basis, revenue grew 23.9%. This increase in revenue was primarily driven by additional revenue of $790 million from acquisitions. Therewas also strong organic growth of $122 million during the year, driven primarily by North America as well as strength in the emerging markets,particularly in China and India. Additionally, to a lesser extent, Europe contributed to this organic growth despite ongoing weakness in the UnitedKingdom during the year.The following table illustrates the impact on 2017 revenue from organic growth, recent acquisitions and divestitures, and foreign currencytranslation in relation to revenue. Water Infrastructure Applied Water Measurement & ControlSolutions Total Xylem(in millions)$ Change% Change $ Change% Change $ Change% Change $ Change% Change2016 Revenue$1,932 $1,393 $446 $3,771 Organic Growth562.9% 342.4 % 327.2% 1223.2%Acquisitions/(Divestitures)——% (10)(0.7)% 790177.1% 78020.7%Constant Currency562.9% 241.7 % 822184.3% 90223.9%Foreign currency translation (a)160.8% 40.3 % 143.1% 340.9%Total change in revenue723.7% 282.0 % 836187.4% 93624.8%2017 Revenue$2,004 $1,421 $1,282 $4,707 (a)Foreign currency translation impact primarily due to strength in the value of the Euro, Canadian dollar, Russian Ruble, Australian dollar, SouthAfrican Rand and various other currencies, partially offset by weakness in the British Pound against the U.S. Dollar.40Water InfrastructureWater Infrastructure’s revenue increased $72 million, or 3.7%, in 2017 (2.9% increase on a constant currency basis) compared to 2016. Revenuebenefited from $16 million of foreign currency translation for the year and included organic growth of $56 million, or 2.9%.Organic growth for the year was driven by strength in the industrial end market, and to a lesser extent in the utility end market. The growth in bothof these end markets was driven by strength from Asia Pacific and North America.From an application perspective, organic revenue growth was driven primarily by our transport application. The transport application grew in theindustrial end market due to strength in the dewatering business which benefited from the recovery of the industrial construction market,particularly within the distribution channel and recovery of oil and gas and mining markets in North America and Latin America. The transportapplication also grew in the utility end market driven by increased municipal spending in North America and increased projects in the Middle Eastand India. Organic revenue from our treatment application also contributed to the segment's growth primarily from growth in China from industrialtreatment project deliveries as well as growth in Europe from municipal treatment projects.Applied WaterApplied Water’s revenue increased $28 million, or 2.0%, in 2017 (1.7% increase on a constant currency basis) compared to 2016. Revenuebenefited from $4 million of foreign currency translation for the year and the constant currency increase included organic growth of $34 million, or2.4%.Organic growth for the year was driven by strength in the residential and commercial end markets in the United States, Asia Pacific and westernEurope, which were partially offset by declines in the industrial market.From an application perspective, growth in residential building services was primarily driven by strength in the United States, where we benefitedfrom the timing of promotions and market share gains, and continued strength in Asia Pacific. Commercial building services also grew, primarily inNorth America, western Europe and Asia Pacific, driven by new product traction and sales channel investments. This growth was partially offsetby a decline in industrial applications, primarily driven by unfavorable weather conditions impacting the agriculture business in the United States,partially offset by strength in western Europe.Measurement & Control SolutionsMeasurement & Control Solutions revenue increased $836 million, or 187.4%, in 2017 (184.3% on a constant currency basis) compared to 2016.The revenue increase for the year was almost entirely from $790 million of revenue related to acquisitions that we did not have in the prior year.Most of the additional revenue contributed by the Sensus business was generated in the United States with additional revenue coming primarilyfrom western Europe and China. The majority of the Sensus business revenue came from water applications with gas and electric applicationsmaking up most of the remaining sales for the year. Organic revenue growth in the Measurement & Control Solutions segment was $32 million, or7.2%, for the year. Organic growth was driven primarily by growth across all applications, except electric which had slight declines. Much of theorganic revenue increase was in the water application, which had increased AMI deployments in North America as well as higher demand for iPerlproduct in eastern Europe and the Middle East. Organic revenue also increased in the gas application, primarily due to AMI deployments in NorthAmerica, as well as in the software and services application, primarily driven by a couple of major contract upgrades. The test application alsocontributed to the increase in organic revenue as a result of strength from the environmental monitoring business in the United States.41Orders/Backlog Water Infrastructure Applied Water Measurement & ControlSolutions Total Xylem(in millions)$ Change% Change $ Change% Change $ Change% Change $ Change% Change2016 Orders$1,957 $1,405 $462 $3,824 Organic Growth1397.1% 795.6 % 429.1% 2606.8%Acquisitions/(Divestitures)——% (11)(0.8)% 762164.9% 75119.6%Constant Currency1397.1% 684.8 % 804174.0% 1,01126.4%Foreign currency translation (a)160.8% 30.2 % 143.0% 330.9%Total change in revenue1557.9% 715.1 % 818177.1% 1,04427.3%2017 Orders$2,112 $1,476 $1,280 $4,868 (a)Foreign currency translation impact primarily due to strength in the value of the Euro, Canadian dollar, Russian Ruble, Australian dollar, SouthAfrican Rand and various other currencies, partially offset by weakness in the British Pound against the U.S. Dollar.Orders received during 2017 increased by $1,044 million, or 27.3%, to $4,868 million (26.4% increase on a constant currency basis). The ordergrowth on a constant currency basis was primarily driven by additional orders from recent acquisitions, primarily Sensus, of $762 million. Organicorder growth was $260 million, or 6.8%, over the prior year.Water Infrastructure segment orders increased $155 million, or 7.9%, to $2,112 million (7.1% growth on a constant currency basis). Ordersbenefited from $16 million of foreign currency translation for the year and included organic growth of $139 million, or 7.1%. The majority of theorganic order growth for the segment came from the transport application, driven by the utility sector in the United States, as well as strong projectorders in China and India. Additionally, dewatering distributor orders increased driven by storm related activity and the strengthening of the oil andgas markets. Treatment applications also had strong order intake, primarily from projects in the emerging markets, Latin America and NorthAmerica.Orders increased in our Applied Water segment by $71 million, or 5.1%, to $1,476 million (4.8% increase on a constant currency basis). The orderincrease was primarily due to organic order growth of $79 million, or 5.6%, driven by strength in the emerging markets and strong commercialbuilding and industrial performance in North America, which was partially offset by the loss of orders related to divested businesses of $11 million.Orders increased in our Measurement & Control Solutions segment by $818 million, or 177.1%, to $1,280 million (174.0% growth on a constantcurrency basis). This increase included orders from recent acquisitions, primarily Sensus, of $762 million and organic order growth of $42 million,or 9.1%, primarily from Sensus order increases in North America for most applications, as well as increased orders from test application strengthin the United States and China.Backlog includes contractual customer commitments as well as orders on hand as of the end of the period. Delivery schedules vary fromcustomer to customer based upon their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customersdue to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues will not equal ending total backlog dueto contract adjustments, foreign currency fluctuations and other factors. Typically, large projects require longer lead production cycles anddeployment schedules, and delays can occur from time to time. Total backlog was $1,513 million at December 31, 2017 and $1,292 million atDecember 31, 2016, an increase of 17%. The December 31, 2016 backlog balance has been revised to include contractual agreements thatSensus has with customers that do not have minimum commitments but which we believe will be executed upon over the terms of the contracts.This year over year increase in backlog of $221 million is due to strong order growth in the fourth quarter across all of our segments as well asbenefits from currency translation impacts. We anticipate that over 60% of our total backlog at December 31, 2017 will be recognized as revenueduring 2018.Gross MarginGross margins as a percentage of consolidated revenue increased to 39.2% in 2017 from 38.8% in 2016. The gross margin increase was primarilydue to the benefits realized from cost reductions from global procurement and continuous improvement initiatives, as well as a decrease in theinventory step-up charge for Sensus in 2017. These positive impacts on gross margin were partially offset by cost inflation and unfavorableproduct mix.42Operating Expense(in millions)2017 2016 ChangeSelling, general and administrative expenses$1,089 $914 19.1 %SG&A as a % of revenue23.1% 24.2% (110)bpResearch and development expenses181 110 64.5 %R&D as a % of revenue3.8% 2.9% 90bpRestructuring and asset impairment charges25 30 (16.7)%Operating expenses$1,295 $1,054 22.9 %Expense to revenue ratio27.5% 28.0% (50)bpSelling, General and Administrative ExpensesSG&A increased by $175 million (increase of 19.1%) to 23.1% of revenue in 2017, as compared to 24.2% of revenue in 2016. The increase inSG&A expenses includes approximately $160 million of incremental SG&A spending for the Sensus business that we did not have prior to theacquisition in the fourth quarter of 2016. The remaining increases in SG&A expenses were primarily due to inflation, investments in regional saleschannels and operational capabilities and foreign currency impacts, which were partially offset by savings from restructuring and other costactions.Research and Development ExpensesR&D spending increased $71 million or 64.5% to 3.8% of revenue in 2017 as compared to 2.9% of revenue in 2016 primarily due to additional R&Dspend from our recent acquisitions and investments in new products and technologies.Restructuring ChargesRestructuring ChargesDuring 2017, we incurred restructuring costs of $7 million, $8 million and $5 million in our Water Infrastructure, Applied Water and Measurement &Control Solutions segments, respectively. We incurred these charges related to actions taken in 2017 primarily as a continuation of our efforts toreposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness.The charges included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure segments, aswell as headcount reductions within our Measurement & Control Solutions segment.During 2016, we recognized restructuring costs of $12 million, $10 million, $6 million and $2 million in our Water Infrastructure, Applied Water,Measurement & Control Solutions and Corporate, respectively. These charges were incurred primarily in an effort to realign our organizationalstructure in Europe and North America to optimize our cost structure. The charges relate to the reduction in structural costs, including a decreasein headcount and consolidation of facilities.43The following table presents expected restructuring spend:(in millions) Water Infrastructure Applied Water Measurement &Control Solutions Corporate TotalActions Commenced in 2017: Total expected costs $18 $12 $3 $— $33Costs incurred during 2017 5 4 2 — 11Total expected costs remaining $13 $8 $1 $— $22 Actions Commenced in 2016: Total expected costs $13 $14 $10 $2 $39Costs incurred during 2016 11 10 6 2 29Costs incurred during 2017 2 4 3 — 9Total expected costs remaining $— $— $1 $— $1The Water Infrastructure, Applied Water, Measurement & Control Solutions, and Corporate actions commenced in 2017 consist primarily ofseverance charges and are expected to continue through the end of 2018. The Water Infrastructure, Applied Water, Measurement & ControlSolutions and Corporate actions commenced in 2016 consist primarily of severance charges and are largely complete. The Water Infrastructure,Applied Water and Measurement & Control Solutions actions commenced in 2015 consist primarily of severance charges and are complete. As aresult of these actions initiated in 2017, we achieved savings of approximately $4 million in 2017 and estimate annual future net savings beginningin 2018 of approximately $15 million, resulting in $11 million of incremental savings from the 2017 actions.Asset Impairment ChargesDuring the first quarter of 2017 we determined that certain assets within our Applied Water segment, including a tradename, were impaired.Accordingly we recognized an impairment charge of $5 million. Refer to Note 11, "Goodwill and Other Intangible Assets," for additional information.Operating IncomeWe generated operating income of $552 million (operating margin of 11.7%) during 2017, reflecting an increase of $144 million, or 35.3%, whencompared to operating income of $408 million (operating margin of 10.8%) during the prior year. This increase in operating income was largelydriven by the inclusion of Sensus operating income for the full year in 2017. Sensus acquisition related costs and restructuring and realignmentcosts decreased $31 million and $6 million, respectively, while special charges increased $6 million when compared to the prior year period.Excluding these costs, adjusted operating income was $626 million (adjusted operating margin of 13.3%) for 2017 as compared to $513 million(adjusted operating margin of 13.6%) for 2016. The decrease in adjusted operating margin was mostly due to cost inflation increases, increasedspending on strategic investments and Sensus purchase accounting impacts, which were largely offset by cost savings from our globalprocurement and productivity initiatives and restructuring savings. The non-cash Sensus purchase accounting impact on adjusted operating marginfor the year was 50 basis points.44The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of thecorresponding adjusted operating margin:(In millions)2017 2016 ChangeWater Infrastructure Operating income$312 $295 5.8%Operating margin15.6% 15.3% 30bpRestructuring and realignment costs16 16 —%Special charges— 2 (100.0)%Adjusted operating income$328 $313 4.8%Adjusted operating margin16.4% 16.2% 20bp Applied Water Operating income$194 $188 3.2%Operating margin13.7% 13.5% 20bpRestructuring and realignment costs17 16 6.3%Special charges5 — NM Adjusted operating income$216 $204 5.9%Adjusted operating margin15.2% 14.6% 60bpMeasurement & Control Solutions Operating income$110 $— NM Operating margin8.6% —% NM Sensus acquisition related costs15 25 (40.0)%Restructuring and realignment costs8 13 (38.5)%Special charges— $3 (100.0)%Adjusted operating income$133 $41 224.4%Adjusted operating margin10.4% 9.2% 120bp Corporate and other Operating loss$(64) $(75) (14.7)%Restructuring and realignment costs— 2 (100.0)%Sensus acquisition related costs7 28 (75.0)%Special charges6 — NM Adjusted operating loss$(51) $(45) 13.3%Total Xylem Operating income$552 $408 35.3%Operating margin11.7% 10.8% 90bp Restructuring and realignment costs41 47 (12.8)%Sensus acquisition related costs22 53 (58.5)%Special charges11 5 120.0%Adjusted operating income$626 $513 22.0%Adjusted operating margin13.3% 13.6% (30)bpNM Not Meaningful45Water InfrastructureOperating income for our Water Infrastructure segment increased $17 million, or 5.8%, with operating margin also increasing from 15.3% to 15.6%,a 30 basis point increase as compared to the prior year. Operating margin was positively impacted year over year by special charges of $2 millionin 2016 that did not recur, while restructuring and realignment costs remained flat. Excluding these items, adjusted operating income increased $15million, or 4.8%, with adjusted operating margin increasing from 16.2% to 16.4%, a 20 basis point increase as compared to the prior year. Theincrease in adjusted operating margin was primarily due to cost reductions from global procurement and continuous improvement initiatives as wellas restructuring savings and favorable volume. These drivers were partially offset by increases in cost inflation and spending on strategicinvestments, as well as unfavorable transactional foreign currency impacts.Applied WaterOperating income for our Applied Water segment increased $6 million, or 3.2%, with operating margin also increasing from 13.5% to 13.7%, a 20basis point increase as compared to the prior year. Operating margin was negatively impacted by higher special charges for a non-cashimpairment of $5 million and a $1 million increase in restructuring and realignment costs. Excluding these items, adjusted operating incomeincreased $12 million, or 5.9%, with adjusted operating margin increasing from 14.6% to 15.2%, an 60 basis point increase as compared to theprior year. The increase in adjusted operating margin was primarily due to cost reductions from global procurement and continuous improvementinitiatives and restructuring savings, which were partially offset by increases in cost inflation, unfavorable mix and the impact from the change inaccounting for pension costs.Measurement & Control SolutionsOperating income for our Measurement & Control Solutions segment increased $110 million (operating margin of 8.6%) for the year as compared tooperating income and margin of zero in 2016. Operating margin was positively impacted by decreases in Sensus acquisition related costs,restructuring and realignment costs and special charges of $10 million, $5 million and $3 million, respectively. Excluding these items, adjustedoperating income increased $92 million, or 224.4%, with most of the increase coming from the inclusion of the incremental adjusted operatingincome for Sensus in 2017. Adjusted operating margin increased from 9.2% to 10.4%, a 120 basis point increase as compared to the prior year.The increase in adjusted operating margin was primarily due to cost reductions from global procurement and continuous improvement initiatives,restructuring savings and favorable volume impacts. These drivers were partially offset by the inclusion of Sensus margins, which were negativelyimpacted by purchase accounting. Non-cash Sensus purchase accounting negatively impacted the segment's full year adjusted operating marginby 200 basis points.Corporate and otherOperating expense for corporate and other decreased $11 million, or 14.7%, compared to the prior year, primarily due to a $21 million decrease inSensus acquisition related costs and a $2 million decrease in restructuring and realignment costs. This was partially offset by $6 million of specialcharges incurred during the year which we did not have in the prior year. Excluding these costs, adjusted operating expense increased $6 millioncompared to the prior year, driven mostly by employee related costs as well as the impact from the change in accounting for pension costs.Interest ExpenseInterest expense was $82 million and $70 million for 2017 and 2016, respectively. The increased interest expense for the year includes additionalinterest expense in 2017 related to debt entered into in the fourth quarter of 2016 to fund our acquisition of Sensus. The increase in interestexpense was partially offset by the reduction in special interest charges incurred in 2016 of $8 million in connection with the early extinguishmentof our Senior Notes due in 2016 and $5 million of financing charges on the bridge loan related to the Sensus acquisition, neither of which recurredin 2017, as well as a lower interest rate on the Senior Notes due 2023 which effectively replaced the Senior Notes due in 2016. See Note 14,"Credit Facilities and Debt" of our consolidated financial statements for a description of our credit facilities and long-term debt and related interest.Income Tax ExpenseThe income tax provision for 2017 was $136 million at an effective tax rate of 29.2% compared to $80 million at an effective tax rate of 23.5% in2016. The 2017 effective tax rate is higher than 2016 due to the provisional one time deemed repatriation transition tax under the newly enactedTax Cuts and Jobs Act, partially offset by the benefit from the remeasurement of deferred tax assets and liabilities and the release of valuationallowances.See Note 7, "Income Taxes" of our consolidated financial statements for further discussion of the Tax Act.46Other Comprehensive IncomeOther comprehensive income was $108 million in 2017 as compared to an $80 million loss in 2016. This increase was driven primarily by favorableforeign currency translation impacts, primarily due to the strengthening of the Euro, Great British Pound, Chinese Yuan, Polish Zloty, amongstother various currencies, against the U.S. Dollar as compared to the weakening of these same currencies in the prior year. Partially offsettingthese favorable movements, was the Euro movement on the Company's net investment hedge as compared to the prior year. The tax impact onthe foreign currency translation related to the net investment hedge also contributed to the year over year increase. Finally, year over yearmovement in foreign currency translation on postretirement benefit plans partially offset the increase in other comprehensive income.Liquidity and Capital ResourcesThe following table summarizes our sources and uses of cash: Year Ended December 31,(in millions)2018 2017 2016Operating activities$586 $686 $497Investing activities(643) (181) (1,886)Financing activities(40) (421) 1,034Foreign exchange (a)(21) 22 (17)Total$(118) $106 $(372)(a)2018 impact is primarily due to the weakness of the Chinese Yuan, Argentine Peso, Indian Rupee and various other currencies against the U.S. Dollar.2017 impact is primarily due to the strengthening of the Euro and the Chinese Yuan against the U.S. Dollar. 2016 impact is primarily due to theweakness of the Euro and the Chinese Yuan against the U.S. dollar.Sources and Uses of LiquidityOperating ActivitiesDuring 2018, net cash provided by operating activities was $586 million, compared to $686 million in 2017. The $100 million year-over-yeardecrease was primarily driven by an increased use of working capital for inventory, which was built up at year end to maintain service levelsimpacted by component shortages as well as to make strategic purchases to manage tariff impacts. Operating cash also decreased during theperiod as a result of increased receivables from higher growth levels. These negative impacts to operating cash flow were partially offset byincreased cash from earnings during the year.During 2017, net cash provided by operating activities was $686 million, compared to $497 million in 2016. The $189 million year-over-yearincrease was primarily driven by increased cash from operating activities of the Sensus business acquired in the fourth quarter of 2016 and strongoperating cash performance across the rest of the business.Investing ActivitiesCash used in investing activities was $643 million in 2018, compared to $181 million in 2017. This increase of $462 million was primarily driven bythe $433 million spent on 2018 acquisitions, primarily the acquisition of Pure Technologies Ltd., versus the $33 million spent for various acquisitionactivities in the prior year. Spending on capital expenditures also increased by $67 million over the prior year, primarily due to increased spendingon software development, building up of the dewatering rental fleet, as well as increased spending on other strategic capital investments to meetincreasing demand.Cash used in investing activities was $181 million in 2017 compared to $1,886 million in 2016. The decrease of $1,705 million was primarily drivenby the $1,782 million spent on the acquisition of Sensus and two other businesses in 2016 as compared to the $33 million spent for acquisitions in2017. This impact is partially offset by increased spending of $46 million over the prior year on capital projects, including spending on capitalizedsoftware in the Sensus business.47Financing ActivitiesCash used by financing activities was $40 million in 2018, compared to cash used by financing activities of $421 in 2017. The decrease in cashused during the year was primarily due to the net issuance of $335 million in short term debt in the current year, which was largely used foracquisition financing. Additionally, short term debt repaid during the year was $52 million versus $282 million during the prior year period (see Note14, "Credit Facilities and Long-Term Debt" of our consolidated financial statements for a full discussion of debt activities). These drivers arepartially offset by the higher net repayment of $120 million of long-term debt in the current year, an increase in share repurchase activity of $34million and an increase in dividends paid of $22 million as compared to the prior year.Cash generated by financing activities was $421 million in 2017, compared to cash generated by financing activities of $1,034 in 2016. In 2017,the net decrease in cash provided was primarily due to the issuance of long-term and short-term debt related to acquisition financing in 2016versus the net repayment of short-term debt in 2017 (see Note 14, "Credit Facilities and Long-Term Debt" of our consolidated financial statementsfor a full discussion of debt activities). Also contributing to the decrease in cash generated by financing activities were increased sharerepurchases and higher dividend payments in 2017.Funding and Liquidity StrategyOur ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capitalmarkets. Historically, we have generated operating cash flow sufficient to fund our primary cash needs centered on operating activities, workingcapital, capital expenditures, strategic investments and dividends. If our cash flows from operations are less than we expect, we may need toincur 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 accessto, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our creditratings 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 noassurance that such financing will be available to us on acceptable terms or that such financing will be available at all.We monitor our global funding requirements and seek to meet our liquidity needs on a cost effective basis. Based on our current global cashpositions, cash flows from operations and access to the commercial paper markets, we believe there is sufficient liquidity to meet our fundingrequirements. In addition, our existing committed credit facilities and access to the public debt markets would provide further liquidity if required.We anticipate that our present sources of funds, including funds from operations and additional borrowings, will provide us with sufficient liquidityand capital resources to meet our liquidity and capital needs in both the United States and outside of the United States over the next twelvemonths.Credit Facilities & Long-Term Contractual CommitmentsSee Note 14, "Credit Facilities and Long-Term Debt" of our consolidated financial statements for a description of our credit facilities and long-termdebt.Non-U.S. OperationsFor 2018 and 2017, we generated 53% and 54% of our revenue from non-U.S. operations, respectively. As we continue to grow our operations inthe emerging markets and elsewhere outside of the United States, we expect to continue to generate significant revenue from non-U.S. operationsand expect that a substantial portion of our cash will be predominately held by our foreign subsidiaries. We expect to manage our worldwide cashrequirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with whichthose funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries whenwe believe it is cost effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation andinvestment opportunities and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. As ofDecember 31, 2018, we have provided a deferred tax liability of $13 million for net foreign withholding taxes and state income taxes on $1.9 billionexpected to be repatriated to the U.S. parent.48Contractual ObligationsThe following table summarizes our contractual commitments as of December 31, 2018:(in millions)2019 2020 - 2021 2022 - 2023 Thereafter TotalDebt and capital lease obligations (1)$257 $600 $570 $900 $2,327Interest payments (1) (2)76 152 93 451 772Operating lease obligations76 104 55 64 299Purchase obligations (3)154 2 — — 156Other long-term obligations reflected on the balancesheet1 16 17 27 61Total commitments$564 $874 $735 $1,442 $3,615In addition to the amounts presented in the table above, we have recorded liabilities for net investment hedges of $46 million and employee severanceindemnity of $16 million. These amounts have been excluded from the contractual obligations table due to an inability to reasonably estimate the timing oramounts of such payments in individual years. Further, benefit payments which reflect expected future service related to the Company's pension and otherpostretirement employee benefit obligations are presented in Note 15, “Postretirement Benefit Plans” of the consolidated financial statements and deferredincome tax liabilities and uncertain tax positions are presented in Note 7, "Income Taxes" of the consolidated financial statements, and as such, theseobligations are not included in the above table. Finally, estimated environmental payments and workers' compensation and general liability reserves areexcluded from the table above. We estimate, based on historical experience, that we will spend approximately $2 million to $3 million per year onenvironmental investigation and remediation and approximately $4 million to $5 million per year on workers' compensation and general liability. AtDecember 31, 2018, we had estimated and accrued $4 million and $21 million related to environmental matters, and workers' compensation and generalliability, respectively.(1)Refer to Note 14, “Credit Facilities and Long-Term Debt,” of the consolidated financial statements for discussion of the use and availability of debt andrevolving credit agreements. Amounts represent principal payments of short-term and long-term debt including current maturities and excludeunamortized discounts.(2)Amounts represent estimates of future interest payments on short-term and long-term debt outstanding as of December 31, 2018.(3)Represents unconditional purchase agreements that are enforceable and legally binding and that specify all significant terms to purchase goods orservices, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of thetransaction. Purchase agreements that are able to cancel without penalty have been excluded.Off-Balance Sheet ArrangementsAs of December 31, 2018, we have issued guarantees for the debt and other obligations of consolidated subsidiaries in the normal course ofbusiness. We have determined that none of these arrangements has a material current effect or is reasonably likely to have a material future effecton our consolidated financial statements, financial condition, changes in financial condition, revenues or expenses, liquidity, capital expendituresor capital resources.We obtain certain stand-by letters of credit, bank guarantees and surety bonds from third-party financial institutions in the ordinary course ofbusiness when required under contracts or to satisfy insurance related requirements. As of December 31, 2018, the amount of stand-by letters ofcredit, bank guarantees and surety bonds was $275 million.Critical Accounting EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent liabilities. Management bases its estimates onhistorical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form thebasis 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 SignificantAccounting Policies,” of the consolidated financial statements. Accounting estimates and assumptions discussed in this section are those that weconsider most critical to an understanding of our financial statements because they are inherently uncertain, involve significant judgments, includeareas where different estimates reasonably could have been used, and changes in the estimate that are reasonably possible could materiallyimpact 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.49Revenue Recognition. As discussed in Note 2, "Recently Issued Accounting Pronouncements", Xylem adopted the new guidance on recognizingrevenue from contracts with customers as of January 1, 2018. In accordance with this new guidance Xylem recognizes revenue in a manner thatdepicts the transfer of promised goods and services to customers in an amount that reflects the consideration to which it expects to be entitled tofor providing those goods and services. For each arrangement with a customer, we identify the contract, the associated performance obligationswithin the contract, determine the transaction price of that contract, allocate the transaction price to each performance obligation and recognizerevenue as each performance obligation is satisfied.The satisfaction of performance obligations in a contract is based upon when the customer obtains control over the asset. Depending on the natureof the performance obligation, control transfers either at a particular point in time, or over time which determines the recognition pattern of revenue.For product sales, other than long-term construction-type contracts, we recognize revenue once control has passed at a point in time, which isgenerally when products are shipped. In instances where contractual terms include a provision for customer acceptance, revenue is recognizedwhen either (i) we have previously demonstrated that the product meets the specified criteria based on either seller or customer specified objectivecriteria or (ii) upon formal acceptance received from the customer where the product has not been previously demonstrated to meet customerspecified objective criteria. We recognize revenue on product sales to channel partners, including resellers, distributors or value-added solutionproviders at the point in time when the risks and rewards, possession, and title have transferred to the customer, which usually occurs at the pointof delivery.Revenue from performance obligations related to services is recognized over time, as the performance obligations are satisfied. In theseinstances, the customer consumes the benefit of the service as Xylem performs.Certain businesses also enter into long-term construction-type sales contracts where revenue is recognized over time. In these instances, revenueis recognized using a measure of progress that applies an input method based on costs incurred in relation to total estimated costs. We alsorecognize revenue for certain of these arrangements using the output method and measure progress based on shipments of product where controlhas transferred to the customer.For all contracts with customers, we determine the transaction price in the arrangement and allocate the transaction price to each performanceobligation identified in the contract. Judgment is required to determine the appropriate unit of account, and we separate out the performanceobligations if they are capable of being distinct and if they are distinct within the context of the contract. The transaction price is adjusted for ourestimate of variable consideration which may include a right of return, discounts, rebates, penalties and retainage. To estimate variableconsideration, we apply the expected value or the most likely amount method, based on whichever method most appropriately predicts the amountof consideration we expect to be entitled to. The method applied is typically based on historical experience and known trends. We constrain theamounts of variable consideration that are included in the transaction price, to the extent that it is probable that a significant reversal in the amountof cumulative revenue recognized will not occur or when uncertainties around the variable consideration are resolved.The adoption of the new revenue guidance did not provide materially different results from historical revenue guidance.Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases ofassets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse. Based on the evaluation ofavailable evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely thannot we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect anychanges to our estimate of the amount we are more likely than not to realize in the valuation allowance, with a corresponding adjustment toearnings 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 incarryback years and the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected bychanges to tax laws, changes to statutory tax rates and changes to future taxable income estimates.Due to the Tax Act, we have recorded net foreign withholding taxes and state income taxes on earnings that are expected to be repatriated to theU.S. parent. We have not recorded any deferred taxes on the amounts that the Company currently does not intend to repatriate as thedetermination of any deferred taxes on this amount is not practicable.The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictionsacross our global operations. We recognize potential liabilities and record tax liabilities50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, additionaltaxes 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 willbe sustained on examination by the taxing authorities or litigation, based on the technical merits of the position. The tax benefits recognized in thefinancial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized uponultimate resolution.We adjust our liability for uncertain tax positions in light of changing facts and circumstances; however, due to the complexity of some of theseuncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If ourestimate of tax liabilities proves to be less than the ultimate assessment, an additional tax expense would result. If a payment of these amountsultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the periodwhen we determine the liabilities are no longer necessary.Business Combinations. We record acquisitions using the purchase method of accounting. All of the assets acquired, liabilities assumed,contractual contingencies and contingent consideration is recorded at fair value as of the acquisition date. The excess of the purchase price overthe estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the purchase method ofaccounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair valueof assets acquired and liabilities assumed, in order to properly allocate purchase price consideration between assets that are depreciated andamortized from goodwill. These assumptions and estimates include a market participant’s use of the asset and the appropriate discount rates for amarket participant. Our estimates are based on historical experience, information obtained from the management of the acquired companies and,when appropriate, includes assistance from independent third-party appraisal firms. Significant assumptions and estimates include, but are notlimited to, the cash flows that an asset is expected to generate in the future, the cost to build/recreate certain technology, the appropriateweighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertainand unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.Goodwill and Intangible Assets. We review goodwill and indefinite-lived intangible assets for impairment annually and whenever events orchanges in circumstances indicate the carrying value of an asset may not be recoverable. We also review the carrying value of our finite-livedintangible assets for potential impairment when impairment indicators arise. We conduct our annual impairment test as of the first day of the fourthquarter. For goodwill, the estimated fair value of each reporting unit is compared to the carrying value of the net assets assigned to that reportingunit. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of the reporting unitexceeds its estimated fair value, then an impairment charge is recognized for that excess up to the amount of recorded goodwill. We estimate thefair value of our reporting units using an income approach. We estimate the fair value of our intangible assets with indefinite lives using either theincome approach or the market approach. Under the income approach, we calculate fair value based on the present value of estimated future cashflows. Under the market approach, we calculate fair value based on recent sales and selling prices of similar assets.Determining the fair value of a reporting unit or an indefinite-lived intangible asset is judgmental in nature and involves the use of significantestimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are notlimited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royaltyrates, future economic and market conditions and identification of appropriate market comparable data. In addition, the identification of reportingunits and the allocation of assets and liabilities to the reporting units when determining the carrying value of each reporting unit also requirejudgment. Goodwill is tested for impairment at either the operating segment identified in Note 21, “Segment and Geographic Data,” of theconsolidated financial statements, or one level below. The fair value of our reporting units and indefinite-lived intangible assets is based onestimates and assumptions that are believed to be reasonable. Significant changes to these estimates and assumptions could adversely impactour conclusions. Actual future results may differ from those estimates.During the fourth quarter of 2018, we performed our annual impairment assessment and determined that the estimated fair values of our goodwillreporting units were in excess of their carrying values. Future goodwill impairment tests could result in a charge to earnings. Our AIA businesswithin our Measurement & Control Solutions segment was the only goodwill reporting unit whose fair value was not substantially in excess of itscarrying value. The majority of this business was purchased during 2018 and was recorded at fair value in Xylem’s financial statements. As aresult, our 2018 assessment indicated that the fair value of the AIA business exceeded its carrying51value by less than 10%. The goodwill associated with the AIA business was $290 million at December 31, 2018. We will continue to evaluategoodwill on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances require us to do so.We determined that no impairment of the indefinite-lived intangibles existed as of the measurement date in 2018. However, future indefinite-livedintangible impairment tests could result in a charge to earnings. We will continue to evaluate indefinite-lived intangibles on an annual basis as ofthe beginning of our fourth quarter and whenever events and changes in circumstances indicate there may be a potential impairment.Contingent Liabilities. As discussed in Note 19, "Commitments and Contingencies" of the consolidated financial statements, the Company is,from time to time, involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations ofpreviously owned entities). The Company recognizes a liability for any contingency that is known or probable of occurrence and reasonablyestimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome ofnegotiations, the number of future claims and the cost of both pending and future claims. In addition, because most contingencies are resolvedover long periods of time, liabilities may change in the future due to various factors, including those discussed in Note 19 of the consolidatedfinancial statements. If the liabilities established by the Company with respect to these contingencies are inadequate, the Company would berequired to incur an expense equal to the amount of the loss incurred in excess of the recorded liability, which would adversely affect theCompany’s financial statements.Receivables and Allowance for Doubtful Accounts and Discounts. Receivables primarily comprise uncollected amounts owed to us fromtransactions with customers and are presented net of allowances for doubtful accounts and early payment discounts.We determine our allowance for doubtful accounts using a combination of factors to reduce our trade receivable balances to their estimated netrealizable amount. We maintain an allowance for doubtful accounts based on a variety of factors, including the length of time receivables are pastdue, macroeconomic trends and conditions, significant one-time events, historical experience and the financial condition of customers. In addition,we record a specific reserve for individual accounts when we become aware of specific customer circumstances, such as in the case ofbankruptcy filings or deterioration in the customer’s operating results or financial position. The past due or delinquency status of a receivable isbased on the contractual payment terms of the receivable. If circumstances related to the specific customer change, we adjust estimates of therecoverability of receivables as appropriate. We determine our allowance for early payment discounts primarily based on historical experience withcustomers.Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and theirdispersion across many different geographical regions. We perform ongoing credit evaluations of the financial condition of our third-partydistributors, resellers and other customers and require collateral, such as letters of credit and bank guarantees, in certain circumstances. As ofDecember 31, 2018 and 2017 we do not believe we have any significant concentrations of credit risk.Postretirement Plans. Company employees around the world participate in numerous defined benefit plans. The determination of projected benefitobligations and the recognition of expenses related to these plans are dependent on various assumptions. These major assumptions primarilyrelate to discount rates, expected long-term rates of return on plan assets, rate of future compensation increases, mortality, health care inflationand years of service (some of which are disclosed in Note 15, “Postretirement Benefit Plans,” of the consolidated financial statements) and otherfactors. 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 projected benefit obligation, over the average remaining service period of active plan participants, or forplans with all or substantially all inactive participants, over the average remaining life expectancy.52Significant AssumptionsManagement develops each assumption using relevant Company experience, in conjunction with market-related data for each individual country inwhich such plans exist. All assumptions are reviewed annually with third-party consultants and adjusted as necessary. The table included belowprovides the weighted average assumptions used to estimate our defined benefit pension obligations and costs as of and for the years ended 2018and 2017. 2018 2017 U.S. Int’l U.S. Int’lBenefit Obligation Assumptions Discount rate4.50% 2.60% 3.75% 2.43%Rate of future compensation increaseNM 2.92% NM 2.93%Net Periodic Benefit Cost Assumptions Discount rate3.75% 2.43% 4.25% 2.63%Expected long-term return on plan assets8.00% 7.23% 8.00% 7.20%Rate of future compensation increaseNM 2.93% NM 2.76%NMNot meaningful. The pension benefits for future service for all the U.S. pension plans are based on years of service and not impacted by futurecompensation increases.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 historicalbroad market returns over long-term timeframes based on the strategic asset allocation, which is detailed in Note 15, “Postretirement BenefitPlans,” of the consolidated financial statements.Based on the approach described above, the chart below shows weighted average actual returns versus the weighted average expected long-termrates of return for our pension plans that were utilized in the calculation of the net periodic pension cost for each respective year. 2018 2017 2016Expected long-term rate of return on plan assets7.34 % 7.30% 7.32%Actual rate of return on plan assets(3.85)% 5.70% 12.20%For the recognition of net periodic pension cost, the calculation of the expected return on plan assets is generally derived by applying the expectedlong-term rate of return to the market-related value of plan assets. The market-related value of plan assets is based on average asset values atthe measurement date over the last five years. The use of fair value, rather than a calculated value, could materially affect net periodic pensioncost. The weighted average expected long-term rate of return for all of our plan assets to be used in determining net periodic benefit costs for 2019is estimated at 7.09%. 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. Adecrease in the discount rate increases the present value of benefit obligations and increases pension expense. We base the discount rateassumption on current investment yields of high-quality fixed income investments during the retirement benefits maturity period. The pensiondiscount rate was determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero and 30 years,developed by the plan’s actuaries. Annual benefit payments are then discounted to present value using this yield curve to develop a single-pointdiscount rate matching the plan’s characteristics. Our weighted average discount rate for all pension plans effective January 1, 2019, is 2.82%.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. EffectiveJanuary 1, 2019, our expected rate of future compensation is 3.02% for all pension plans. The estimated impact of a 25 basis point change in theexpected 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 8.24% for 2019, decreasing ratably to4.48% in 2027. An increase or decrease in the health care trend rates by one percent per year would impact the aggregate annual service andinterest components by less than $1 million, and impact the benefit obligation by approximately $3 million.We currently anticipate making contributions to our pension and postretirement benefit plans in the range of $1553million to $25 million during 2019, of which $5 million is expected to be made in the first quarter.Funded StatusFunded status is derived by subtracting the respective year-end values of the projected benefit obligations from the fair value of plan assets. Weestimate that every 25 basis point change in the discount rate impacts the funded status by approximately $29 million.Fair Value of Plan AssetsThe plan assets of our pension plans comprise a broad range of investments, including domestic and foreign equity securities, interests in privateequity and hedge funds, fixed income investments, insurance contracts, 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 fundinvestments are generally measured at net asset value. However, in certain instances, the values reported by the asset managers were not currentat the measurement date. Accordingly, we made estimate adjustments to the last reported value where necessary to measure the assets at fairvalue at the measurement date. These adjustments consider information received from the asset managers, as well as general market information.The adjustment recorded at December 31, 2018 and 2017 for these assets represented less than one percent of total plan assets in eachrespective year. Asset values for other positions were generally measured using market observable prices. We estimate that a 5% change inasset values will impact funded status by approximately $26 million.New Accounting PronouncementsSee Note 2, “Recently Issued Accounting Pronouncements,” of the consolidated financial statements for a complete discussion of recentaccounting pronouncements.54ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to market risk, primarily related to foreign currency exchange rates and interest rates. These exposures are actively monitored bymanagement. Our exposure to foreign exchange rate risk is due to certain costs, revenue and borrowings being denominated in currencies otherthan one of our subsidiaries functional currency. Similarly, we are exposed to market risk as the result of changes in interest rates which mayaffect the cost of our financing. It is our policy and practice to use derivative financial instruments only to the extent necessary to manageexposures.Foreign Currency Exchange Rate RiskWe conduct approximately 53% of our business in various locations outside the United States.Our economic foreign currency risk primarily relates to receipts from customers, payments to suppliers and intercompany transactionsdenominated in foreign currencies. We may use derivative financial instruments to offset risk related to receipts from customers and payments tosuppliers, when it is believed that the exposure will not be limited by our normal operating and financing activities. We enter into currency forwardcontracts periodically in order to manage the exchange rate fluctuation risk on certain intercompany transactions associated with third party salesand purchases. These risks are also mitigated by natural hedges including the presence of manufacturing facilities outside the United States,global sourcing and other spending which occurs in foreign countries. Our principal foreign currency transaction exposures primarily relate to theEuro, Swedish Krona, Polish Zloty, Canadian Dollar, British Pound, and Australian Dollar. We estimate that a hypothetical 10% movement inforeign currency exchange rates would not have a material economic impact to Xylem’s financial position and results of operations.Additionally, we are subject to foreign exchange translation risk due to changes in the value of foreign currencies in relation to our reportingcurrency, the U.S. Dollar. The translation risk is primarily concentrated in the exchange rate between the U.S. Dollar and the Euro, Chinese Yuan,British Pound, Canadian Dollar, Swedish Krona and Australian Dollar. As the U.S. Dollar strengthens against other currencies in which we transactbusiness, revenue and income will generally be negatively impacted, and if the U.S. Dollar weakens, revenue and income will generally bepositively impacted. We expect to continue to generate significant revenue from non-U.S. operations and we expect our cash will be predominatelyheld by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiariesthrough which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certaininternational subsidiaries to the U.S. and other international subsidiaries when it is cost effective to do so, though we continually review ourdomestic and foreign cash profile, expected future cash generation and investment opportunities and reassess whether there is a need torepatriate funds held internationally to support our U.S. operations. We also hedge our investment in certain foreign subsidiaries via the use ofcross currency swaps and the designation of our 2.25% Senior Notes of €500 million aggregate principal amount due March 2023 as a netinvestment hedge. Accordingly, we estimate that a 10% movement of the U.S. Dollar to various foreign currency exchange rates we translatefrom, in aggregate would not have a material economic impact on our financial position and results of operations.Effective July 1, 2018, Argentina was determined to be a highly inflationary economy, and as such we evaluated the impact of revaluing ourmonetary assets and liabilities under the applicable guidance and do not expect it to have a material impact.Interest Rate RiskAs of December 31, 2018, our long-term debt portfolio is primarily comprised of four series of fixed-rate senior notes that total $2.1 billion. Thesenior notes are not exposed to interest rate risk as the bonds are at a fixed rate until maturity. Based on current interest rate market we do notanticipate material risk associated with our debt refinancing within the target time frame of completion.Commodity Price ExposuresFor a discussion of risks relating to commodity prices, refer to “Item 1A. Risk Factors.”55ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageNo.Audited Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm57Consolidated Income Statements for the Years Ended December 31, 2018, 2017 and 201658Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 201659Consolidated Balance Sheets as of December 31, 2018 and 201760Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 201661Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 201662Notes to Consolidated Financial Statements: Note 1 Summary of Significant Accounting Policies63Note 2 Recently Issued Accounting Pronouncements71Note 3 Acquisitions and Divestitures73Note 4 Revenue78Note 5 Restructuring and Asset Impairment Charges80Note 6 Other Non-Operating Income, Net82Note 7 Income Taxes82Note 8 Earnings Per Share85Note 9 Inventories86Note 10 Property, Plant and Equipment86Note 11 Goodwill and Other Intangible Assets86Note 12 Derivative Financial Instruments87Note 13 Accrued and Other Current Liabilities90Note 14 Credit Facilities and Long-Term Debt90Note 15 Postretirement Benefit Plans92Note 16 Stock-Based Compensation Plans100Note 17 Capital Stock102Note 18 Accumulated Other Comprehensive Income (Loss)104Note 19 Commitment and Contingencies105Note 20 Related Party Transactions107Note 21 Segment and Geographic Data108Note 22 Valuation and Qualifying Accounts110Note 23 Quarterly Financial Data11056REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and Board of Directors ofXylem Inc.Rye Brook, New YorkOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Xylem Inc. and subsidiaries (the "Company") as of December 31, 2018 and2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years inthe period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financialstatements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generallyaccepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theCompany's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2019,expressed an unqualified opinion on the Company's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits includedperforming procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performingprocedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, aswell as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Deloitte & Touche LLPStamford, ConnecticutFebruary 22, 2019We have served as the Company's auditor since 2010.57XYLEM INC. AND SUBSIDIARIESCONSOLIDATED INCOME STATEMENTS(In Millions, except per share data)Year Ended December 31,2018 2017 2016Revenue$5,207 $4,707 $3,771Cost of revenue3,181 2,860 2,309Gross profit2,026 1,847 1,462Selling, general and administrative expenses1,161 1,089 914Research and development expenses189 181 110Restructuring and asset impairment charges22 25 30Operating income654 552 408Interest expense82 82 70Other non-operating income, net13 6 2(Loss)/gain on sale of businesses— (10) —Income before taxes585 466 340Income tax expense36 136 80Net income549 330 260Less: Net loss attributable to non-controlling interests— (1) —Net income attributable to Xylem$549 $331 $260Earnings per share: Basic$3.05 $1.84 $1.45Diluted$3.03 $1.83 $1.45Weighted average number of shares: Basic179.8 179.6 179.1Diluted181.1 180.9 180.0Dividends declared per share$0.8400 $0.7200 $0.6196 See accompanying notes to consolidated financial statements.58XYLEM INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In Millions)Year Ended December 31,2018 2017 2016Net income$549 $330 $260Other comprehensive (loss) income, before tax: Foreign currency translation adjustment(85) 79 (65)Net change in derivative hedge agreements: Unrealized (loss) gain(8) 9 —Amount of loss (gain) reclassified into net income4 (5) (2)Net change in postretirement benefit plans: Net loss(37) (19) (20)Prior service credit— 1 1Amortization of prior service credit cost(4) (3) (3)Amortization of net actuarial loss into net income13 13 13Settlement1 1 —Foreign currency translation adjustment15 (18) 19Other comprehensive (loss) income, before tax(101) 58 (57)Income tax expense (benefit) related to other comprehensive loss10 (50) 23Other comprehensive (loss) income, net of tax(111) 108 (80)Comprehensive income$438 $438 $180Less: comprehensive loss attributable to noncontrolling interests(2) — —Comprehensive income attributable to Xylem$440$438$180See accompanying notes to consolidated financial statements.59XYLEM INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In Millions, except per share amounts) December 31,2018 2017ASSETS Current assets: Cash and cash equivalents$296 $414Receivables, less allowances for discounts, returns and doubtful accounts of $35 and $35 in 2018 and2017, respectively1,031 956Inventories595 524Prepaid and other current assets172 177Total current assets2,094 2,071Property, plant and equipment, net656 643Goodwill2,976 2,768Other intangible assets, net1,232 1,168Other non-current assets264 210Total assets$7,222 $6,860LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$586 $549Accrued and other current liabilities546 551Short-term borrowings and current maturities of long-term debt257 —Total current liabilities1,389 1,100Long-term debt, net2,051 2,200Accrued postretirement benefits400 442Deferred income tax liabilities303 252Other non-current accrued liabilities297 347Total liabilities4,440 4,341Commitment and Contingencies (Note 19) Stockholders’ equity: Common stock — par value $0.01 per share: Authorized 750.0 shares, issued 192.9 and 192.3 shares in 2018 and 2017, respectively2 2Capital in excess of par value1,950 1,912Retained earnings1,639 1,227Treasury stock – at cost 13.2 shares and 12.4 shares in 2018 and 2017, respectively(487) (428)Accumulated other comprehensive loss(336) (210)Total stockholders’ equity2,768 2,503Non-controlling interest14 16Total equity2,782 2,519Total liabilities and stockholders’ equity$7,222 $6,860See accompanying notes to consolidated financial statements.60XYLEM INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions)Year Ended December 31,2018 2017 2016Operating Activities Net income$549 $330 $260Adjustments to reconcile net income to net cash provided by operatingactivities: Depreciation117 109 87Amortization144 125 64Deferred income taxes(47) (33) 14Share-based compensation30 21 18Restructuring and asset impairment charges22 25 30Loss/(gain) from sale of businesses— 10 —Other, net9 19 6Payments for restructuring(21) (28) (16)Contributions to postretirement benefit plans(41) (33) (27)Changes in assets and liabilities (net of acquisitions): Changes in receivables(103) (79) (6)Changes in inventories(97) 27 (15)Changes in accounts payable51 50 61Changes in accrued liabilities(6) 28 13Changes in accrued taxes— 104 (13)Net changes in other assets and liabilities(21) 11 21Net Cash — Operating activities586 686 497Investing Activities Capital expenditures(237) (170) (124)Proceeds from the sale of property, plant and equipment— 1 1Acquisitions of businesses and assets, net of cash acquired(433) (33) (1,782)Proceeds from sale of businesses22 16 —Cash received from investments11 10 —Cash paid for investments(11) (11) —Other, net5 6 19Net Cash — Investing activities(643) (181) (1,886)Financing Activities Short-term debt issued335 — 274Short-term debt repaid, net(52) (282) (80)Long-term debt issued, net1 — 1,540Long-term debt repaid(120) — (608)Repurchase of common stock(59) (25) (4)Proceeds from exercise of employee stock options7 16 24Dividends paid(152) (130) (112)Other, net— — —Net Cash — Financing activities(40) (421) 1,034Effect of exchange rate changes on cash(21) 22 (17)Net change in cash and cash equivalents(118) 106 (372)Cash and cash equivalents at beginning of year414 308 680Cash and cash equivalents at end of year$296 $414 $308Supplemental disclosure of cash flow information: Cash paid during the year for: Interest$78 $78 $49Income taxes (net of refunds received)$75 $57 $78See accompanying notes to consolidated financial statements.61XYLEM INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(In Millions, except per share amounts) CommonStock Capital inExcess ofPar Value RetainedEarnings Accumulated OtherComprehensiveIncome (Loss) TreasuryStock Non-ControllingInterest TotalBalance at December 31, 2015$2 $1,834 $885 $(238) $(399) $— $2,084Net income 260 260Other comprehensive loss, net (80) (80)Dividends declared ($0.6196 pershare) (112) (112)Stock incentive plan activity 42 42Repurchase of common stock (4) (4)Acquisition activity $17 $17Balance at December 31, 2016$2 $1,876 $1,033 $(318) $(403) $17 $2,207Cumulative effect of change inaccounting principle (7) (7)Net income 331 (1) 330Other comprehensive income, net 108 108Dividends declared ($.72 per share) (130) (130)Stock incentive plan activity 36 (5) 31Repurchase of common stock (20) (20)Balance at December 31, 2017$2 $1,912 $1,227 $(210) $(428) $16 $2,519Cumulative effect of change inaccounting principle 14 (17) (3)Net income 549 549Other comprehensive loss, net (109) (2) (111)Dividends declared ($.84 per share) (151) (151)Stock incentive plan activity 38 (9) 29Repurchase of common stock (50) (50)Balance at December 31, 2018$2 $1,950 $1,639 $(336) $(487) $14 $2,782See accompanying notes to consolidated financial statements.62XYLEM INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Summary of Significant Accounting PoliciesXylem Inc. (“Xylem” or the “Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio ofproducts and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment.Xylem operates in three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. The Water Infrastructure segmentfocuses on the transportation and treatment of water, offering a range of products including water and wastewater pumps, treatment equipment,and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on the residential, commercial andindustrial markets. The Applied Water segment’s major products include pumps, valves, heat exchangers, controls and dispensing equipment. TheMeasurement & Control Solutions segment focuses on developing advanced technology solutions that enable intelligent use and conservation ofcritical water and energy resources as well as analytical instrumentation used in the testing of water. The Measurement & Control Solutionssegment's major products include smart metering, networked communications, measurement and control technologies, critical infrastructuretechnologies, software and services including cloud-based analytics, remote monitoring and data management, leak detection and pressuremonitoring solutions and testing equipment.On October 31, 2011 (the "Distribution Date"), ITT Corporation (“ITT”) completed the Spin-off (the “Spin-off”) of Xylem, formerly ITT’s waterequipment and services businesses. The Spin-off was completed pursuant to the Distribution Agreement, dated as of October 25, 2011 (the“Distribution Agreement”), among ITT (now ITT LLC), Exelis Inc., acquired by Harris Inc. on May 29, 2015, (“Exelis”) and Xylem. Xylem Inc. wasincorporated in Indiana on May 4, 2011 in connection with the Spin-off.Hereinafter, except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and “the Company” refer to XylemInc. and its subsidiaries. References in the notes to the consolidated financial statements to “ITT” or “ former parent” refers to ITT Corporation(now ITT LLC) and its consolidated subsidiaries (other than Xylem Inc.).Basis of PresentationThe consolidated financial statements reflect our financial position and results of operations in conformity with accounting principles generallyaccepted in the United States of America (“GAAP”). All intercompany transactions between our businesses have been eliminated.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and thereported 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 contingencyaccruals and valuation allowances, valuation of intangible assets, goodwill and indefinite lived intangible impairment testing and contingentliabilities. Actual results could differ from these estimates.Consolidation PrinciplesWe consolidate companies in which we have a controlling financial interest or when Xylem is considered the primary beneficiary of a variableinterest entity. We account for investments in companies over which we have the ability to exercise significant influence but do not hold acontrolling financial interest under the equity method, and we record our proportionate share of income or losses in the Consolidated IncomeStatements. Equity method investments are reviewed for impairment when events or circumstances indicate the investment may be other thantemporarily impaired. This requires significant judgment, including an assessment of the investee’s financial condition, the possibility ofsubsequent rounds of financing, and the investee’s historical and projected results of operations. If the actual results of operations for the investeeare significantly different from projections, we may incur future charges for the impairment of these investments.63Foreign Currency TranslationThe national currencies of our foreign companies are generally the functional currencies. Balance sheet accounts are translated at the exchangerate in effect at the end of each period; income statement accounts are translated at the average rates of exchange prevailing during the period.Gains and losses on foreign currency translations are reflected in the cumulative translation adjustments component of stockholders’ equity. Netgains or losses from foreign currency transactions are reported currently in selling, general and administrative expenses.Revenue RecognitionAs discussed in Note 2, "Recently Issued Accounting Pronouncements", Xylem adopted the new guidance on recognizing revenue from contractswith customers as of January 1, 2018. In accordance with this new guidance Xylem recognizes revenue in a manner that depicts the transfer ofpromised goods and services to customers in an amount that reflects the consideration to which it expects to be entitled to for providing thosegoods and services. For each arrangement with a customer, we identify the contract, the associated performance obligations within the contract,determine the transaction price of that contract, allocate the transaction price to each performance obligation and recognize revenue as eachperformance obligation is satisfied.The satisfaction of performance obligations in a contract is based upon when the customer obtains control over the asset. Depending on the natureof the performance obligation, control transfers either at a particular point in time, or over time which determines the recognition pattern of revenue.For product sales, other than long-term construction-type contracts, we recognize revenue once control has passed at a point in time, which isgenerally when products are shipped. In instances where contractual terms include a provision for customer acceptance, revenue is recognizedwhen either (i) we have previously demonstrated that the product meets the specified criteria based on either seller or customer specified objectivecriteria or (ii) upon formal acceptance received from the customer where the product has not been previously demonstrated to meet customerspecified objective criteria. We recognize revenue on product sales to channel partners, including resellers, distributors or value-added solutionproviders at the point in time when control is transferred which is determined based on when the risks and rewards, possession, and title havetransferred to the customer, which usually occurs at the point of delivery.Revenue from performance obligations related to services is recognized over time, as the performance obligations are satisfied. In theseinstances, the customer consumes the benefit of the service as Xylem performs.Certain businesses also enter into long-term construction-type sales contracts where revenue is recognized over time. In these instances, revenueis recognized using a measure of progress that applies an input method based on costs incurred in relation to total estimated costs. We alsorecognize revenue for certain of these arrangements using the output method and measure progress based on shipments of product where controlhas transferred to the customer.If shipping and handling activities are performed after a customer obtains control of a good, we account for the shipping and handling activities asactivities to fulfill a promise to transfer a good. Shipping and handling related costs are accrued as revenue is recognized.For all contracts with customers, we determine the transaction price in the arrangement and allocate the transaction price to each performanceobligation identified in the contract. Judgment is required to determine the appropriate unit of account, and we separate out the performanceobligations if they are capable of being distinct and if they are distinct within the context of the contract. We base our allocation of the transactionprice to the performance obligations on the relative standalone selling prices for the goods or services contained in a particular performanceobligation. The standalone selling prices are determined first by reference to observable prices. In the event observable prices are not available,we estimate the stand-alone selling price by maximizing observable inputs and apply an adjusted market assessment approach, expected costplus margin approach, or a residual approach in limited situations. Revenue in these instances is recognized on individual performance obligationswithin the same contract as they are satisfied.The transaction price is adjusted for our estimate of variable consideration which may include a right of return, discounts, rebates, penalties andretainage. To estimate variable consideration, we apply the expected value or the most likely amount method, based on whichever method mostappropriately predicts the amount of consideration we expect to receive. The method applied is typically based on historical experience and knowntrends. We constrain the amounts of variable consideration that are included in the transaction price, to the extent that it is probable that asignificant reversal in the amount of cumulative revenue recognized will not occur or when uncertainties around the variable consideration areresolved.64We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on andconcurrent with specific revenue-producing transaction and collected from a customer, for example sales, use, value added and some excisetaxes.For all contracts with customers, payment received for our products and services may not necessarily follow the same pattern of revenuerecognition to which it relates and are dictated by the terms and conditions of our contracts with customers. Payments received for product salestypically occur following delivery and the satisfaction of the performance obligation based upon the terms outlined in the contracts. Paymentsreceived for services typically occur following the services being rendered. For long-term construction-type projects, payments are typically madethroughout the contract as progress is made.In limited situations, contracts with customers include financing components where payment terms exceed one year, however, we believe that thefinancing effects are not significant to Xylem. In addition, we apply a practical expedient and do not adjust the promised amount of consideration ina contract for the effects of significant financing components when we expect payment terms to be one year or less from the time the goods orservices are transferred until ultimate payment.We offer standard warranties for our products to ensure that our products comply with agreed-upon specifications in our contracts. For standardwarranties, these do not give rise to performance obligations and represent assurance-type warranties. In certain instances, product warrantyterms are adjusted to account for the specific nature of the contract. In these instances, we assess the warranties to determine whether theyrepresent service-type warranties, and should be accounted for as a separate performance obligation in the contract.Costs to obtain a contract include incremental costs that the Company has incurred which it expects to recover. Incremental costs only includecosts that the Company would not have incurred had the contract not been obtained. Costs that would have been incurred regardless of whether ornot the contract was obtained are expensed as incurred, unless they are explicitly chargeable to the customer whether or not the contract isobtained.Costs to obtain contracts are capitalized when incurred. The costs to obtain contracts are then amortized in a manner that is consistent with thepattern of transfer of the related goods or services provided in the contract. The Company elects to apply the practical expedient to expense coststo obtain contracts when the associated amortization period of those costs would be one year or less.For annual periods prior to January 1, 2018, revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed ordeterminable, 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 whenproducts are shipped. Certain contracts with customers require delivery, installation, testing, certification or other acceptance provisions to besatisfied before revenue is recognized. We recognize revenue on product sales to channel partners, including resellers, distributors or value-addedsolution providers at the time of sale when the channel partners have economic substance apart from Xylem and Xylem has completed itsobligations related to the sale. Revenue from the rental of equipment is recognized over the rental period. Service revenue is recognized asservices are performed.For agreements that contain multiple deliverables, we recognize revenue based on the relative selling price if the deliverable has stand-alone valueto the customer and, in arrangements that include a general right of return relative to the delivered element, performance of the undeliveredelement is considered probable and substantially in the Company’s control. The selling price for a deliverable is based on vendor-specific objectiveevidence of selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”) if VSOE is not available, or best estimated sellingprice, 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 andstart-up services. Generally, these elements are satisfied within the same reporting period although certain contracts may be completed over 6months. We allocate arrangement consideration based on the relative selling prices of the separate units of accounting determined in accordancewith the hierarchy described above. For deliverables that are sold separately, we establish VSOE based on the price when the deliverable is soldseparately. We establish TPE, generally for services, based on prices similarly situated customers pay for similar services from third-partyvendors. For those deliverables for which we are unable to establish VSOE or TPE, we estimate the selling price considering various factorsincluding market and pricing trends, geography, product customization, and profit objectives. Revenue for multiple element arrangements isrecognized when the appropriate revenue recognition criteria for the individual deliverable have been satisfied.65Certain businesses enter into long-term construction-type sales contracts for which revenue is recognized under the percentage-of-completionmethod based upon percentage of costs incurred to total estimated costs.Shipping and Handling CostsShipping and handling costs are recorded as a component of cost of revenue.Share-Based CompensationShare-based awards issued to employees and members of the Board of Directors include non-qualified stock options, restricted stock unit awardsand performance share unit awards. Compensation costs resulting from share-based payment transactions are recognized primarily within selling,general and administrative expenses, at fair value over the requisite service period (typically three years) on a straight-line basis. The calculatedcompensation cost is adjusted based on an estimate of awards ultimately expected to vest. For performance awards, the calculated compensationcost is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the probable outcome of the performancecondition. The fair value of a non-qualified stock option is determined on the date of grant using a binomial lattice pricing model incorporatingmultiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes individends. The fair value of restricted stock unit awards is determined using the closing price of our common stock on date of grant. The fair valueof Return on Invested Capital ("ROIC") performance share units at 100% target is determined using the closing price of our common stock on dateof grant. The fair value of Total Shareholder Return ("TSR") performance share units is calculated on the date of grant using a Monte Carlosimulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficientsbetween peers, the risk-free rate of return, the expected dividend yield and other award design features.Research and DevelopmentWe conduct research and development activities, which consist primarily of the development of new products, product applications, andmanufacturing processes. To the extent these activities are related to developing software that is sold to our customers, we capitalize theapplicable development costs. All other research and development costs are charged to expense as incurred.Exit and Disposal CostsWe periodically initiate management-approved restructuring activities to achieve cost savings through reduced operational redundancies and toposition ourselves strategically in the market in response to prevailing economic conditions and associated customer demand. Costs associatedwith restructuring actions can include severance, infrastructure charges to vacate facilities or consolidate operations, contract termination costsand other related charges. For involuntary separation plans, a liability is recognized when it is probable and reasonably estimable. For voluntaryseparation plans, a liability is recognized when the employee irrevocably accepts the voluntary termination. For one-time termination benefits, suchas additional severance pay or benefit payouts, and other exit costs, such as lease termination costs, the liability is measured and recognizedinitially at fair value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the periodof change.Deferred Financing CostsDeferred financing costs represent costs incurred in conjunction with our debt financing activities and are capitalized in long-term debt andamortized over the life of the related financing arrangements. If the debt is retired early, the related unamortized deferred financing costs arewritten off in the period the debt is retired and are recorded in the results of operations under the caption “interest expense.”Income TaxesIncome taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are determined based on the estimated futuretax effects of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities, as measured bythe 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 valuationallowance is intended in part to provide for the uncertainty regarding the ultimate utilization of our U.S. capital loss carryforwards, U.S. foreign taxcredit carryovers, and foreign net operating loss carryforwards. In determining whether a valuation allowance is warranted, we consider all positiveand negative evidence and all sources of taxable income such as prior earnings history, expected future earnings, carryback and carryforwardperiods and tax strategies to estimate if sufficient future taxable income will be generated to realize the66deferred tax asset. The assessment of the adequacy of our valuation allowance is based on our estimates of taxable income by jurisdiction inwhich 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 thelevel of valuation allowance that could materially impact our business, financial condition and results of operations.Due to the U.S. Tax Cuts and Jobs Act (the "Tax Act"), we have recorded net foreign withholding taxes and state income taxes on earnings thatare expected to be repatriated to the U.S. parent. We have not recorded any deferred taxes on the amounts that the Company currently does notintend to repatriate as the determination of any deferred taxes on this amount is not practicable.Tax benefits are recognized for an uncertain tax position when, in management’s judgment, it is more likely than not that the position will besustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit ismeasured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxingauthority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new informationbecomes available. Such adjustments are recognized in the period in which they are identified. The effective tax rate includes the net impact ofchanges in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. While it is oftendifficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits isadequate. We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income, net and taxpenalties as a component of income tax expense in our Consolidated Income Statements.Earnings Per ShareWe present two calculations of earnings per share (“EPS”). “Basic” EPS equals net income divided by weighted average shares outstanding duringthe period. “Diluted” EPS equals net income divided by the sum of weighted average common shares outstanding during the period plus potentiallydilutive shares. Potentially dilutive common shares that are anti-dilutive are excluded from diluted EPS.Cash EquivalentsWe 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 DiscountsReceivables primarily comprise uncollected amounts owed to us from transactions with customers and are presented net of allowances fordoubtful accounts, returns and early payment discounts.We determine our allowance for doubtful accounts using a combination of factors to reduce our trade receivable balances to their estimated netrealizable amount. We maintain an allowance for doubtful accounts based on a variety of factors, including the length of time receivables are pastdue, macroeconomic trends and conditions, significant one-time events, historical experience and the financial condition of customers. In addition,we record a specific reserve for individual accounts when we become aware of specific customer circumstances, such as in the case ofbankruptcy filings or deterioration in the customer’s operating results or financial position. The past due or delinquency status of a receivable isbased on the contractual payment terms of the receivable. If circumstances related to the specific customer change, we adjust estimates of therecoverability of receivables as appropriate. We determine our allowance for early payment discounts primarily based on historical experience withcustomers.Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and theirdispersion across many different geographical regions. We perform ongoing credit evaluations of the financial condition of our third-partydistributors, resellers and other customers and require collateral, such as letters of credit and bank guarantees, in certain circumstances. As ofDecember 31, 2018 and 2017 we do not believe we have any significant concentrations of credit risk.InventoriesInventories, which include the costs of material, labor and overhead, are stated at the lower of cost or net realizable value using the first in, firstout ("FIFO") method. Estimated losses from obsolete and slow-moving inventories are recorded to reduce inventory values to their estimated netrealizable value. Our manufacturing operations recognize costs of sales using standard costs with full overhead absorption, which generallyapproximates actual cost.67Property, Plant and EquipmentThese assets are recorded at historical cost and are depreciated using the straight-line method of depreciation over the estimated useful lives asfollows: Estimated LifeBuildings and improvements5 to 40 yearsMachinery and equipment2 to 10 yearsFurniture and fixtures3 to 7 yearsEquipment held for lease or rental2 to 10 yearsLeasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease. Costs related to maintenance andrepairs that do not prolong the assets' useful lives are expensed as incurred.Goodwill and Intangible AssetsGoodwill represents purchase consideration paid in a business combination that exceeds the values assigned to the net assets of acquiredbusinesses. Intangible assets include customer relationships, proprietary technology, brands and trademarks, patents, software and otherintangible assets. Intangible assets with a finite life are amortized on a straight-line basis over an estimated economic useful life which rangesfrom 1 to 25 years and is included in cost of revenue or selling, general and administrative expense. Certain of our intangible assets, namelycertain brands and trademarks, as well as FCC licenses, have an indefinite life and are not amortized.Long-Lived Asset ImpairmentLong-lived assets, including intangible assets with finite lives, are amortized and tested for impairment whenever events or changes incircumstances indicate their carrying value may not be recoverable. We assess the recoverability of long-lived assets based on the undiscountedfuture cash flow the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expectedto 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 approachor, 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 impairmentindicators arise, such as changes to the reporting unit structure, significant adverse changes in the business climate or an adverse action orassessment by a regulator). We conduct our annual impairment testing on the first day of our fourth quarter. For goodwill, the estimated fair valueof 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 reportingunit exceeds its carrying value, goodwill is not impaired. If the carrying value of the reporting unit exceeds its estimated fair value, then animpairment charge is recognized for that excess up to the amount of recorded goodwill. We estimate the fair value of our reporting units using anincome approach. We estimate the fair value of our intangible assets with indefinite lives using either the income approach or the market approach.Under the income approach, we calculate fair value based on the present value of estimated future cash flows. Under the market approach, wecalculate fair value based on recent sales and selling prices of similar assets.Product WarrantiesFor assurance-type warranties, we accrue for the estimated cost of product warranties at the time revenue is recognized and record it as acomponent of cost of revenue. Our product warranty liability reflects our best estimate of probable liability under the terms and conditions of ourproduct warranties offered to customers. We estimate the liability based on our standard warranty terms, the historical frequency of claims and thecost to replace or repair our products under warranty. Factors that impact our warranty liability include the number of units sold, the length ofwarranty term, historical and anticipated rates of warranty claims and cost per claim. We also record a warranty liability for specific matters. Weassess the adequacy of our recorded warranty liabilities quarterly and adjust amounts as necessary.For service-type warranties (i.e. non-standard warranties) costs incurred to fulfill the extended or service warranty are recognized/recorded as thecosts are incurred.Postretirement Benefit PlansThe determination of defined benefit pension and postretirement plan obligations and their associated costs requires the use of actuarialcomputations to estimate participant plan benefits to which the employees wil68l be entitled. The significant assumptions primarily relate to discount rates, expected long-term rates of return on plan assets, rate of futurecompensation increases, mortality, years of service and other factors. We develop each assumption using relevant company experience inconjunction with market-related data for each individual country in which such plans exist. All actuarial assumptions are reviewed annually withthird-party consultants and adjusted as necessary. For the recognition of net periodic postretirement cost, the calculation of the expected return onplan assets is generally derived by applying the expected long-term rate of return on the market-related value of plan assets. The market-relatedvalue of plan assets is based on average asset values at the measurement date over the last five years. Actual results that differ from ourassumptions are accumulated and amortized on a straight-line basis only to the extent they exceed 10% of the higher of the market-related valueor the projected benefit obligation, over the average remaining service period of active participants, or for plans with all or substantially all inactiveparticipants, over the average remaining life expectancy. The fair value of plan assets is determined based on market prices or estimated fairvalue at the measurement date.We consider changes to a plan’s benefit formula that eliminate the accrual for future service but continue to allow for future salary increases (i.e.“soft freeze”) to be a curtailment.Business CombinationsWe allocate the purchase price of acquisitions to the tangible and intangible assets acquired, liabilities assumed, and non-controlling interests inthe acquiree based on their estimated fair value at the acquisition date. The excess of the acquisition price over those estimated fair values isrecorded as goodwill. Changes to the acquisition date provisional fair values prior to the expiration of the measurement period, a period not toexceed 12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Acquisition-related expenses andrestructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.Derivative Financial InstrumentsWe record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on whether wehave elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied thecriteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of anasset, liability, or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as ahedge of the exposure to variability in expected future cash flows, including forecasted transactions, are considered cash flow hedges. Derivativesmay also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generallyprovides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value ofthe hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecastedtransactions in a cash flow hedge. We may enter into derivative contracts that are intended to hedge certain risks economically, even thoughhedge accounting does not apply or we elect not to apply hedge accounting.During the fourth quarter of 2018 we adopted new accounting guidance that eliminates the concept of ineffectiveness for cash flow and netinvestment hedges (refer to Note 2, “Recently Issued Accounting Pronouncements”). Prior to this adoption, the effective portion of changes in thefair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk was recorded in other comprehensive income("OCI") and was subsequently reclassified into either revenue or cost of revenue (hedge of sales classified into revenue and hedge of purchasesclassified into cost of revenue) in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of the change in fairvalue of the derivative was recognized directly in selling, general and administrative expenses. Our policy was to de-designate cash flow hedges atthe time forecasted transactions are recognized as assets or liabilities on a business unit’s balance sheet and report subsequent changes in fairvalue through selling, general and administrative expenses where the gain or loss due to movements in currency rates on the underlying asset orliability is revalued. If it became probable that the originally forecasted transaction would not occur, the gain or loss related to the hedge recordedwithin accumulated other comprehensive income ("AOCI") was immediately recognized into net income.Prior to the adoption of the new guidance, changes in the fair value of derivatives designated and that qualify as net investment hedges of foreignexchange risk were recorded in OCI. Amounts in AOCI were reclassified into earnings at the time the hedged net investment is sold orsubstantially liquidated. Effectiveness of derivatives designated as net investment hedges was assessed using the forward method.Subsequent to adopting the new hedge guidance, changes in the fair value of derivatives designated and that qualify as cash flow hedges offoreign exchange risk are recorded in other comprehensive income ("OCI") and are subsequently reclassified into either revenue or cost of revenue(hedge of sales classified into revenue and hedge69of purchases classified into cost of revenue) in the period that the hedged forecasted transaction affects earnings. Our policy is to de-designatecash flow hedges at the time forecasted transactions are recognized as assets or liabilities on a business unit’s balance sheet and reportsubsequent changes in fair value through selling, general and administrative expenses where the gain or loss due to movements in currency rateson the underlying asset or liability is revalued. If it becomes probable that the originally forecasted transaction will not occur, the gain or lossrelated to the hedge recorded within accumulated other comprehensive income ("AOCI") is immediately recognized into net income.Subsequent to adopting the new hedge guidance effectiveness of derivatives designated as net investment hedges is assessed using the spotmethod. The changes in the fair value of these derivatives due to movements in spot exchange rates are recorded in OCI. Amounts in AOCI arereclassified into earnings at the time the hedged net investment is sold or substantially liquidated. Furthermore, we will recognize interest incomebased on the interest rate differential embedded in the derivative instrument.Commitments and ContingenciesWe record accruals for commitments and loss contingencies for those which are both probable and for which the amount can be reasonablyestimated. In addition, legal fees are accrued for cases where a loss is probable and the related fees can be reasonably estimated. Significantjudgment is required to determine both probability and the estimated amount of loss. We review these accruals quarterly and adjust the accruals toreflect 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 theliability can be reasonably estimated, based on current law and existing technologies. Our estimated liability is reduced to reflect the anticipatedparticipation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financiallycapable of paying their respective shares of the relevant costs. These accruals are reviewed quarterly and are adjusted as assessment andremediation efforts progress or as additional technical or legal information becomes available. Actual costs to be incurred at identified sites infuture periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Accruals for environmentalliabilities are primarily included in other non-current liabilities at undiscounted amounts and exclude claims for recoveries from insurancecompanies or other third parties.Concentrations of Credit RiskFinancial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, andaccounts 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. Wehave not sustained any material credit losses during the previous three years from instruments held at financial institutions. We may utilize forwardcontracts 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 theirdispersion 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, 2018 and 2017 were uninsured. Foreign cashbalances at December 31, 2018 and 2017 were $274 million and $373 million, respectively.Fair Value MeasurementsWe 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 marketparticipants at the measurement date. We use a hierarchical structure to prioritize the inputs to valuation techniques used to measure fair valueinto three broad levels defined as follows:•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.•Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.Level 2 inputs include quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quotedprices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or othermeans.70•Level 3 inputs are unobservable inputs for the assets or liabilities.The fair value hierarchy is based on maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fairvalue. Classification within the fair value hierarchy is based on the lowest level input that is significant to the fair value measurement.NAV Practical Expedient is the measurement of fair value using the net asset value ("NAV") per share (or its equivalent) as an alternative to thefair value hierarchy as discussed above.Note 2. Recently Issued Accounting PronouncementsPronouncements Not Yet AdoptedIn August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the accounting for implementation costs of ahosting arrangement that is a service contract. The guidance establishes the requirement to capitalize certain implementation costs incurred in ahosting arrangement that is a service contract, effectively aligning with the requirement to capitalize certain implementation costs incurred todevelop or obtain internal-use software. This guidance is effective for interim and annual periods beginning after December 15, 2019 with earlyadoption permitted. The requirements of the amended guidance may be applied using either a retrospective or prospective approach. We areevaluating the impact of the guidance on our financial condition and results of operations.In June 2016, the FASB issued guidance amending the accounting for the impairment of financial instruments, including trade receivables. Undercurrent guidance, credit losses are recognized when the applicable losses are probable of occurring and this assessment is based on past eventsand current conditions. The amended guidance eliminates the “probable” threshold and requires an entity to use a broader range of information,including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses.This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annualperiods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approachexcept for debt securities, which require a prospective transition approach. We are evaluating the impact of the guidance on our financial conditionand results of operations.In February 2016, the FASB issued guidance amending the accounting for leases. Specifically, the amended guidance requires all lessees torecord a lease liability at lease inception, with a corresponding right of use asset ("ROU"), except for short-term leases. Lessor accounting is notfundamentally changed. This amended guidance is effective for interim and annual periods beginning after December 15, 2018 using a modifiedretrospective approach. Early adoption is permitted. We will apply the modified retrospective approach by recording a cumulative effect adjustmentas of the date of adoption, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. As aresult, adoption of the standard will result in the recognition of ROU assets and lease liabilities for operating leases of between $255 million and$285 million, as of January 1, 2019, the date of initial application. The guidance will not have a material impact on our consolidated incomestatements and statements of cash flow.Recently Adopted PronouncementsIn August 2017, the FASB issued amended guidance on hedging activities. The amendment better aligns a company’s risk management activitiesand financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying for hedgingrelationships and the presentation of hedge results. Specifically, the guidance:(1)Eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges;(2)Eliminates the benchmark interest rate concept of variable - rate instruments in cash flow hedges and allows companies to designate thecontractually specified interest rate as the hedged risk;(3)Requires a company to present the earnings effect of the hedging instrument in the same income statement line item in which theearnings effect of the hedged item is reported; and(4)Provides the ability to perform subsequent hedge effectiveness tests qualitatively.This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. Early adoptionis permitted with the effect of adoption reflected as of the beginning of the fiscal year of adoption. For cash flow and net investment hedgesexisting at the date of adoption, a cumulative-effect71adjustment related to eliminating the separate measurement of ineffectiveness is required. Other presentation and disclosure guidance is requiredonly prospectively. We adopted this guidance in the fourth quarter of 2018. The adoption resulted in the recognition of $2 million of interest incomeas a result of our transition from the forward rate method to the spot rate method in accounting for our net investment hedges.In February 2018, the FASB issued new guidance on the reclassification of certain tax effects in Accumulated Other Comprehensive Income("AOCI"). The guidance allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act(the “Tax Act”). This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those annualperiods. Early adoption is permitted. The guidance may be applied either in the period of adoption or retrospectively to each period (or periods) inwhich the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We early adopted this guidance effectivethe first quarter of 2018, and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. As a result of adoptingthe guidance, AOCI was reduced by $17 million and retained earnings increased by $17 million. This amount includes the effect of the change inthe US federal corporate income tax rate.In March 2017, the FASB issued amended guidance on the presentation of net periodic benefit costs. The amendment requires that an employerreport the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinentemployees during the period. The other components are required to be presented in the income statement separately and outside a subtotal ofincome from operations, if one is presented. The amendment also requires entities to disclose the income statement lines that contain the othercomponents if they are not appropriately described. This guidance is effective retrospectively for periods beginning after December 15, 2017,including interim periods within those annual periods. Early adoption is permitted. We adopted this guidance effective the first quarter of 2018. Theprior period consolidated income statements and segment results have been retrospectively adjusted in accordance with the new guidance. Theimpact to the presentation between operating income and other non-operating income within Xylem's Consolidated Income Statements wasapproximately $4 million and $2 million for the years ended December 31, 2017 and 2016, respectively.In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The guidance outlines a single comprehensivemodel to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,including industry-specific guidance. The core principle of the model is that an entity recognizes revenue to portray the transfer of goods andservices to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices. The standard also expands disclosure requirements regarding revenue recognition. This guidance is effective for interim and annualreporting periods beginning after December 15, 2017 and may be applied retrospectively to each prior period presented or using a modifiedretrospective approach with the cumulative effect recognized as of the date of initial application. Early adoption is permitted for interim and annualreporting periods beginning after December 15, 2016. We adopted this guidance as of January 1, 2018 using the modified retrospective transitionmethod. The adoption of the guidance did not have a material impact on our financial condition and results of operations. See Note 4, "Revenue",for further details.In May 2017, the FASB issued guidance, which amends the scope of modification accounting guidance for share-based payment arrangements.The guidance outlines the types of changes to the terms or conditions of share-based payment arrangements that would require the use ofmodification accounting. Specifically, modification accounting would not apply if the fair value, vesting conditions, and classification of the awardas equity or liability are the same immediately before and after the modification. This guidance is effective prospectively for interim and annualreporting periods beginning December 15, 2017 and early adoption is permitted. We elected to early adopt this guidance effective the secondquarter of 2017. The adoption of this guidance did not impact our financial condition or results from operations.In January 2017, the FASB issued guidance amending the impairment testing of goodwill. Under current guidance, the testing of goodwill forimpairment is performed at least annually using a two-step test. Step one involves comparing the fair value of a “reporting unit” to its carryingamount. If the applicable book value exceeds the reporting unit’s fair value then step two must be performed. Step two involves comparing the fairvalue of the reporting unit’s goodwill to the applicable carrying amount of the asset and recognizing an impairment charge equal to the amount bywhich the carrying amount of the goodwill exceeds its implied fair value. The amended guidance eliminates step two of the impairment test andallows an entity to record an impairment charge equal to the amount that the carrying amount of the applicable reporting unit exceeds its fair value,up to the value of the recorded goodwill. This guidance is effective prospectively for interim and annual goodwill impairment tests beginning afterDecember 15, 2019 with early adoption permitted for interim or annual tests after January 1, 2017. We elected to72early adopt this guidance effective the first quarter of 2017. The adoption of this guidance did not impact our financial condition or results ofoperations.In October 2016, the FASB issued guidance amending the accounting for income taxes. Under current guidance the recognition of current anddeferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to an outside party. The amended guidanceeliminates the prohibition against immediate recognition of current and deferred income tax amounts associated with intra-entity transfers of assetsother than inventory. This guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted asof the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available forissuance. The requirements of the amended guidance should be applied on a modified retrospective basis through a cumulative-effect adjustmentdirectly to retained earnings as of the beginning of the period of adoption. We elected to early adopt this guidance effective the first quarter of2017. As a result of adopting the amended guidance, prepaid tax assets were reduced by $14 million, long-term deferred tax assets increased $3million, and accrued taxes were reduced by $4 million. The net impact of these adjustments on retained earnings was a decrease of $7 million.In July 2015, the FASB issued guidance regarding simplifying the measurement of inventory. Under prior guidance, inventory is measured at thelower of cost or market, where market is defined as replacement cost, with a ceiling of net realizable value and a floor of net realizable value less anormal profit margin. The amended guidance requires the measurement of inventory at the lower of cost and net realizable value. Net realizablevalue is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, andtransportation. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2016 and early application ispermitted. We adopted this guidance effective the first quarter of 2017. The adoption of this guidance did not impact our financial condition orresults of operations.Note 3. Acquisitions and Divestitures2018 Acquisitions and DivestituresPure Technologies Ltd.On January 31, 2018, we acquired all the issued and outstanding shares of Pure Technologies Ltd. (“Pure”), a leader in intelligent leak detectionand condition assessment solutions for water distribution networks for approximately $420 million, net of cash received. Acquisition costs of $4million were reflected as a component of selling, general and administrative expenses in our Consolidated Income Statement.Pure’s results of operations were consolidated with the Company effective February 1, 2018 and are reflected in the Measurement & ControlSolutions segment.The Pure purchase price allocation as of January 31, 2018 is shown in the following table.(in millions)AmountCash$14Receivables23Inventories4Prepaid and other current assets2Property, plant and equipment22Intangible assets149Other long-term assets1Accounts payable(3)Accrued and other current liabilities(12)Deferred income tax liabilities(25)Other non-current accrued liabilities(2)Total identifiable net assets173 Goodwill261 Total consideration$43473During the fourth quarter of 2018 we finalized the Pure purchase price allocation. The fair values of Pure's assets and liabilities were determinedbased on estimates and assumptions which management believes are reasonable.Goodwill arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of Pure andXylem. All of the goodwill was assigned to the Measurement & Control Solutions segment and is not deductible for tax purposes.The estimate of the fair value of Pure identifiable intangible assets was determined primarily using the “income approach,” which requires aforecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royaltymethod. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing ofprojected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangibleasset’s life cycle, as well as other factors. The following table summarizes key information underlying identifiable intangible assets related to thePure acquisition:Category Life Amount (in millions)Customer Relationships 17 - 18 years $84Technology 3 - 10 years 38Tradenames 20 years 21Internally Developed Software 3 years 6Total $149The following table summarizes, on an unaudited pro forma basis, the condensed combined results of operations of the Company for the yearsended December 31, 2018 and 2017, respectively, assuming the acquisition of Pure was made on January 1, 2017.(in millions)Year Ended December 31, 20182017Revenue$5,212$4,809Net income$546$323The foregoing unaudited pro forma results are for informational purposes only and are not necessarily indicative of the actual results of operationsthat might have occurred had the acquisition occurred on January 1, 2017, nor are they necessarily indicative of future results. The pro formafinancial information includes the impact of purchase accounting and other nonrecurring items directly attributable to the acquisition, which include:•Amortization expense of acquired intangibles•Adjustments to the depreciation of property, plant and equipment reflecting the impact of the calculated fair value of those assets inaccordance with purchase accounting•Adjustments to interest expense to remove historical Pure interest costs and reflect Xylem's current debt profile•The related tax impact of the above referenced adjustmentsThe pro forma results do not include any cost savings or operational synergies that may be generated or realized due to the acquisition of Pure.During the eleven month period ended December 31, 2018 Pure had revenue and an operating loss of $96 million and $2 million, respectively.74Other Acquisition ActivityDuring the twelve months ended December 31, 2018 we spent approximately $13 million, net of cash received on other acquisition activity.During the third quarter we divested our Precision Die Casting business for approximately $22 million, net of cash assumed. The sale resulted inan immaterial gain, which is reflected in gain from sale of business in our Consolidated Income Statement. The business, which was part of ourMeasurement & Controls Solutions segment, provided aluminum die casting products primarily to customers in the automotive sector. Thebusiness reported 2017 annual revenue of approximately $32 million.2017 Acquisitions and DivestituresAcquisition ActivityDuring 2017 we spent approximately $33 million on acquisition activity, including the acquisition of EmNet LLC (“EmNet”), a developer of softwareand data analytics solutions for municipalities.DivestituresOn October 31, 2017, we divested our Flowtronex and Water Equipment Technologies (WET) businesses for $6 million. The sale resulted in a gainof approximately $1 million, which is reflected in gain from sale of business in our Consolidated Income Statement. The business, which was partof our Applied Water segment, provided turf and reverse osmosis packages to customers in the agricultural and industrial sectors. The businessreported approximately $9 million of revenue in the first 10 months of 2017.On February 17, 2017, we divested our United Kingdom and Poland based membranes business for approximately $10 million. The sale resulted ina gain of $5 million, which is reflected in gain from sale of business in our Consolidated Income Statement. The business, which was part of ourApplied Water segment, provided membrane filtration products primarily to customers in the municipal water and industrial sectors. The businessreported 2016 annual revenue of approximately $8 million.Assets Held for SaleDuring the fourth quarter of 2017 two of our businesses qualified as held for sale treatment. Accordingly an estimated loss of $16 million wasrecognized.2016 AcquisitionsSensus Worldwide LimitedOn October 31, 2016, we acquired all of the outstanding equity interests of Sensus Worldwide Limited (other than Sensus Industries Limited)(“Sensus”) effective October 31, 2016 for $1,766 million ($1,710 million net of cash acquired), including a $6 million payment in 2017 for a workingcapital adjustment. Sensus develops advanced technology solutions that enable intelligent use and conservation of critical water and energyresources. Sensus' major products include smart metering, networked communications, measurement and control technologies, software andservices including cloud-based analytics, remote monitoring and data management. The Company acquired Sensus because it believes that,within its market category, its products have superior qualities and usefulness to customers. The Company also acquired Sensus on the strengthof its developed technology that we plan to leverage across our existing base of products and customers.Acquisition costs of $19 million were reflected as a component of selling, general and administrative expenses in our Consolidated IncomeStatements.Sensus results of operations were consolidated with the Company effective November 1, 2016 and it is part of the Measurement & ControlSolutions segment. Refer to Note 21, "Segment and Geographic Data" for Measurement & Control Solutions segment information.75The Sensus purchase price allocation as of October 31, 2016 is shown in the following table.(in millions)AmountCash$56Receivables104Inventories79Prepaid and other current assets19Property, plant and equipment176Intangible assets782Other long-term assets5Accounts payable(69)Accrued and other current liabilities(90)Deferred income tax liabilities(198)Accrued post retirement benefits(84)Other non-current accrued liabilities(60)Total identifiable net assets720 Goodwill1,063Non-controlling interest(17) Total consideration$1,766In the third quarter of 2017 we finalized the Sensus purchase price allocation. The fair values of Sensus' assets and liabilities were determinedbased on estimates and assumptions which management believes are reasonable.Goodwill arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of Sensus andXylem. All of the goodwill was assigned to the Measurement & Control Solutions segment and is not deductible for tax purposes.The estimate of the fair value of Sensus identifiable intangible assets was determined primarily using the “income approach,” which requires aforecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royaltymethod. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing ofprojected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangibleasset’s life cycle, as well as other factors. The following table summarizes key information underlying identifiable intangible assets related to theSensus acquisition:Category Life Amount (in millions)Customer and Distributor Relationships 2 - 18 years $543Tradenames 10 - 25 years 98Internally Developed Network Software 7 years 60FCC Licenses Indefinite lived 24Technology 5 - 15 years 39Other 1 - 16 years 18Total $78276The following table summarizes, on an unaudited proforma basis, the condensed combined results of operations of the Company for the yearended December 31, 2016 assuming the acquisition of Sensus was made on January 1, 2015. Year Ended December 31,(in millions)2016Revenue$4,528Net income$286The foregoing unaudited proforma results are for informational purposes only and are not necessarily indicative of the actual results of operationsthat might have occurred had the acquisition occurred on January 1, 2015, nor are they necessarily indicative of future results. The pro formafinancial information includes the impact of purchase accounting and other nonrecurring items directly attributable to the acquisition, which include:•Adjustments to revenue resulting from the valuation of the acquired deferred revenue balance to fair value as part of purchase accounting•Amortization expense of acquired intangibles•Amortization of the fair value step-up in inventory•Adjustments to the depreciation of property, plant and equipment reflecting the impact of the calculated fair value of those assets inaccordance with purchase accounting•Amortization of the fair value adjustment for warranty liabilities•Adjustments to interest expense to remove historical Sensus interest costs and reflect Xylem's current debt profile•The related tax impact of the above referenced adjustmentsThe pro forma results do not include any cost savings or operational synergies that may be generated or realized due to the acquisition of Sensus.For the two month period ended December 31, 2016 Sensus had revenue and an operating loss of $132 million and $13 million, respectively.Visenti Pte. LtdOn October 18, 2016, we acquired Visenti Pte. Ltd. (“Visenti”), a smart water analytics company focused on leak detection and pressuremonitoring solutions to help water utilities manage their water networks for $8 million. Visenti, a privately-owned company headquartered inSingapore, has approximately 25 employees. Our consolidated financial statements include Visenti's results of operations prospectively fromOctober 18, 2016 within the Measurement & Control Solutions segment.Tideland Signal CorporationOn February 1, 2016, we acquired Tideland Signal Corporation (“Tideland”), a leading producer of analytics solutions in the coastal and oceanmanagement sectors, for $70 million. Tideland, a privately-owned company headquartered in Texas, has approximately 160 employees. Ourconsolidated financial statements include Tideland's results of operations prospectively from February 1, 2016 within the Measurement & ControlSolutions segment.77Note 4. RevenueDisaggregation of RevenueThe following table illustrates the sources of revenue: Twelve Months Ended(in millions)December 31, 2018Revenue from contracts with customers$4,963Other244Total$5,207The following table reflects revenue from contracts with customers by application: Twelve Months Ended(in millions)December 31, 2018Water Infrastructure Transport$1,535 Treatment397 Applied Water Commercial Building Services596 Residential Building Services232 Industrial Water706 Measurement and Control Solutions Water692 Electric143 Gas195 Software and Services/Other123 Test344 Total$4,96378The following table reflects revenue from contracts with customers by geographical region: Twelve Months Ended(in millions)December 31, 2018Water Infrastructure United States$539 Europe758 Emerging Markets & Other635 Applied Water United States797 Europe386 Emerging Markets & Other351 Measurement and Control Solutions United States913 Europe273 Emerging Markets & Other311 Total$4,963Contract BalancesWe receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to revenue recognized inadvance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Change in contractassets and liabilities are due to our performance under the contract.The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities.(in millions)Contract Assets (a)Contract LiabilitiesBalance at 1/1/2018$89$107 Additions, net87101 Revenue recognized from opening balance—(89) Billings(76)— Foreign currency and other(4)(6)Balance at 12/31/2018$96$113(a)Excludes receivable balances which are disclosed on the balance sheetPerformance obligationsDelivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cyclesand delays can occur from time to time. As of December 31, 2018, the aggregate amount of the transaction price allocated to performanceobligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $258 million. We expect to recognizerevenue upon the completion of satisfying the majority of these performance obligations in the following 12 to 36 months. The Company elects toapply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose originalexpected duration is less than one year.79Note 5. Restructuring and Asset Impairment ChargesFrom time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically positionourselves based on the economic environment and customer demand. During 2018, 2017 and 2016, the costs incurred primarily relate to an effortto reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness.In 2018, the charges included the reduction of headcount and consolidation of facilities within our Measurement & Control Solutions and WaterInfrastructure segments, as well as headcount reductions within our Applied Water segment. In 2017 and 2016 the charges included the reductionof headcount and consolidation of facilities within our Applied Water, Water Infrastructure, and Measurement & Control Solutions segments, aswell as Corporate headcount reductions. The components of restructuring charges incurred during each of the previous three years ended arepresented below. Year Ended December 31,(in millions) 2018 2017 2016By component: Severance and other charges $19 $20 $28Lease related charges 1 — 2Other restructuring charges 1 2 1Reversal of restructuring accruals (1) (2) (1)Total restructuring charges 20 20 30Asset impairment charges 2 5 —Total restructuring and asset impairment charges $22 $25 $30 By segment: Water Infrastructure $11 $7 $12Applied Water 2 13 10Measurement & Control Solutions 9 5 6Corporate and other — — 2RestructuringThe following table displays a rollforward of the restructuring accruals, presented on our Consolidated Balance Sheets within accrued and othercurrent liabilities, for the years ended December 31, 2018 and 2017.(in millions) 2018 2017Restructuring accruals - January 1 $7 $15Restructuring charges 20 20Cash payments (21) (28)Foreign currency and other (1) —Restructuring accruals - December 31 $5 $7 By segment: Water Infrastructure $1 $1Applied Water 1 1Measurement & Control Solutions 2 2Regional selling locations (a) 1 3Corporate and other — —(a)Regional selling locations consist primarily of selling and marketing organizations that incurred restructuring expense which was allocated to thesegments. The liabilities associated with restructuring expense were not allocated to the segments.80The following is a rollforward of employee position eliminations associated with restructuring activities for the years ended December 31, 2018 and2017. 2018 2017Planned reductions - January 1 47 188Additional planned reductions 206 151Actual reductions and reversals (184) (292)Planned reductions - December 31 69 47The following table presents expected restructuring spend:(in millions) Water Infrastructure Applied Water Measurement &Control Solutions Corporate TotalActions Commenced in 2018: Total expected costs $9 $1 $7 $— $17Costs incurred during 2018 7 1 7 — 15Total expected costs remaining $2 $— $— $— $2 Actions Commenced in 2017: Total expected costs $18 $12 $3 $— $33Costs incurred during 2017 5 4 2 — 11Costs incurred during 2018 2 1 1 — 4Total expected costs remaining $11 $7 $— $— $18 Actions Commenced in 2016: Total expected costs $13 $14 $10 $2 $39Costs incurred during 2016 11 10 6 2 29Costs incurred during 2017 2 4 3 — 9Costs incurred during 2018 — — 1 — 1Total expected costs remaining $—$—$—$—$—The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2018 consist primarily of severance chargesand are expected to continue through the third quarter of 2019. The Water Infrastructure, Applied Water and Measurement & Control Solutionsactions commenced in 2017 consist primarily of severance charges and are expected to continue through the second quarter of 2020. The WaterInfrastructure, Applied Water, Measurement & Control Solutions and Corporate actions commenced in 2016 consist primarily of severance chargesand are complete.Asset Impairment ChargesDuring the fourth quarter of 2018 we determined that certain assets within our Water Infrastructure segment, including certain software, wereimpaired. Accordingly we recognized an impairment charge of $2 million.During the first quarter of 2017 we determined that certain assets within our Applied Water segment, including a tradename, were impaired.Accordingly we recognized an impairment charge of $5 million. Refer to Note 11, "Goodwill and Other Intangible Assets," for additional information.81Note 6. Other Non-Operating Income, NetThe components of other non-operating income, net are as follows: Year Ended December 31,(in millions)2018 2017 2016Interest income$4 $3 $2Income from joint ventures5 3 3Other income (expense) – net4 — (3)Total other non-operating income, net$13 $6 $2Note 7. Income TaxesThe source of pre-tax income and the components of income tax expense are as follows: Year Ended December 31,(in millions)2018 2017 2016Income components: Domestic$208 $162 $80Foreign377 304 260Total pre-tax income$585 $466 $340Income tax expense components: Current: Domestic – federal$9 $109 $19Domestic – state and local13 9 5Foreign61 51 42Total Current83 169 66Deferred: Domestic – federal$17 $(29) $19Domestic – state and local5 10 1Foreign(69) (14) (6)Total Deferred(47) (33) 14Total income tax provision$36 $136 $80Effective income tax rate6.1% 29.2% 23.5%Reconciliations between taxes at the U.S. federal income tax rate and taxes at our effective income tax rate on earnings before income taxes areas follows: Year Ended December 31, 2018 2017 2016Tax provision at U.S. statutory rate21.0 % 35.0 % 35.0 %Increase (decrease) in tax rate resulting from: State income taxes2.3 1.6 0.8Uncertain tax positions2.6 1.6 (6.4)Valuation allowance(47.1) 3.3 18.5Tax exempt interest(1.4) (10.6) (14.3)Foreign tax rate differential2.9 (6.7) (7.9)Impact of foreign earnings, net(1.7) 37.0 5.9Tax incentives(6.2) (6.6) (8.9)Intercompany sale of assets35.5 — —Other – net(1.8) (2.5) 0.8Rate change— (22.9) —Effective income tax rate6.1 % 29.2 % 23.5 %82We operate under tax incentives, which are effective January 2013 through December 2023 and may be extended if certain additional requirementsare satisfied. The tax incentives are conditional upon our meeting and maintaining certain employment thresholds. The inability to meet thethresholds would have a prospective impact and at this time we continue to believe we will meet the requirements.Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets andliabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse.The following is a summary of the components of the net deferred tax assets and liabilities recognized in the Consolidated Balance Sheets: December 31,(in millions)2018 2017Deferred tax assets: Employee benefits$97 $108Accrued expenses30 34Loss and other tax credit carryforwards279 419Inventory7 8Other11 24 424 593Valuation allowance(234) (350)Net deferred tax asset$190 $243Deferred tax liabilities: Intangibles$247 $300Investment in foreign subsidiaries8 20Property, plant, and equipment69 57Other29 49Total deferred tax liabilities$353 $426Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realizeexisting deferred tax assets. On the basis of this evaluation, as of December 31, 2018, a valuation allowance of $234 million has been establishedto reduce the deferred income tax asset related to certain U.S. and foreign net operating losses and U.S. and foreign capital loss carryforwards.A reconciliation of our valuation allowance on deferred tax assets is as follows:(in millions)2018 2017 2016Valuation allowance — January 1$350 $311 $248Change in assessment (a)1 (28) 17Current year operations(271) 48 38Foreign currency and other (b)154 19 (32)Acquisitions— — 40Valuation allowance — December 31$234 $350 $311(a)Increase in assessment in 2018 is primarily attributable to loss positions in various jurisdictions. Decrease in assessment in 2017 is primarilyattributable to Foreign Tax Credits utilization resulting from the Tax Act.(b)Included in foreign currency and other in 2018 is an increase in net operating losses due to amended prior year tax returns for which a valuationallowance was recorded.Deferred taxes are classified net of unrecognized tax benefits in the Consolidated Balance Sheets as follows: December 31,(in millions)2018 2017Non-current assets$140 $69Non-current liabilities(303) (252)Total net deferred tax liabilities$(163) $(183)83Tax attributes available to reduce future taxable income begin to expire as follows:(in millions)December 31, 2018 First Year of ExpirationU.S. net operating loss$12 December 31, 2024State net operating loss98 December 31, 2019State excess interest expense12 IndefinitelyState tax credits2 IndefinitelyForeign net operating loss1,119 December 31, 2019Foreign tax credits3 December 31, 2030The Company has provided a deferred tax liability of $13 million for net foreign withholding taxes and state income taxes on $1.9 billion of earningsexpected to be repatriated to the U.S. parent, as of December 31, 2018. The Company currently does not intend to repatriate approximately $1.1billion taxed under the Tax Act, and has not recorded any deferred taxes related to such amounts as the determination of the amount is notpracticable.Unrecognized Tax BenefitsWe 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 thetaxing authorities or litigation, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statementsfrom such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Areconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:(in millions)2018 2017 2016Unrecognized tax benefits — January 1$130 $67 $47Current year tax positions— 56 12Prior year tax positions7 7 (22)Acquisitions— — 30Settlements(1) — —Unrecognized tax benefits — December 31$136 $130 $67The amount of unrecognized tax benefits at December 31, 2018 which, if ultimately recognized, will reduce our annual effective tax rate is $136million. We believe that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $8 million within the next 12months as a result of the expiration of certain statute of limitations.We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income, net and tax penalties as acomponent of income tax expense in our Consolidated Income Statements. The amount of accrued interest relating to unrecognized tax benefitsas of December 31, 2018 and 2017 was $7 million and $4 million.The following table summarizes our earliest open tax years by major jurisdiction:Jurisdiction Earliest Open YearItaly 2013Luxembourg 2016Sweden 2013Germany 2009United Kingdom 2011United States 2016Switzerland 2013Tax ActOn December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TaxAct”). The Tax Act makes broad and complex changes to the U.S. tax code. The SEC staff issued SAB 118, which provided guidance onaccounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Actenactment date for companies to complete the accounting under ASC 740.84Our accounting for the reduction of U.S. federal corporate tax rate is complete. We recorded a provisional tax benefit for corporate tax ratereduction of $107 million as of December 31, 2017. Upon further analysis of our deferred tax assets and liabilities, we recognized a measurement-period adjustment of $1.5 million as an additional decrease of the net deferred tax liabilities and recorded a corresponding deferred tax benefit of$1.5 million during the period ended December 31, 2018. The effect of this measurement period adjustment on the 2018 effective tax rate wasabout 0.3%. A total decrease of the net deferred tax liabilities of $108 million has been recorded for the corporate rate reduction, with acorresponding deferred tax benefit of $108 million.Our accounting for the Deemed Repatriation Transition Tax ("Transition Tax") is complete. We made an estimate of the Transition Tax andrecorded a provisional Transition Tax liability of $153 million as of December 31, 2017. On the basis of revised E&P computations that werecompleted and additional guidance, we recognized a measurement-period adjustment of a $9 million decrease to the income tax expense in 2018.The effect of the measurement-period adjustment on the 2018 effective tax rate was approximately 1.6%. A total Transition Tax obligation to dateof $144 million has been recorded, with a corresponding adjustment of $144 million to income tax expense.The FASB has indicated that a company can make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxableincome related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’smeasurement of its deferred taxes (the “deferred method”). During the third quarter of 2018, we adopted the period cost method to treat the taxeffects of future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred.Note 8. Earnings Per ShareThe following is a reconciliation of the shares used in calculating basic and diluted earnings per share. Year Ended December 31, 2018 2017 2016Net income attributable to Xylem (in millions)$549 $331 $260Shares (in thousands): Weighted average common shares outstanding179,750 179,602 179,069Add: Participating securities (a)27 27 37Weighted average common shares outstanding — Basic179,777 179,629 179,106Plus incremental shares from assumed conversions: (b) Dilutive effect of stock options876 712 499Dilutive effect of restricted stock units and performance share units479 516 433Weighted average common shares outstanding — Diluted181,132 180,857 180,038Basic earnings per share$3.05 $1.84 $1.45Diluted earnings per share$3.03 $1.83 $1.45(a)Restricted stock awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders are considered participatingsecurities for purposes of computing earnings per share.(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shareslisted 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 wereotherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting ofrestricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognizedcompensation expense for outstanding awards. Performance share units are included in the treasury stock calculation of diluted earnings per share based uponachievement of underlying performance and market conditions at the end of the reporting period, as applicable. See Note 16, "Stock-Based Compensation Plans" forfurther detail on the performance share units. Year Ended December 31,(in thousands)2018 2017 2016Stock options1,300 1,626 1,892Restricted stock units333 379 514Performance share units465 504 37385Note 9. InventoriesThe components of total inventories are summarized as follows: December 31,(in millions)2018 2017Finished goods$248 $223Work in process45 42Raw materials302 259Total inventories$595 $524Note 10. Property, Plant and EquipmentThe components of total property, plant and equipment, net are as follows: December 31,(in millions)2018 2017Land, buildings and improvements$326 $329Machinery and equipment819 799Equipment held for lease or rental249 241Furniture and fixtures109 101Construction work in progress107 85Other22 21Total property, plant and equipment, gross1,632 1,576Less accumulated depreciation976 933Total property, plant and equipment, net$656 $643Depreciation expense was $117 million, $109 million, and $87 million for 2018, 2017, and 2016, respectively.Note 11. Goodwill and Other Intangible AssetsChanges in the carrying value of goodwill by reportable segment during the years ended December 31, 2018 and 2017 are as follows:(in millions)WaterInfrastructure Applied Water Measurement &Control Solutions TotalBalance as of December 31, 2016$640 $505 $1,487 $2,632Activity in 2017 Divested/acquired— (3) 10 7Foreign currency and other27 24 78 129Balance as of December 31, 2017$667 $526 $1,575 $2,768Activity in 2018 Acquired— — 279 279Foreign currency and other(14) (10) (47) (71)Balance as of December 31, 2018$653 $516 $1,807 $2,976During the fourth quarter of 2018, we performed our annual impairment assessment and determined that the estimated fair values of our goodwillreporting units were in excess of each of their carrying values. However, future goodwill impairment tests could result in a charge to earnings. Wewill continue to evaluate goodwill on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstancesindicate there may be a potential impairment.86Other Intangible AssetsInformation regarding our other intangible assets is as follows:(in millions)December 31, 2018 December 31, 2017 CarryingAmount AccumulatedAmortization NetIntangibles CarryingAmount AccumulatedAmortization NetIntangiblesCustomer and distributorrelationships$951 $(286) $665 $906 $(241) $665Proprietary technology andpatents198 (93) 105 163 (75) 88Trademarks148 (41) 107 138 (37) 101Software355 (164) 191 277 (130) 147Other24 (19) 5 26 (20) 6Indefinite-lived intangibles159 — 159 161 — 161Other intangibles$1,835 $(603) $1,232 $1,671 $(503) $1,168We determined that no impairment of the indefinite-lived intangibles existed as of the measurement date of our impairment assessment in 2018 or2017. Future impairment tests could result in a charge to earnings. We will continue to evaluate the indefinite-lived intangible assets on an annualbasis 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 and patents, trademarks, software and other are amortized over weighted averagelives of approximately 14 years, 14 years, 13 years, 5 years and 5 years, respectively.Total amortization expense for intangible assets was $144 million, $125 million, and $64 million for 2018, 2017 and 2016, respectively.Estimated amortization expense for each of the five succeeding years is as follows:(in millions) 2019$135202012720211122022102202397During the first quarter of 2017 we determined that the intended use of a finite lived trade name within our Applied Water segment had changed.Accordingly we recorded a $4 million impairment charge. The charge was calculated using the income approach, which is considered a Level 3input for fair value measurement purposes, and is reflected in "Restructuring and asset impairment charges" in our Consolidated IncomeStatements.Note 12. Derivative Financial InstrumentsRisk Management Objective of Using DerivativesWe are exposed to certain risks arising from both our business operations and economic conditions, and principally manage our exposures tothese risks through management of our core business activities. Certain of our foreign operations expose us to fluctuations of interest rates andexchange rates that may impact revenue, expenses, cash receipts, cash payments, and the value of our stockholders' equity. We enter intoderivative financial instruments to protect the value or fix the amount of certain cash flows in terms of the functional currency of the business unitwith that exposure and reduce the volatility in stockholders' equity.87Cash Flow Hedges of Foreign Exchange RiskWe are exposed to fluctuations in various foreign currencies against our functional currencies. We use foreign currency derivatives, includingcurrency forward agreements, to manage our exposure to fluctuations in the various exchange rates. Currency forward agreements involve fixingthe foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flowhedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures relate to the Euro, Swedish Krona, BritishPound, Canadian Dollar, Polish Zloty, and Australian Dollar. We had foreign exchange contracts with purchase notional amounts totaling $506million and $455 million as of December 31, 2018 and 2017, respectively. As of December 31, 2018, our most significant foreign currencyderivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchaseEuro, purchase Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar and to sell Canadian Dollar and purchase Euro. Thepurchase notional amounts associated with these currency derivatives were $191 million, $168 million, $52 million, $37 million, $29 million and $22million, respectively. As of December 31, 2017, the purchase notional amounts associated with these currency derivatives were $147 million, $149million, $66 million, $34 million, $28 million and $25 million, respectively.Hedges of Net Investments in Foreign OperationsWe are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.Cross Currency SwapsWe enter into cross currency swaps to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. The total notional amount ofderivative instruments designated as net investment hedges was $426 million and $446 million as of December 31, 2018 and 2017, respectively.Foreign Currency Denominated DebtOn March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023. We designated the entirety of theoutstanding balance, or $566 million and $592 million as of December 31, 2018 and 2017, respectively, net of unamortized discount, as a hedge ofa net investment in certain foreign subsidiaries.Forward ContractsOn September 23, 2016, we entered into forward contacts with a total notional amount of €300 million to manage our exposure to fluctuations inthe Euro-U.S. Dollar exchange rate. The contracts were designated as net investment hedges and were settled in 2016.88The table below presents the effect of our derivative financial instruments on the Consolidated Income Statements and Consolidated Statementsof Comprehensive Income. Year Ended December 31,(in millions) 2018 2017 2016Derivatives in Cash Flow Hedges Foreign Exchange Contracts Amount of (loss) gain recognized in OCI (a) $(8) $9 $—Amount of (gain) reclassified from OCI into revenue (a) — (6) (2)Amount of loss reclassified from OCI into cost of revenue (a) 4 1 — Derivatives in Net Investment Hedges Cross Currency Swaps Amount of (loss) gain recognized in OCI (a) $22 $(53) $19Amount income recognized in Interest Expense 2 — —Foreign Currency Denominated Debt Amount of (loss) gain recognized in OCI (a) $27 $(74) $28Forward Contracts Amount of gain recognized in OCI (a) $— $— $9(a)Effective portionAs of December 31, 2018, $1 million of the net losses on cash flow hedges is expected to be reclassified into earnings in the next 12 months.As of December 31, 2018, no gains or losses on the net investment hedges are expected to be reclassified into earnings over the next 12 months.The ineffective portion of the change in fair value of a cash flow hedge was not material for 2018, 2017, and 2016.The net investment hedges did not experience any ineffectiveness in 2018, 2017 and 2016.The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and are determined through the use ofmodels that consider various assumptions including yield curves, time value and other measurements.The fair values of our derivative contracts currently included in our hedging program were as follows: December 31,(in millions)2018 2017Derivatives designated as hedging instruments Assets Cash Flow Hedges Other current assets$3 $3Liabilities Cash Flow Hedges Other current liabilities(1) (1)Net Investment Hedges Other non-current liabilities(46) (64)The fair value of our long-term debt, due in 2023, designated as a net investment hedge was $599 million and $638 million as of December 31,2018 and 2017, respectively.89Note 13. Accrued and Other Current Liabilities December 31,(in millions)2018 2017Compensation and other employee-benefits$194 $203Customer-related liabilities129 119Accrued warranty costs44 55Accrued taxes85 75Other accrued liabilities94 99Total accrued and other current liabilities$546 $551Note 14. Credit Facilities and Long-Term DebtTotal debt outstanding is summarized as follows: December 31,(in millions)2018 20174.875% Senior Notes due 2021 (a)$600 $6002.250% Senior Notes due 2023 (a)570 5973.250% Senior Notes due 2026 (a)500 5004.375% Senior Notes due 2046 (a)400 400Research and development finance contract— 125Term loan257 —Debt issuance costs and unamortized discount (b)(19) (22)Total debt2,308 2,200Less: short-term borrowings and current maturities of long-term debt257 —Total long-term debt$2,051 $2,200(a)The fair value of our Senior Notes (as defined below) was determined using quoted prices in active markets for identical securities, which areconsidered Level 1 inputs. The fair value of our Senior Notes due 2021 (as defined below) was $620 million and $648 million as of December 31, 2018and 2017, respectively. The fair value of our Senior Notes due 2023 (as defined below) was $599 million and $638 million as of December 31, 2018and 2017, respectively. The fair value of our Senior Notes due 2026 (as defined below) was $476 million and $498 million as of December 31, 2018and 2017, respectively. The fair value of our Senior Notes due 2046 (as defined below) was $397 million and $431 million as of December 31, 2018and 2017, respectively.(b)The debt issuance costs and unamortized discount is recognized as a reduction in the carrying value of the Senior Notes in the Consolidated BalanceSheets and is being amortized to interest expense in our Consolidated Income Statements over the expected remaining terms of the Senior Notes.Senior NotesOn September 20, 2011, we issued 4.875% Senior Notes of $600 million aggregate principal amount due October 2021 (the "Senior Notes due2021"). On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023 (the "Senior Notes due2023"). On October 11, 2016, we issued 3.250% Senior Notes of $500 million aggregate principal amount due October 2026 (the “Senior Notes due2026”) and 4.375% Senior Notes of $400 million aggregate principal amount due October 2046 (the “Senior Notes due 2046” and, together with theSenior Notes due 2021, the Senior Notes due 2023 and the Senior Notes due 2026, the “Senior Notes”).The Senior Notes include covenants that restrict our ability, subject to exceptions, to incur debt secured by liens and engage in sale andleaseback transactions, as well as provide for customary events of default (subject, in certain cases, to receipt of notice of default and/orcustomary grace and cure periods). We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal tothe principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may also redeem the Senior Notes in certain othercircumstances, as set forth in the applicable Senior Notes indenture.If a change of control triggering event (as defined in the applicable Senior Notes indenture) occurs, we will be required to make an offer to purchasethe Senior Notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase.90Interest on the Senior Notes due 2021 is payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable onMarch 11 of each year. Interest on the Senior Notes due 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each yearbeginning on May 1, 2017. As of December 31, 2018, we were in compliance with all covenants for the Senior Notes.We used the net proceeds of the Senior Notes due 2026 and the Senior Notes due 2046, together with cash on hand, proceeds from issuancesunder our existing commercial paper program and borrowings under the Term Facility (as described below), to fund the acquisition of Sensus (referto Note 3 for further information on the Sensus acquisition).Credit FacilitiesFive-Year Revolving Credit FacilityEffective March 27, 2015, Xylem entered into a Five-Year Revolving Credit Facility (the "Credit Facility") with Citibank, N.A., as administrativeagent, and a syndicate of lenders. The Credit Facility provides for an aggregate principal amount of up to $600 million of: (i) revolving extensions ofcredit (the "revolving loans") outstanding at any time and (ii) the issuance of letters of credit in a face amount not in excess of $100 millionoutstanding at any time. The Credit Facility provides for increases of up to $200 million for a possible maximum total of $800 million in aggregateprincipal amount at our request and with the consent of the institutions providing such increased commitments.At our election, the interest rate per annum applicable to the revolving loans will be based on either (i) a Eurodollar rate determined by reference toLIBOR, adjusted for statutory reserve requirements, plus an applicable margin or (ii) a fluctuating rate of interest determined by reference to thegreatest of: (a) the prime rate of Citibank, N.A., (b) the U.S. Federal funds effective rate plus half of 1% or (c) the Eurodollar rate determined byreference to LIBOR, adjusted for statutory reserve requirements, in each case, plus an applicable margin.In accordance with the terms of an amendment to the Credit Facility dated August 30, 2016, we may not exceed a maximum leverage ratio of 4.00to 1.00 (based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) for a period of 12-months following theSensus acquisition and a maximum leverage ratio of 3.50 to 1.00 through the rest of the term. The Credit Facility also contains limitations on,among other things, incurring secured debt, granting liens, entering into sale and leaseback transactions, mergers, consolidations, liquidations,dissolutions and sales of assets. In addition, the Credit Facility contains other terms and conditions such as customary representations andwarranties, additional covenants and customary events of default. As of December 31, 2018 the Credit Facility was undrawn and we are incompliance with all covenants.European Investment Bank - R&D Finance ContractOn October 28, 2016, the Company entered into a Finance Contract (the “Finance Contract”) with the European Investment Bank (the “EIB”). TheCompany's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the FinanceContract and Xylem Inc. is the Guarantor. The Finance Contract provides for up to €105 million (approximately $120 million) to finance research,development and innovation projects in the field of sustainable water and wastewater solutions during the period from 2017 through 2019 inSweden, Germany, Italy, the United Kingdom, Hungary and Austria. The Company has unconditionally guaranteed the performance of theborrowers under the Finance Contract. Under the Finance Contract, the borrowers are able to draw loans on or before April 28, 2018, with amaturity of no longer than 11 years.The Finance Contract is subject to the same leverage ratio as the Credit Facility. Both agreements also contain limitations on, among other things,incurring debt, granting liens, and entering into sale and leaseback transactions, as well as other terms and conditions, such as customaryrepresentations and warranties, additional covenants and customary events of default.The Finance Contract provides for fixed rate loans and floating rate loans. Under the Finance Contract, the interest rate per annum applicable tofixed rate loans is at a fixed percentage rate per annum specified by the EIB which includes the applicable margin. The interest rate per annumapplicable to floating rate loans is at the rate determined by reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in PoundsSterling or U.S. Dollars, plus an applicable spread specified by the EIB which includes the applicable margin. The applicable margin is 59 basispoints (0.59%). As of December 31, 2017, there was $125 million outstanding under the Finance Contract. On November 28, 2018, the FinanceContract was repaid and settled for $120 million.91Term Loan FacilityOn January 26, 2018, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month €225 million (approximately $257million) term loan facility (the “Term Facility”) the terms of which are set forth in a term loan agreement, among the borrower, the Company, asparent guarantor and ING Bank. The Company has entered into a parent guarantee in favor of ING Bank also dated January 26, 2018 to secure allpresent and future obligations of the borrower under the Term Loan Agreement. The Term Facility was used to partially fund the acquisition of PureTechnologies Ltd.. On January 25, 2019, the Company extended the Term Facility for another month and intends to further extend the TermFacility at the next maturity.Commercial PaperOur commercial paper program generally serves as a means of short-term funding and has a combined outstanding limit of $600 million inclusiveof the Five-Year Revolving Credit Facility. As of December 31, 2018 and December 31, 2017, none of the Company's $600 million commercialpaper program was outstanding. We will periodically borrow under this program and may borrow under it in future periods.Note 15. Postretirement Benefit PlansDefined contribution plans – Xylem and certain of our subsidiaries maintain various defined contribution savings plans, which allow employeesto 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 apercentage of the employee contributions up to certain limits, generally between 3.0% – 7.0% of employee eligible pay. Matching obligations, themajority of which were funded in cash in connection with the plans, and other company contributions are as follows:(in millions)Defined Contribution2018$39201738201635The Xylem Stock Fund, an investment option under the defined contribution plan in which Company employees participate is considered anEmployee Stock Ownership Plan. As a result, participants in the Xylem Stock Fund may receive dividends in cash or may reinvest such dividendsinto the Xylem Stock Fund. Company employees held approximately 328 thousand and 344 thousand shares of Xylem Inc. common stock in theXylem Stock Fund at December 31, 2018 and 2017, respectively.Defined benefit pension plans and other postretirement plans – We historically have maintained qualified and nonqualified defined benefitretirement plans covering certain current and former employees, including hourly and union plans as well as salaried plans, which generally requireup 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, finalpay, or final average pay. The other postretirement benefit plans are all unfunded plans in the U.S. and Canada.During 2018 and 2017, we made several amendments to plans that had no material impact to the Company's financial statements.92Amounts recognized in the Consolidated 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 postretirementplans, the presentation of such balances and a summary of amounts recorded within accumulated other comprehensive income.(in millions)December 31, 2018 December 31, 2017 Pension Other Total Pension Other TotalFair value of plan assets$567 $— $567 $628 $— $628Projected benefit obligation(862) (52) (914) (950) (55) (1,005)Funded status$(295) $(52) $(347) $(322) $(55) $(377)Amounts recognized in the balancesheet Other non-current assets$68 $— $68 $81 $— $81Accrued and other current liabilities(12) (3) (15) (13) (3) (16)Accrued postretirement benefits(351) (49) (400) (390) (52) (442)Net amount recognized$(295) $(52) $(347) $(322) $(55) $(377)Accumulated other comprehensiveincome (loss): Net actuarial losses$(260) $(24) $(284) $(251) $(24) $(275)Prior service credit(4) 12 8 (1) 12 11Total$(264) $(12) $(276) $(252) $(12) $(264)The unrecognized amounts recorded in accumulated other comprehensive income will be subsequently recognized as expense on a straight-linebasis only to the extent they exceed 10% of the higher of the market-related value or the projected benefit obligation, over the average remainingservice 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 decreasesin other comprehensive income, net of tax.The net actuarial loss included in accumulated other comprehensive income at the end of 2018 and expected to be recognized in net periodicbenefit cost during 2019 is $12 million ($9 million, net of tax). The prior service credit included in accumulated other comprehensive income to berecognized in 2019 is $4 million ($3 million, net of tax).93The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated financial statements for our definedbenefit domestic and international pension plans were: Domestic Plans International Plans December 31, December 31,(in millions)2018 2017 2018 2017Change in benefit obligation: Benefit obligation at beginning of year$107 $100 $843 $754Service cost3 3 9 12Interest cost4 4 19 21Benefits paid(5) (5) (36) (30)Actuarial loss (gain)(10) 5 (20) 10Plan amendments, settlements and curtailments— 1 3 (2)Foreign currency translation/other— (1) (55) 78Benefit obligation at end of year$99 $107 $763 $843Change in plan assets: Fair value of plan assets at beginning of year$84 69 $544 $493Employer contributions22 10 16 20Actual return on plan assets(4) 10 (20) 21Benefits paid(5) (5) (36) (30)Plan amendments, settlements and curtailments— — — (3)Foreign currency translation/other— — (34) 43Fair value of plan assets at end of year$97 $84 $470 $544Unfunded status of the plans$(2) $(23) $(293) $(299)The following table provides a rollforward of the projected benefit obligation for the other postretirement employee benefit plans:(in millions)2018 2017Change in benefit obligation: Benefit obligation at beginning of year$55 $64Service cost— 1Interest cost2 2Benefits paid(3) (3)Actuarial gain/(loss)1 (5)Plan Amendment and other(3) (4)Benefit obligation at the end of year$52 $55The accumulated benefit obligation (“ABO”) for all the defined benefit pension plans was $829 million and $916 million at December 31, 2018 and2017, respectively.For defined benefit pension plans in which the ABO was in excess of the fair value of the plans’ assets, the projected benefit obligation, ABO andfair value of the plans’ assets were as follows: December 31,(in millions)2018 2017Projected benefit obligation$500 $528Accumulated benefit obligation470 499Fair value of plan assets137 12694The components of net periodic benefit cost for our defined benefit pension plans are as follows: Year Ended December 31,(in millions)2018 2017 2016Domestic defined benefit pension plans: Service cost$3 $3 $3Interest cost4 4 4Expected return on plan assets(7) (6) (5)Amortization of net actuarial loss2 2 2Net periodic benefit cost$2 $3 $4International defined benefit pension plans: Service cost$9 $12 $10Interest cost19 21 21Expected return on plan assets(35) (34) (30)Amortization of net actuarial loss9 9 8Settlement1 1 —Net periodic benefit cost$3 $9 $9Total net periodic benefit cost$5 $12 $13The components of net periodic benefit cost other than the service cost component are included in the line item "other non-operating income(expense), net" in the Consolidated Income Statements.Other changes in assets and benefit obligations recognized in other comprehensive loss, as they pertain to our defined benefit pension plans areas follows: Year Ended December 31,(in millions)2018 2017 2016Domestic defined benefit pension plans: Net (gain) loss$1 $1 $(1)Prior service cost— 1 —Amortization of net actuarial loss(2) (2) (2)(Gains) losses recognized in other comprehensive loss$(1) $— $(3)International defined benefit pension plans: Net (gain) loss$35 $23 $18Prior service credit3 1 (1)Amortization of net actuarial loss(9) (9) (8)Settlement(1) (1) —Foreign Exchange(15) 19 (20)(Gains) losses recognized in other comprehensive loss$13 $33 $(11)Total (gains) losses recognized in other comprehensive loss$12 $33 $(14)Total (gains) losses recognized in comprehensive income$17 $45 $(1)The components of net periodic benefit cost for other postretirement employee benefit plans are as follows: Year Ended December 31,(in millions)2018 2017 2016Service cost$— $1 $1Interest cost2 2 3Amortization of prior service credit(4) (3) (3)Amortization of net actuarial loss2 2 3Net periodic benefit cost$— $2 $495Other changes in benefit obligations recognized in other comprehensive loss, as they pertain to other postretirement employee benefit plans areas follows: Year Ended December 31,(in millions)2018 2017 2016Net loss (gain)$1 $(5) $3Prior service credit(3) (3) —Amortization of prior service credit4 3 3Amortization of net actuarial loss(2) (2) (3)Foreign Exchange/Other— (1) 1Losses (gains) recognized in other comprehensive loss$— $(8) $4Total losses (gains) recognized in comprehensive income$— $(6) $8AssumptionsThe following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, asthey pertain to our pension plans. 2018 2017 2016 U.S. Int’l U.S. Int’l U.S. Int’lBenefit Obligation Assumptions Discount rate4.50% 2.60% 3.75% 2.43% 4.25% 2.63%Rate of future compensation increaseNM 2.92% NM 2.93% NM 2.76%Net Periodic Benefit Cost Assumptions Discount rate3.75% 2.43% 4.25% 2.63% 4.27% 3.44%Expected long-term return on plan assets8.00% 7.23% 8.00% 7.20% 8.00% 7.25%Rate of future compensation increaseNM 2.93% NM 2.76% NM 3.29%NMNot meaningful. The pension benefits for future service for all the U.S. pension plans are based on years of service and not impacted by futurecompensation increases.Management develops each assumption using relevant company experience in conjunction with market-related data for each individual country inwhich 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, theweight of each asset class in the target mix, the correlations among asset classes and their expected volatilities. The assets of the pension plansare held by a number of independent trustees, managed by several investment institutions and are accounted for separately in the Company’spension funds.Our expected return on plan assets is estimated by evaluating both historical returns and estimates of future returns. Specifically, we analyze theplans’ actual historical annual return on assets, net of fees, over the past 15, 20 and 25 years; estimate future returns based on independentestimates of asset class returns; and evaluate historical broad market returns over long-term timeframes based on our asset allocation range. Forthe U.S. Master Trust which has only existed since 2011, historical returns were estimated using a constructed portfolio that reflects theCompany’s strategic asset allocation and the historical compound geometric returns of each asset class for the longest time period available.Based on this approach, the weighted average expected long-term rate of return for all of our plan assets to be used in determining net periodicbenefit costs for 2019 is estimated at 7.09%.96The table below provides the weighted average actual rate of return generated on all of our plan assets during each of the years presented ascompared to the weighted average expected long-term rates of return utilized in calculating the net periodic benefit costs. 2018 2017 2016Expected long-term rate of return on plan assets7.34 % 7.30% 7.32%Actual rate of return (loss) on plan assets(3.85)% 5.70% 12.20%The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 8.24% for 2019, decreasing ratably to4.48% in 2027. An increase or decrease in the health care trend rates by one percent per year would impact the aggregate annual service andinterest components by less than $1 million, and impact the benefit obligation by approximately $3 million.Investment PolicyThe investment strategy for managing worldwide postretirement benefit plan assets is to seek an optimal rate of return relative to an appropriatelevel 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.On April 3, 2017 the liquid assets in two United Kingdom Plans transitioned into a new fund structure. The restructuring involved transferring aportion of the assets into pooled diversified growth funds, while some investments were sold off and some were kept in place. At December 31,2018, the pooled funds make up 54% of the assets of the two United Kingdom Plans. Liability hedging and illiquid assets remain outside of thisarrangement.The following table provides the actual asset allocations of plan assets as of December 31, 2018 and 2017, and the related asset target allocationranges by asset category. 2018 2017 TargetAllocationRangesEquity securities29.7% 35.6% 10-50%Fixed income24.5% 23.4% 10-40%Hedge funds11.8% 17.0% 0-40%Private equity1.1% 1.6% 0-30%Cash, insurance contracts and other32.9% 22.4% 0-60%Fair Value of Plan AssetsIn measuring plan assets at fair value, the fair value hierarchy is applied which categorizes and prioritizes the inputs used to estimate fair valueinto three levels. See Note 1 "Summary of Significant Accounting Policies" for further detail on fair value hierarchy. In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from thepricing service, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations arerepresentative of fair value, including net asset value ("NAV"). Additionally, in certain circumstances, the NAV reported by an asset manager maybe 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 andexchange traded funds) are generally valued at the closing price reported on the major market on which the individual securities are traded atthe measurement date. Equity securities held by the Company that are publicly traded in active markets are classified within Level 1 of thefair value hierarchy. Those equities that are held in proprietary funds pooled with other investor accounts measured at fair value using the NAVper share practical expedient are not classified in the fair value 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.97discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income securities listed on activemarkets are classified in Level 1. Fixed income held in proprietary funds pooled with other investor accounts measured at fair value using theNAV per share practical expedient are not classified in the fair value hierarchy. Hedging Instruments are collateralized daily with either cash orgovernment bonds, have daily liquidity and pricing based on observable inputs from over-the-counter markets, and are classified as Level 2.•Hedge funds — Hedge funds are pooled funds that employ a range of investment strategies including equity and fixed income, credit driven,macro and multi oriented strategies. The valuation of limited partnership interests in hedge funds may require significant managementjudgment. Generally, hedge funds are valued using the NAV reported by the asset manager, and are adjusted when it is determined that NAVis not representative of fair value. In making such an assessment, a variety of factors is reviewed, including, but not limited to, the timelinessof NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported bythe asset manager. All of the hedge funds held have lockups and/or gates. Hedge funds have unfunded commitments of $0 million and $5million at December 31, 2018 and 2017, respectively.•Private equity — Private equity includes a diversified range of strategies, including buyout funds, distressed funds, venture and growth equityfunds and mezzanine funds with long-term commitments, and redemptions beginning no earlier than 2018. The valuation of limited partnershipinterests in private equity funds may require significant management judgment. Generally, private equity is valued using the NAV reported bythe asset manager, and is adjusted when it is determined that NAV is not representative of fair value. In making such an assessment, avariety of factors is reviewed, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in generaleconomic and market conditions subsequent to the last NAV reported by the asset manager. Private equity is not liquid and has unfundedcommitments of $3 million and $4 million at December 31, 2018 and 2017, respectively.•Cash, insurance contracts and other — Primarily comprised of insurance contracts and cash. Insurance contracts are valued at contractvalue, which approximates fair value, and is calculated using the prior year balance adjusted for investment returns and cash flows and aregenerally classified as Level 3. Insurance contracts are held by certain foreign pension plans. Cash and cash equivalents are held in accountswith brokers or custodians for liquidity and investment collateral and are classified as Level 1.98The following table provides the fair value of plan assets held by our pension benefit plans by asset class. 2018 2017(in millions)Level 1Level 2Level 3NAV PracticalExpedientTotal Level 1Level 2Level 3NAV PracticalExpedientTotalEquity securities Global stockfunds/securities$88$—$—$29$117 $101$—$—$29$130Index funds———11 ———33Diversified Growth andIncome Funds———5151 ———9292Fixed income Corporate bonds34——2559 24——832Government bonds31——2051 48——553Hedging Instruments522——27 536——41Diversified Growth andIncome Funds———22 ———2020Hedge funds———6767 ———107107Private equity———66 ———1010Cash, insurance contractsand other104—1270186 90—1733140Total plan assetssubject to leveling$262$22$12$271$567 $268$36$17$307$628The following table presents a reconciliation of the beginning and ending balances of fair value measurement within our pension plans usingsignificant unobservable inputs (Level 3).(in millions) Insurance Contracts andOtherBalance, December 31, 2016 $24Purchases, sales, settlements (8)Currency impact 1Balance, December 31, 2017 $17Purchases, sales, settlements (5)Currency impact —Balance, December 31, 2018 $12Contributions and Estimated Future Benefit PaymentsFunding requirements under governmental regulations are a major consideration in making contributions to our postretirement plans. We madecontributions of $41 million and $33 million to our pension and postretirement defined benefit plans during 2018 and 2017, respectively.Discretionary contributions were made to the U.S. Plan in the third quarter of 2017 for $6 million and the third quarter of 2018 for $19 million toincrease the funding ratio and reduce regulatory fees. We currently anticipate making contributions to our pension and postretirement definedbenefit plans in the range of $15 million to $25 million during 2019, of which approximately $5 million is expected to be made in the first quarter.99The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:(in millions)Pension Other Benefits2019$35 $3202036 4202136 4202237 4202339 4Years 2023 - 2027205 19Note 16. Stock-Based Compensation PlansOur 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 compensationprogram in connection with their service on our board. Share-based awards issued to employees include non-qualified stock options, restrictedstock unit awards and performance share unit awards. Under the 2011 Omnibus Incentive Plan, the number of shares initially available for awardswas 18 million. As of December 31, 2018, there were approximately 6 million shares of common stock available for future grants.Total share-based compensation costs recognized for 2018, 2017 and 2016 were $30 million, $21 million, and $18 million, respectively. Theunamortized compensation expense at December 31, 2018 related to our stock options, restricted share units and performance share units was $6million, $20 million and $16 million, respectively, and is expected to be recognized over a weighted average period of 1.8, 1.9 and 1.7 years,respectively.The amount of cash received from the exercise of stock options was $7 million for 2018 with a tax benefit of $11 million realized associated withstock option exercises and vesting of restricted stock units. We classify as an operating activity the cash flows attributable to excess tax benefitsarising from stock option exercises and restricted stock unit vestings.Stock Option GrantsOptions are awarded with a contractual term of ten years and generally vest over a three-year period and are exercisable within the contractualterm, except in certain instances of death, retirement or disability. The exercise price per share is the fair market value of the underlying commonstock on the date each option is granted. At December 31, 2018, there were options to purchase an aggregate of 2.1 million shares of commonstock. The following is a summary of the changes in outstanding stock options for 2018: Shareunits (inthousands) WeightedAverageExercisePrice / Share Weighted AverageRemainingContractualTerm (Years) Aggregate IntrinsicValue (in millions)Outstanding at January 1, 20182,076 $37.44 7.0 Granted316 $75.11 Exercised(214) $34.08 Forfeited and expired(53) $49.36 Outstanding at December 31, 20182,125 $43.08 6.5 $53Options exercisable at December 31, 20181,403 $35.46 5.5 $44Vested and non-vested expected to vest as of December 31, 20182,065 $42.37 6.4 $53The amount of non-vested options outstanding was 0.7 million, 0.9 million and 1.0 million at a weighted average fair value of $58.00, $42.84 and$37.10 as of December 31, 2018, 2017 and 2016, respectively. The total intrinsic value of options exercised (which is the amount by which thestock price exceeded the exercise price of the options on the date of exercise) during 2018, 2017 and 2016 was $9 million, $14 million and $12million, respectively.100The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple andvariable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. Thefollowing are weighted-average assumptions used for 2018, 2017, and 2016: 2018 2017 2016Dividend yield1.12% 1.49% 1.63%Volatility23.41% 25.39% 28.87%Risk-free interest rate2.76% 2.07% 1.41%Expected term (in years)5.1 5.10 5.60Weighted-average fair value per option$17.80 $10.66 $9.05Expected volatility is calculated based on a weighted analysis of historic and implied volatility measures for a set of peer companies and Xylem.We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and optioncharacteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options areexpected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.Restricted Stock Unit GrantsRestricted shares granted to employees in 2018 vest over a three-year period. Restricted shares granted to employees prior to 2017 generallybecome fully vested upon the third anniversary of the date of grant. Prior to the time a restricted share becomes fully vested, the awardees cannottransfer, pledge, hypothecate or encumber such shares. Prior to the time a restricted share is fully vested, the awardees do not have certain rightsof a stockholder, such as the right to vote and receive dividends; however, dividends accrue during the vesting period and are paid upon vesting. Ifan employee leaves prior to vesting, whether through resignation or termination for cause, the restricted stock unit and related accrued dividendsare forfeited. If an employee retires, a pro rata portion of the restricted stock unit may vest in accordance with the terms of the grant agreements.Restricted stock units granted to Board members become fully vested upon the day prior to the next annual meeting. The fair value of therestricted share unit awards is determined using the closing price of our common stock on date of grant.Our restricted stock units activity was as follows for 2018: Share Units (inthousands) Weighted AverageGrant Date FairValue / ShareOutstanding at January 1, 2018779 $35.39Granted274 74.81Vested(458) 40.39Forfeited(58) 53.09Outstanding at December 31, 2018537 59.41Performance Share UnitsPerformance share units granted under the long-term incentive plan vest based upon performance by the Company over a three-year periodagainst targets approved by the Compensation Committee of the Company's Board of Directors prior to the grant date. For the performanceperiods, the performance share units were granted at a target of 100% with actual payout contingent upon the achievement of a pre-set, three-yearadjusted Return on Invested Capital and cumulative adjusted net income performance target for ROIC performance share units and a relative TSRperformance for TSR performance share units. The calculated compensation cost for ROIC performance share units is adjusted based on anestimate of awards ultimately expected to vest and our assessment of the probable outcome of the performance condition.ROIC Performance Share Unit GrantsThe fair value of the ROIC performance share unit awards is determined using the closing price of our common stock on date of grant.101Our ROIC performance share unit activity was as follows for 2018: Share units (in thousands) Weighted AverageGrant Date FairValue / ShareOutstanding at January 1, 2018298 $41.48Granted77 75.12Forfeited(101) 38.39Outstanding at December 31, 2018274 52.11TSR Performance Share Unit GrantsThe following is a summary of our TSR performance share unit grants for 2018. Share units (inthousands) WeightedAverageGrant DateFair Value /ShareOutstanding at January 1, 2018213 $47.04Granted77 98.86Forfeited(16) 51.39Outstanding at December 31, 2018274 61.04The fair value of TSR performance share units were calculated on the date of grant using a Monte Carlo simulation model utilizing several keyassumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate ofreturn, the expected dividend yield and other award design features. The following are weighted-average key assumptions for 2018 grants.Volatility26.80%Risk-free interest rate2.44%Note 17. Capital StockThe Company has the authority to issue an aggregate of 750 million shares of common stock having a par value of $0.01 per share. Thestockholders of Xylem common stock are entitled to receive dividends as declared by the Xylem Board of Directors. Dividends declared were$0.8400, $0.7200 and $0.6196 during 2018, 2017 and 2016, respectively.The changes in shares of common stock outstanding for the three years ended December 31 are as follows:(share units in thousands)2018 2017 2016Beginning Balance, January 1179,862 179,367 178,377Stock incentive plan net activity672 985 1,085Repurchase of common stock(810) (490) (95)Ending Balance, December 31179,724 179,862 179,367For the years ended December 31, 2018 and December 31, 2017 the Company repurchased 0.8 million shares for $59 million of common stockand repurchased 0.5 million shares for $25 million of common stock, respectively. Repurchases include both share repurchase programsapproved by the Board of Directors and repurchases in relation to settlement of employee income tax withholding obligations due as a result of thevesting of restricted stock units. The detail of repurchases by each program are as follows:On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program'sobjective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. For the year ended December 31,2018 we repurchased 0.7 million shares for $50 million. For the year ended December 31, 2017 we repurchased 0.1 million shares for $7 million.There are up to $363 million in shares that may still be purchased under this plan as of December 31, 2018.102On August 18, 2012, the Board of Directors authorized the repurchase of up to 2.0 million shares of common stock with no expiration date. Theprogram's objective is to offset dilution associated with various Xylem employee stock plans by acquiring shares in the open market from time totime. For the year ended December 31, 2017 we repurchased 0.3 million shares for $13 million. As of June 2017, we have exhausted theauthorized amount to repurchase shares under this plan.Aside from the aforementioned repurchase programs, we repurchased 0.1 million and 0.1 million shares for $9 million and $5 million during 2018and 2017, respectively, in relation to settlement of employee income tax withholding obligations due as a result of the vesting of restricted stockunits. These repurchases are included in the stock incentive plan net activity in the above table.103Note 18. Accumulated Other Comprehensive LossThe following table provides the components of accumulated other comprehensive loss for 2018, 2017 and 2016:(in millions)Foreign CurrencyTranslation Postretirement BenefitPlans Derivative Instruments TotalBalance at January 1, 2016$(43) $(185) $(10) $(238)Foreign currency translation adjustment(65) (65)Foreign currency gain reclassified into gain on sale ofbusiness(21) (21)Changes in postretirement benefit plans (19) (19)Income tax expense on changes in postretirement benefitplans 3 3Foreign currency translation adjustment for postretirementbenefit plans 19 19Amortization of prior service cost and net actuarial loss onpostretirement benefit plans into other non-operating income(expense), net 10 10Income tax impact on amortization of postretirement benefitplan items (5) (5)Reclassification of unrealized loss on derivative hedgeagreements into revenue (2) (2)Reclassification of unrealized loss on derivative hedgeagreements into cost of revenue(11) 11 —Balance at December 31, 2016$(140) $(177) $(1) $(318)Foreign currency translation adjustment79 79Income tax impact on foreign currency translationadjustment46 46Changes in postretirement benefit plans (18) (18)Income tax expense on changes in postretirement benefitplans 7 7Foreign currency translation adjustment for postretirementbenefit plans (18) (18)Amortization of prior service cost and net actuarial loss onpostretirement benefit plans into other non-operating income(expense), net 11 11Income tax impact on amortization of postretirement benefitplan items (3) (3)Unrealized loss on derivative hedge agreements 9 9Reclassification of unrealized (gain) loss on foreignexchange agreements into revenue (6) (6)Reclassification of unrealized (gain) loss on foreignexchange agreements into cost of revenue— 1 1Balance at December 31, 2017$(15) $(198) $3 $(210)104(in millions)Foreign CurrencyTranslation Postretirement BenefitPlans Derivative Instruments TotalCumulative effect of change in accounting principle(11) (6) (17)Foreign currency translation adjustment(83) (83)Income tax impact on foreign currency translationadjustment(12) (12)Changes in postretirement benefit plans (36) (36)Foreign currency translation adjustment for postretirementbenefit plans 15 15Income tax expense on changes in postretirement benefitplans 5 5Amortization of prior service cost and net actuarial loss onpostretirement benefit plans into other non-operating income(expense), net 9 9Income tax impact on amortization of postretirement benefitplan items (3) (3)Unrealized loss on derivative hedge agreements (8) (8)Reclassification of unrealized (gain) loss on foreignexchange agreements into cost of revenue 4 4Balance at December 31, 2018$(121) $(214) $(1) $(336)Note 19. Commitments and ContingenciesLegal ProceedingsFrom time to time we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the businessoperations of previously owned entities). These proceedings may seek remedies relating to environmental matters, tax, intellectual propertymatters, acquisitions or divestitures, product liability and personal injury claims, privacy, employment, labor and pension matters, governmentcontract issues and commercial or contractual disputes.From time to time claims may be asserted against Xylem alleging injury caused by any of our products resulting from asbestos exposure. Webelieve there are numerous legal defenses available for such claims and would defend ourselves vigorously. Pursuant to the DistributionAgreement among ITT Corporation (now ITT LLC), Exelis and Xylem, ITT Corporation (now ITT LLC) has an obligation to indemnify, defend andhold Xylem harmless for asbestos product liability matters, including settlements, judgments, and legal defense costs associated with all pendingand future claims that may arise from past sales of ITT’s legacy products.Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment ofthe merits of the particular claims, we do not expect that any asserted or unasserted legal claims or proceedings, individually or in the aggregate,will have a material adverse effect on our results of operations, or financial condition.We have estimated and accrued $7 million and $10 million as of December 31, 2018 and 2017, respectively for these general legal matters.IndemnificationsAs part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC), Exelis Inc. and Xylem will indemnify, defend and hold harmlesseach of the other parties with respect to such parties’ assumed or retained liabilities under the Distribution Agreement and breaches of theDistribution Agreement or related spin agreements. The former parent’s indemnification obligations include asserted and unasserted asbestos andsilica liability claims that relate to the presence or alleged presence of asbestos or silica in products manufactured, repaired or sold prior toOctober 31, 2011, the Distribution Date, subject to limited exceptions with respect to certain employee claims, or in the structure or material of anybuilding or facility, subject to exceptions with respect to employee claims relating to Xylem buildings or facilities. The indemnification associatedwith pending and future asbestos claims does not expire. Xylem has not recorded a liability for material matters for which we expect to beindemnified by the former105parent or Exelis Inc. through the Distribution Agreement and we are not aware of any claims or other circumstances that would give rise to materialpayments from us under such indemnifications. On May 29, 2015, Harris Inc. acquired Exelis. As the parent of Exelis, Harris Inc. is responsiblefor Exelis’s indemnification obligations under the Distribution Agreement.GuaranteesWe obtain certain stand-by letters of credit, bank guarantees and surety bonds from third-party financial institutions in the ordinary course ofbusiness when required under contracts or to satisfy insurance related requirements. As of December 31, 2018, the amount of stand-by letters ofcredit, bank guarantees and surety bonds was $275 million. EnvironmentalIn the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, orare alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in variousstages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notificationfrom the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly orcurrently owned and/or operated by Xylem or for which we are responsible under the Distribution Agreement, and other properties or water suppliesthat may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmentalinvestigation and/or remediation. These sites include instances where we have been identified as a potentially responsible party under federal andstate 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 theliability can be reasonably estimated, based on current law and existing technologies. Our accrued liabilities for these environmental mattersrepresent 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 andremediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on anundiscounted basis. We have estimated and accrued $4 million and $4 million as of December 31, 2018 and 2017, respectively, for environmentalmatters.It is difficult to estimate the final costs of investigation and remediation due to various factors, including incomplete information regarding particularsites and other potentially responsible parties, uncertainty regarding the extent of investigation or remediation and our share, if any, of liability forsuch conditions, the selection of alternative remedial approaches, and changes in environmental standards and regulatory requirements. Webelieve the total amount accrued is reasonable based on existing facts and circumstances.Operating LeasesWe lease certain offices, manufacturing buildings, machinery, computers and other equipment. We often pay maintenance, insurance and taxexpense related to leased assets. Total rent expense for the three years ended December 31, 2018 was as follows:(in millions)Total2018$81201770201663At December 31, 2018, we are obligated to make minimum rental payments under operating leases which are as follows:(in millions)2019 2020 2021 2022 2023 ThereafterMinimum rental payments$76 $61 $43 $33 $22 $64106WarrantiesWe warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and specific non-performance.Warranty expense was $20 million, $28 million, and $32 million for 2018, 2017 and 2016, respectively. The table below provides changes in thecombined current and non-current product warranty accruals over each period.(in millions)2018 2017Warranty accrual – January 1$82 $99Net charges for product warranties in the period20 28Settlement of warranty claims(42) (48)Foreign currency and other— 3Warranty accrual – December 31$60 $82Note 20. Related Party TransactionsSales to and purchases from unconsolidated entities for 2018, 2017 and 2016 are as follows:(in millions) 2018 2017 2016Sales to unconsolidated affiliates $10 $12 $11Purchases from unconsolidated affiliates 22 17 22107Note 21. Segment and Geographic DataOur business has three reportable segments: Water Infrastructure, Applied Water and Measurement & Control Solutions. When determining thereportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics. The WaterInfrastructure segment focuses on the transportation and treatment of water, offering a range of products including water and wastewater pumps,treatment equipment, and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on theresidential, commercial and industrial markets. The Applied Water segment's major products include pumps, valves, heat exchangers, controlsand dispensing equipment. The Measurement & Control Solutions segment focuses on developing advanced technology solutions that enableintelligent use and conservation of critical water and energy resources as well as analytical instrumentation used in the testing of water. TheMeasurement & Control Solutions segment's major products include smart metering, networked communications, measurement and controltechnologies, critical infrastructure technologies, software and services including cloud-based analytics, remote monitoring and data management,leak detection and pressure monitoring solutions and testing equipment.The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1). Thefollowing tables contain financial information for each reportable segment: Year Ended December 31,(in millions)2018 2017 2016Revenue: Water Infrastructure$2,176 $2,004 $1,932Applied Water1,534 1,421 1,393Measurement & Control Solutions1,497 1,282 446Total$5,207 $4,707 $3,771Operating income: Water Infrastructure$359 $312 $295Applied Water236 194 188Measurement & Control Solutions118 110 —Corporate and other(59) (64) (75)Total operating income654 552 408Interest expense82 82 70Other non-operating income (expense)13 6 2(Loss)/gain from sale of businesses— (10) —Income before taxes$585 $466 $340Depreciation and amortization: Water Infrastructure$66 $64 $66Applied Water22 23 24Measurement & Control Solutions144 122 41Regional selling locations (a)20 17 11Corporate and other9 8 9Total$261 $234 $151Capital expenditures: Water Infrastructure$84 $58 $62Applied Water28 20 21Measurement & Control Solutions101 69 13Regional selling locations (b)16 18 24Corporate and other8 5 4Total$237 $170 $124108(a)Depreciation and amortization expense incurred by the Regional selling locations was included in an overall allocation of Regional selling locationcosts to the segments; however, a certain portion of that expense was not specifically identified to a segment. That is the expense captured in thisRegional selling location line.(b)Represents capital expenditures incurred by the Regional selling locations not allocated to the segments.The following table illustrates revenue by product category, net of intercompany revenue. Year Ended December 31,(in millions)2018 2017 2016Pumps, accessories, parts and service$3,322 $2,998 $2,888Other (a)1,885 1,709 883Total$5,207 $4,707$3,771(a)Other includes treatment equipment, analytical instrumentation, heat exchangers, valves, controls and smart meters.The following table contains the total assets for each reportable segment as of December 31, 2018, 2017 and 2016. Total Assets(in millions)2018 2017 2016Water Infrastructure$1,233 $1,232 $1,179Applied Water1,051 1,002 990Measurement & Control Solutions3,576 3,198 3,102Regional selling locations (a)1,181 1,119 965Corporate and other (b)181 309 238Total$7,222 $6,860 $6,474(a)The Regional selling locations have assets that consist primarily of cash, accounts receivable and inventory which are not allocated to the segments.(b)Corporate and other consists of items pertaining to our corporate headquarters function, which principally consist of cash, deferred tax assets, pensionassets and certain plant and equipment.Geographical InformationRevenue is attributed to countries based upon the location of the customer. Property, Plant & Equipment is attributed to countries based upon thelocation of the assets. Revenue Year Ended December 31,(in millions)2018 2017 2016United States$2,424 $2,161 $1,574Europe1,449 1,335 1,195Asia Pacific660 611 518Other674 600 484Total$5,207 $4,707 $3,771 Property, Plant & Equipment December 31,(in millions)2018 2017 2016United States$281 $258 $255Europe250 259 237Asia Pacific66 85 87Other59 41 37Total$656 $643 $616109Note 22. Valuation and Qualifying AccountsThe table below provides changes in the allowance for doubtful accounts over each period.(in millions)2018 2017 2016Balance at beginning of year$25 $21 $22Additions charged to expense5 5 4Deductions/other(5) (1) (5)Balance at end of year$25 $25 $21Note 23. Quarterly Financial Data (Unaudited)Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, exceptfor the fourth quarter which ends on December 31. 2018 Quarter Ended(in millions, except per share amounts) Dec. 31 Sept. 30 June 30 Mar. 31 Revenue $1,386 $1,287 $1,317 $1,217Gross profit 542 505 519 460Operating income 194 176 171 113Net income attributable to Xylem $225 $130 $115 $79Earnings per share:Basic $1.25 $0.73 $0.64 $0.44Diluted $1.24 $0.72 $0.64 $0.43 2017 Quarter Ended(in millions, except per share amounts) Dec. 31 Sept. 30 June 30 Mar. 31 Revenue $1,277 $1,195 $1,164 $1,071Gross profit 507 471 457 412Operating income 177 152 137 86Net income attributable to Xylem $71 $105 $99 $56Earnings per share:Basic $0.40 $0.58 $0.55 $0.31Diluted $0.40 $0.58 $0.55 $0.31ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the Company, has evaluated the effectivenessof the design and operation of our disclosure controls and procedures as of the end of the year ended December 31, 2018 pursuant to Rule 13a-15(b) and 15d-15(e) of the Securities Exchange Act of 1934 (“the Exchange Act”). Based upon that evaluation, our CEO and our CFO concludedthat our disclosure controls and procedures as of the year ended December 31, 2018 were effective, in all material respects, and designed toprovide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (1)recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (2) accumulated andcommunicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.Management's Annual Report on Internal Control Over Financial Reporting110As required by the SEC's rules and regulations for the implementation of Section 404 of the Sarbanes-Oxley Act, the Company's management isresponsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.The Company's management, including the CEO and CFO, conducted an assessment of the effectiveness of our internal control over financialreporting as of December 31, 2018 based on the framework established in Internal Control - Integrated Framework issued by the Committee ofSponsoring Organization of the Treadway Commission (2013). This assessment included an evaluation of the design of our internal control overfinancial reporting and testing of the operational effectiveness of those controls. Based on our assessment, the Company's management hasconcluded that our internal control over financial reporting was effective as of December 31, 2018. Management's assessment of the effectivenessof the Company's internal control over financial reporting as of December 31, 2018 excluded Pure Technologies Ltd. ("Pure"), which was acquiredby the Company on January 31, 2018. Pure is a wholly-owned subsidiary of the Company whose total assets and total net sales represented lessthan 6% of consolidated total assets and less than 2% of consolidated net sales, respectively, of the Company as of and for the year endedDecember 31, 2018. As permitted by guidelines established by the Securities and Exchange Commission, companies are allowed to excludecertain acquisitions from their assessments of internal control over financial reporting during the first year of an acquisition while integrating theacquired companies.The effectiveness of the Company's internal control over financial reporting as of December 31, 2018 has been audited by Deloitte & Touche LLP,an independent registered public accounting firm, as stated in their report which appears following Item 9B of this Annual Report on Form 10-K.Changes in Internal Control Over Financial ReportingThere were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2018 thathave materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNone111REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors ofXylem Inc.Rye Brook, New YorkOpinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Xylem Inc. and subsidiaries (the "Company") as ofDecember 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theconsolidated financial statements as of and for the year ended December 31, 2018, and the related notes (collectively referred to as the “financialstatements”), of the Company and our report dated February 22, 2019, expressed an unqualified opinion on those financial statements.As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internalcontrol over financial reporting at Pure Technologies (“Pure”), which was acquired on January 31, 2018 and whose financial statements constituteless than 6% and 2% of total assets and total revenue, respectively, of the consolidated financial statement amounts as of and for the year endedDecember 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at Pure.Basis of OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a publicaccounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federalsecurities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition ofthe company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.112/s/ Deloitte & Touche LLPStamford, ConnecticutFebruary 22, 2019113PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this Item is incorporated herein by reference to the information in our Definitive Proxy Statement to be filed with theSEC in connection with our 2019 Annual Meeting of Shareholders (the “2019 Proxy Statement”) under the captions “Proposal 1 - Election ofDirectors,” "Identifying and Evaluating Director Nominees," "Board Committees - Audit Committee" and “Section 16(a) Beneficial OwnershipReporting Compliance.”The information called for by Item 10 with respect to executive officers is set forth in Part I of this Report under the caption “Executive Officers ofthe Registrant” and is incorporated by reference in this section.We have adopted corporate governance principles and charters for each of our board committees. The principles address director qualificationstandards, responsibilities, access to management and independent advisors, compensation, orientation and continuing education, successionplanning and board and committee self-evaluation. The corporate governance principles and board committee charters are available on theCompany’s website at www.investors.xyleminc.com. A copy of the corporate governance principles and board committee charters are alsoavailable to any shareholder who requests a copy from the Company’s Corporate Secretary at our Principal Executive Offices.We have also adopted a written code of conduct which is applicable to all of our directors, officers and employees, including the Company’s ChiefExecutive Officer and Chief Financial Officer and other executive officers identified pursuant to this Item 10. In accordance with the SEC’s rulesand regulations, a copy of the Code of Conduct has been posted to our website and it is also available to any shareholder who requests a copyfrom the Company's Corporate Secretary. We intend to disclose any changes in our Code of Conduct and waivers of the Code of Conduct on ourwebsite at www.xylem.com within four business days following the date of the amendment or waiver.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item is incorporated herein by reference to the information in our 2019 Proxy Statement set forth under captions“Executive Compensation," "Director Compensation", "Board Committees - Leadership Development and Compensation Committee" and“Leadership Development and Compensation Committee Report.”ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this Item is incorporated herein by reference to the information in our 2019 Proxy Statement set forth under thecaptions “Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners” and "Equity Compensation Plan Information."ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this Item is incorporated herein by reference to the information in our 2019 Proxy Statement set forth under thecaptions "Governance - Director Independence" and “Governance - Related Party Transactions.” ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this Item is incorporated herein by reference to the information in our 2019 Proxy Statement set forth under thecaptions “Fees of Audit and Other Services Fees” and "Pre-Approval of Audit and Non-Audit Services."114PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a)(1)The Index to Consolidated Financial Statements of the Registrant under Item 8 of this Report is incorporated herein by reference asthe list of Financial Statements required as part of this Report. (2)Financial Statement Schedules — All financial statement schedules have been omitted because they are not applicable or therequired information is shown in the financial statements or notes thereto. (3)Exhibits — See exhibits listed under Part (b) below.EXHIBIT INDEXExhibitNumber DescriptionLocation 2.1 Distribution Agreement, dated as of October 25, 2011, amongITT Corporation, Exelis Inc. and Xylem Inc.Incorporated by reference to Exhibit 10.1 of ITT Corporation’s Form10-Q Quarterly Report filed on October 28, 2011 (CIK No. 216228,File No. 1-5672). 2.2 Share Purchase Agreement, dated as of August 15, 2016, byand among Xylem Inc., Xylem Luxembourg S.à r.l., SensusWorldwide Limited, Sensus Industries Limited, and SensusUSA Inc.Incorporated by reference to Exhibit 2.1 to Xylem Inc.’s CurrentReport on Form 8-K filed on August 15, 2016 (CIK No. 1524472, FileNo. 1-35229). 2.3 First Amendment to Share Purchase Agreement, dated as ofOctober 31, 2016, by and among Xylem Inc., XylemLuxembourg S.à r.l., Sensus Worldwide Limited, SensusIndustries Limited, and Sensus USA Inc.Incorporated by reference to Exhibit 2.2 to Xylem Inc.’s CurrentReport on Form 8-K filed on November 1, 2016 (CIK No. 1524472,File No. 1-35229). 3.1 Fourth Amended and Restated Articles of Incorporation ofXylem Inc.Incorporated by reference to Exhibit 3.1 of Xylem Inc.’s Form 8-Kfiled on May 15, 2017 (CIK No. 1524472, File No. 1-35229). 3.2 Fourth Amended and Restated By-laws of Xylem Inc.Incorporated by reference to Exhibit 3.1 of Xylem Inc.’s Form 8-Kfiled on May 15, 2017 (CIK No. 1524472, File No. 1-35229). 4.1 Indenture, dated as of September 20, 2011, between XylemInc., ITT Corporation, as initial guarantor, and Union Bank,N.A., as trustee.Incorporated by reference to Exhibit 4.2 of ITT Corporation’s Form8-K Current Report filed on September 21, 2011 (CIK No. 216228,File No. 1-5672). 4.2 Senior Indenture, dated March 11, 2016, by and between theCompany and Deutsche Bank Trust Company Americas, astrustee.Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-Kfiled on March 11, 2016 (CIK No. 1524472, File No. 1-35229). 4.3 First Supplemental Indenture, dated March 11, 2016, by andbetween the Company and Deutsche Bank Trust CompanyAmericas, as trustee.Incorporated by reference to Exhibit 4.2 of Xylem Inc.’s Form 8-Kfiled on March 11, 2016 (CIK No. 1524472, File No. 1-35229) 4.4 Second Supplemental Indenture, dated March 11, 2016, byand between the Company and Deutsche Bank TrustCompany Americas, as trustee.Incorporated by reference to Exhibit 4.3 of Xylem Inc.’s Form 8-Kfiled on March 11, 2016 (CIK No. 1524472, File No. 1-35229). 4.5 Third Supplemental Indenture, dated October 11, 2016, by andbetween the Company and Deutsche Bank Trust CompanyAmericas, as trustee.Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-Kfiled on October 11, 2016 (CIK No. 1524472, File No. 1-35229). 4.6 Form of Xylem Inc. 4.875% Senior Notes due 2021.Incorporated by reference to Exhibit 4.6 of Xylem Inc.'s Form S-4Registration Statement filed on May 24, 2012 (CIK No. 1524472,File No. 333-181643). 115ExhibitNumber DescriptionLocation4.7 Form of Xylem Inc. 2.250% Senior Notes due 2023.Incorporated by reference to Exhibit 4.3 of Xylem Inc.’s CurrentReport on Form 8-K dated March 11, 2016 (CIK No. 1524472, FileNo. 1-35229). 4.8 Form of Xylem Inc. 3.250% Senior Notes due 2026.Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-Kfiled on October 11, 2016 (CIK No. 1524472, File No. 1-35229). 4.9 Form of Xylem Inc. 4.375% Senior Notes due 2046.Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-Kfiled on October 11, 2016 (CIK No. 1524472, File No. 1-35229). 10.1#Form of Xylem 2011 Omnibus Incentive Plan Non-QualifiedStock Option Award Agreement (2015).Incorporated by reference to Exhibit 10.1 of Xylem Inc.’s Form 10-KAnnual Report filed on February 26, 2015 (CIK No. 1524472, FileNo. 1-35229). 10.3 Tax Matters Agreement, dated as of October 25, 2011, amongITT Corporation, Exelis Inc. and Xylem Inc.Incorporated by reference to Exhibit 10.3 of ITT Corporation’s Form10-Q Quarterly Report filed on October 28, 2011 (CIK No. 216228,File No. 1-5672). 10.5 Five-Year Revolving Credit Facility Agreement, dated as ofMarch 27, 2015, among Xylem Inc., the Lenders NamedTherein, Citibank, N.A., as Administrative Agent and J.P.Morgan Chase Bank, N.A., as Syndication Agent.Incorporated by reference to Exhibit 10.1 of Xylem Inc.'s Form 8-Kfiled on March 31, 2015 (CIK No. 1524472, File No. 1-35229). 10.6#Xylem 2011 Omnibus Incentive Plan (Amended as ofFebruary 24, 2016).Incorporated by reference to Exhibit 10.6 of Xylem Inc.'s Form 10-Kfiled on February 26, 2016 (CIK No. 1524472, File No. 1-35229). 10.7#Form of Xylem Non-Qualified Stock Option Award Agreement(Amended as of February 24, 2016).Incorporated by reference to Exhibit 10.7 of Xylem Inc.'s Form 10-Kfiled on February 26, 2016 (CIK No. 1524472, File No. 1-35229). 10.8#Form of Xylem Restricted Stock Unit Agreement (Amendedas of February 24, 2016).Incorporated by reference to Exhibit 10.8 of Xylem Inc.'s Form 10-Kfiled on February 26, 2016 (CIK No. 1524472, File No. 1-35229). 10.9#Form of Xylem Performance Share Unit Agreement (Amendedas of February 24, 2016).Incorporated by reference to Exhibit 10.9 of Xylem Inc.'s Form 10-Kfiled on February 26, 2016 (CIK No. 1524472, File No. 1-35229). 10.10#Xylem Retirement Savings Plan.Incorporated by reference to Exhibit 10.1 of Xylem Inc.’s Form 10-Qfiled on July 30, 2013 (CIK No. 1524472, File No. 1-35229). 10.11#Xylem Supplemental Retirement Savings Plan.Incorporated by reference to Exhibit 10.11 of Xylem Inc.’s Form 10-Q Quarterly Report filed on November 21, 2011 (CIK No. 1524472,File No. 1-35229). 10.12#Xylem Deferred Compensation Plan.Incorporated by reference to Exhibit 10.12 of Xylem Inc.'s Form 10-K Annual Report filed on February 23, 2017 (CIK No. 1524472, FileNo. 1-35229). 10.13#Xylem Deferred Compensation Plan for Non-EmployeeDirectors.Incorporated by reference to Exhibit 10.13 of Xylem Inc.’s Form 10-Q Quarterly Report filed on November 21, 2011 (CIK No. 1524472,File No. 1-35229). 10.14#Form of Non-Employee Director Restricted Stock Unit AwardAgreement.Incorporated by reference to Exhibit 10.1 of Xylem Inc.’s Form 10-QQuarterly Report filed on July 30, 2015 (CIK No. 1524472, FileNo. 1-35229). 10.15#Xylem Special Senior Executive Severance Pay Plan(Amended as of February 24, 2016).Incorporated by reference to Exhibit 10.15 of Xylem Inc.'s Form 10-K filed on February 26, 2016 (CIK No. 1524472, File No. 1-35229). 10.16#Xylem Senior Executive Severance Pay Plan (Amended as ofMay 10, 2017).Incorporated by reference to Exhibit 10.1 of Xylem Inc.'s Form 10-Qfiled on August 1, 2017 (CIK No. 1524472, File No. 1-35229).116ExhibitNumber DescriptionLocation 10.17#Form of Xylem 2011 Omnibus Incentive Plan 2011 Non-Qualified Stock Option Award Agreement — Founders Grant.Incorporated by reference to Exhibit 10.17 of Xylem Inc.’s Form 10-Q Quarterly Report filed on November 21, 2011 (CIK No. 1524472,File No. 1-35229). 10.18#Form of Xylem 2011 Omnibus Incentive Plan Non-QualifiedStock Option Award Agreement — General Grant.Incorporated by reference to Exhibit 10.18 of Xylem Inc.’s Form 10-Q Quarterly Report filed on November 21, 2011 (CIK No. 1524472,File No. 1-35229). 10.19#Xylem Annual Incentive Plan for Executive Officers(Amended as of February 24, 2016).Incorporated by reference to Exhibit 10.16 of Xylem Inc.'s Form 10-K filed on February 26, 2016 (CIK No. 1524472, File No. 1-35229). 10.20#Form of Director’s Indemnification Agreement.Incorporated by reference to Exhibit 10.16 of Xylem Inc.'s Form 10-K filed on February 26, 2016 (CIK No. 1524472, File No. 1-35229). 10.21#Form of Xylem 2011 Omnibus Incentive Plan Non-QualifiedStock Option Award Agreement (2013).Incorporated by reference to Exhibit 10.1 of Xylem Inc.'s Form 10-QQuarterly Report filed on April 30, 2013 (CIK No. 1524472, File No.1-35229). 10.22#Letter Agreement between Xylem Inc. and Patrick K. Decker.Incorporated by reference to Exhibit 10.1 of Xylem Inc.'s Form 10-QQuarterly Report filed on April 29, 2014 (CIK No. 1524472, File No.1-35229). 10.30 Term Loan Agreement, dated as of January 26, 2018 amongXylem Europe GmbH, as borrower, Xylem Inc., as parentguarantor and ING Bank, as lender (including Form of ParentGuarantee).Incorporated by reference to Exhibit 10.30 of Xylem Inc.'s Form 10-K filed on February 23, 2018 (CIK No. 1524472, File No. 1-35229 10.31#Form of Xylem Restricted Stock Unit Agreement (Amendedas of February 21, 2018).Incorporated by reference to Exhibit 10.31 of Xylem Inc.'s Form 10-K filed on February 23, 2018 (CIK No. 1524472, File No. 1-35229 10.32#Form of Xylem Performance Share Unit Agreement (Amendedas of February 21, 2018).Incorporated by reference to Exhibit 10.32 of Xylem Inc.'s Form 10-K filed on February 23, 2018 (CIK No. 1524472, File No. 1-35229 10.33 Amendment to Term Loan Agreement, dated as of January26, 2018 among Xylem Europe GmbH, as borrower, XylemInc., as parent guarantor and ING Bank, as lender (includingForm of Parent Guarantee).Filed herewith. 21.0 Subsidiaries of the Registrant.Filed herewith. 23.1 Consent of Independent Registered Public Accounting Firm.Filed herewith. 31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) of theSecurities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.Filed herewith. 31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a) of theSecurities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.Filed herewith. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.This Exhibit is intended to be furnished in accordance withRegulation S-K Item 601(b) (32) (ii) and shall not be deemed to befiled for purposes of Section 18 of the Securities Exchange Act of1934 or incorporated by reference into any filing under the SecuritiesAct of 1933 or the Securities Exchange Act of 1934, except as shallbe expressly set forth by specific reference. 117ExhibitNumber DescriptionLocation32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.This Exhibit is intended to be furnished in accordance withRegulation S-K Item 601(b) (32) (ii) and shall not be deemed to befiled for purposes of Section 18 of the Securities Exchange Act of1934 or incorporated by reference into any filing under the SecuritiesAct of 1933 or the Securities Exchange Act of 1934, except as shallbe expressly set forth by specific reference. (101) The following materials from Xylem Inc.’s Annual Report onForm 10-K for the year ended December 31, 2018, areformatted in XBRL (Inline Extensible Business ReportingLanguage): (i) Consolidated Income Statements, (ii)Consolidated Statements of Comprehensive Income, (iii)Consolidated Balance Sheets, (iv) Consolidated Statementsof Cash Flows, (v) Consolidated Statement of Stockholder'sEquityand (vi) Notes to Consolidated Financial Statements.The instance document does not appear in the interactive data filebecause its XBRL tags are embedded within the Inline XBRLdocument.#Management contract or compensatory plan or arrangement118ITEM 16. FORM 10-K SUMMARYNoneSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized. XYLEM INC. (Registrant) /s/ Paul A. Stellato Paul A. Stellato Vice President, Controller and Chief Accounting OfficerFebruary 22, 2019Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated:February 22, 2019 /s/ Patrick K. Decker Patrick K. Decker President and Chief Executive Officer (Principal Executive Officer) February 22, 2019 /s/ Markos I. Tambakeras Markos I. Tambakeras, Chairman February 22, 2019 /s/ Jeanne Beliveau-Dunn Jeanne Beliveau-Dunn, Director February 22, 2019 /s/ Curtis J. Crawford Curtis J. Crawford, Director February 22, 2019 /s/ Robert F. Friel Robert F. Friel, Director February 22, 2019 /s/ Victoria D. Harker Victoria D. Harker, Director February 22, 2019 /s/ Sten E. Jakobsson Sten E. Jakobsson, Director February 22, 2019 /s/ Steven R. Loranger Steven R. Loranger, Director February 22, 2019 /s/ Surya N. Mohapatra Surya N. Mohapatra, Director February 22, 2019 /s/ Jerome A. Peribere Jerome A. Peribere, Director119AMENDMENT AGREEMENT NO. 1 TOEUR 225,000,000 TERM LOAN AGREEMENTDATED JANUARY 26, 2018This amendment agreement (the Amendment Agreement) is dated January 25, 2019 and is made between:(1)Xylem Europe GmbH, a company incorporated under the laws of Switzerland, having its registered address at Bleicheplatz 6, 8200 Schaffhausen,Switzerland, registration number CH-287.650.247 (the Borrower);(2)Xylem Inc., an Indiana company incorporated under the laws of United States of America, having its registered address at 1 International Drive, RyeBrook, NY 10573, United States of America, registration number 201 105 050 0560 (the Parent Guarantor);(3)ING Bank, a branch of ING-DiBa AG, a company incorporated under the laws of Germany, having its registered address at Hamburger Allee 1, 60486Frankfurt am Main (the Bank).WHEREAS(A)The Borrower, the Parent Guarantor and the Bank (together the Parties) have entered into a EUR 225,000,000 term loan agreement dated January26, 2018 (the Facility Agreement);(B)The Borrower has requested the Bank to amend the Facility Agreement.(C)The Parties have agreed to amend the Facility Agreement as set forth in this Amendment Agreement.IT IS AGREED AS FOLLOWS:1.DEFINITIONS AND INTERPRETATION(a)Words and expressions defined in the Facility Agreement shall, unless the context otherwise requires, have the same meaning when used herein.(b)Effective Date means the date on which the Bank has notified the Borrower that it has received all of the documents and evidence set out in Schedule1 Conditions Precedent of this Amendment Agreement in form and substance satisfactory to the Bank.(c)As from the Effective Date all references in the Facility Agreement to "this Agreement" or to clauses, sub-clauses or paragraphs of the FacilityAgreement shall be read and construed as references, respectively, to the Facility Agreement and to such clauses, sub-clauses and paragraphs as areamended by the terms of this Amendment Agreement. The words "hereof" and "hereunder" where used in the Facility Agreement shall be construed asreferring to the Facility Agreement as amended by the terms of this Amendment Agreement.(d)Subject only to the modifications in this Amendment Agreement, all other terms and conditions of the Facility Agreement remain in full force and effect.(e)This Amendment Agreement is a Finance Document.2.AMENDMENTThe Parties agree to amend the Facility Agreement, subject to the terms of this Amendment Agreement as of the Effective Date as follows:(a)The following Definitions shall be added to Clause 1. Definitions of the Facility Agreement:“Initial Final Maturity Date means 29 January 2019.Extended Final Maturity Date means 28 February 2019 or such other later date as agreed between the Bank and the Borrower in writing. "(b)The following shall be added as a new Clause 4.6. Conditions Subsequent in the Facility Agreement:“As soon as possible and no later than the Extended Final Maturity Date, the Bank has to receive all of the documents and evidence set out in Schedule 2Conditions Subsequent in form and substance satisfactory to the Bank.(c)The table in Clause 5.3 Margin of the Facility Agreement is amended and reads as follows:Long Term Credit RatingMargin (per cent. per annum)Applies until and including Initial Final MaturityDate.Margin (per cent. per annum)Applies from 30 January 2019 until andincluding Extended Final Maturity Date.Baa2/BBB (or higher)0.450.525Baa3/BBB- (or lower)0.650.725(d)Para. (a) of Clause 6. Repayment of the Facility Agreement is amended and reads as follows:“(a) The Borrower must repay the Loan made to it in one amount on the Extended Final Maturity Date.”3.NO DEFAULTThe Borrower hereby confirms that no Event of Default has occurred and is continuing or would result from the amendment set out in this AmendmentAgreement on the date of this Amendment Agreement and on the Effective Date, and in each case by reference to the facts and circumstances then existing. 4.CONTINUING ENFORCEABILITY(a)The Borrower and the Parent Guarantor hereby confirm that the Finance Documents shall continue and remain in full force and effect, notwithstandingany amendment, novation, supplement, extension, restatement, increase or replacement of the Facility Agreement as set out in this AmendmentAgreement.(b)The Parent Guarantor hereby confirms for the benefit of the Bank that the guarantee granted by the Parent Guarantor under the Parent Guarantee shallremain in full force and effect notwithstanding the amendments referred to in Clause 2 Amendment and extend to any new obligations assumed bythe Borrower under the Finance Documents as a result of this Amendment Agreement. (c)Notwithstanding any provision of this Amendment Agreement to the contrary, it is acknowledged and agreed that the Parent Guarantor enters into thisAmendment Agreement solely for the purpose of giving the confirmations referred to in this Clause 4. Continuing Enforceability and therepresentations in Clause 6. Parent Guarantor Representations below.5.BORROWER REPRESENTATIONSThe Borrower makes the representations and warranties as set out in this Clause on the date of this Amendment Agreement and on the Effective Date, and ineach case by reference to the facts and circumstances then existing:5.1 STATUSIt is a corporation, duly incorporated and validly existing under the law of its jurisdiction of incorporation. It has the power to own its assets and carry onits business as it is being conducted.5.2 BINDING OBLIGATIONSSubject to applicable insolvency and other laws generally affecting the rights or remedies of creditors the obligations expressed to be assumed by it ineach Finance Document are legal, valid, binding and enforceable obligations.5.3 NON-CONFLICT WITH OTHER OBLIGATIONSThe entry into and performance by it of, and the transaction contemplated by, the Finance Documents do not and will not conflict in any materialrespect with (i) any law or regulation applicable to it, (ii) any constitutional documents or (iii) any agreement or instrument binding upon it or anymember of the Group or any of its or any member of the Group’s assets.5.4 POWER AND AUTHORITYIt has the power to enter into, perform and deliver, and has taken all necessary action to authorise its entry into, performance and delivery of, theFinance Documents and the transactions contemplated by those Finance Documents.5.5 VALIDITY AND ADMISSIBILITY IN EVIDENCEAll Authorisations required (i) to enable it lawfully to enter into, exercise its rights and comply with its obligations in the Finance Documents, and (ii) tomake the Finance Documents admissible in evidence in its jurisdiction of incorporation, have been obtained or effected and are in full force and effect.5.6 GOVERNING LAW AND ENFORCEMENTThe choice of governing law of the Finance Documents will be recognised and enforced in its jurisdiction of incorporation. Any judgment obtained inrelation to a Finance Document in the jurisdiction of the governing law of that Finance Document will be recognised and enforced in its jurisdiction ofincorporation.5.7 NO DEFAULTNo Event of Default is continuing or is reasonably likely to result from the utilisation of the Facility or the entry into, the performance of, or anytransaction contemplated by, any Finance Document.5.8 NO MISLEADING INFORMATIONAll the information supplied to the Bank were and continue to be true and accurate in any material respect; in particular, the financial statementsfurnished to the Bank fairly and completely reflect the financial status of the Borrower as on the date of and for the period to which they refer and arenot affected by any material change since the date these accounts were drawn up.5.9 NO LITIGATIONNo litigation, attachment, arbitration, administrative procedure, which has or might have an adverse effect on its financial condition or its ability toperform its obligations under the Finance Documents, or a reorganization or bankruptcy procedure, is pending or resolved save for those disclosedupon the signing of this Amendment Agreement.6.PARENT GUARANTOR REPRESENTATIONSThe Parent Guarantor makes the representations and warranties as set out in this Clause on the date of this Amendment Agreement and on the EffectiveDate, solely for the purpose of giving the confirmations referred to in Clause 4. Continuing Enforceability and in each case by reference to the facts andcircumstances then existing: 6.1 BINDING OBLIGATIONSSubject to applicable insolvency and other laws generally affecting the rights or remedies of creditors the obligations expressed to be assumed by it inthe Parent Guarantee are legal, valid, binding and enforceable obligations.6.2 POWER AND AUTHORITYIt has the power to enter into, perform and deliver, and has taken all necessary action to authorise its entry into, performance and delivery of, theParent Guarantee and the transactions contemplated by the Parent Guarantee. 6.3 GOVERNING LAW AND ENFORCEMENTThe choice of governing law of the Parent Guarantee will be recognised and enforced in its jurisdiction of incorporation. Any judgment obtained inrelation to the Parent Guarantee in the jurisdiction of the governing law of the Parent Guarantee will be recognised and enforced in its jurisdiction ofincorporation.7.GOVERNING LAW AND JURISDICTION(a)This Amendment Agreement and any non-contractual obligations arising out of or in connection with it are governed by the laws of Germany.(b)The courts of Frankfurt am Main in Germany, in first instance, have jurisdiction to settle any dispute in connection with this Amendment Agreement.This submission shall not limit the rights of the Bank to take proceedings in any other court which may exercise jurisdiction over the Borrower or any ofits assets.(c)The nomination of domicile referred to in paragraph (b) does not affect any other method of service allowed by law.SCHEDULE 1CONDITIONS PRECEDENTTO BE DELIVERED BEFORE 29 JANUARY 2019(1)Duly signed copy of the Amendment Agreement.(2)Certified copies of up to date excerpts from the commercial register, a signature-card with a specimen of the signature, copies of the identitycards/passports and, if applicable, all additional documentation evidencing that the Person(s) executing a document or notice on behalf of theBorrower are entitled to represent the Borrower and the Parent Guarantor.(3)New secretary certificate including Samir Patel’s passport copy.(4)Certified passport copy of Christian Blanc as it is expiring on 21/01/2019.(5)Organizational Regulations Xylem Europe (written confirmation from one of the Directors that there were no changes and the copy we have is theversion still in force).(6)All information that the Bank needs to fulfil its know your customer requirements and comply with applicable anti money-laundering legislation.(7)A copy of the Group structure chart, including the ultimate parent of the Borrower.(8)Legal opinions: legal opinion on the executed Parent Guarantee (to be prepared by ING’s lawyer in the US) and capacity opinion done by ING legal inSwitzerland(9)A copy of the duly executed Parent Guarantee and relevant Finance Documents.SCHEDULE 2CONDITIONS SUBSEQUENTTO BE DELIVERED BEFORE 28 FEBRUARY 2019(1)A copy of the updated resolution of the board of directors of the Borrower and the Parent Guarantor approving the amendment and the execution of theAmendment Agreement.(2)A copy of the updated resolution/letter of the shareholder(s) of the Borrower.SIGNATORIESXYLEM EUROPE GMBH _/s/ Christian Blanc______________By: Christian BlancTitle: SVP & President of Europe CTXYLEM INC.__/s/ Samir Patel_______________By: Samir PatelTitle: Vice President & TreasurerING BANK, a branch of ING-DiBa AG__/s/ Nikola Kopp_______________ __/s/ Ingo Steen_______________By: Nikola Kopp By: Ingo SteenTitle: Director Title: VPEXHIBIT 21SUBSIDIARIES OF THE REGISTRANT*NameJurisdiction ofOrganizationName Under Which DoingBusinessAanderaa Data Instruments ASNorway Arrow Rental LimitedIreland Bellingham & Stanley Ltd.England & Wales Bombas Flygt de Venezuela S.A.Venezuela BS Pumps LimitedEngland & Wales Citilogics, LLCOhio CMS Research CorporationAlabama EmNet, LLCIndiana Faradyne Motors (Suzhou) Co. Ltd.China Faradyne Motors LLCDelaware Flow Control LLCDelaware Flowtronex PSI, LLCNevada Fluid Handling, LLCDelaware Godwin Holdings Ltd.England & Wales Goulds Water Technology Philippines, IncPhilippines Grindex ABSweden Grindex Pumps LLCDelaware IMT B.V.Netherlands Jabsco Marine Italia s.r.l.Italy Jabsco S. de R.L. De C.V.Mexico Jason Consultants LimitedEngland & Wales Jason Consultants, LLCDelaware Lowara s.r.l.ItalyLowaraLowara UK LtdEngland & Wales Lowara Vogel Polska SP ZOOPoland MJK Automation ApSDenmark MultiTrode Inc.Florida Multitrode Pty LtdAustralia Nova Analytics Europe LLCDelaware O.I. CorporationOklahomaOI AnalyticalPCI Membrane Systems, Inc.Delaware Pension Trustee Management LtdEngland & Wales Pipeline Technologies Philippines CorpPhilippines Portacel Inc.Pennsylvania Pure Holding Inc.Delaware Pure Inspection Technologies SA DEMexico Pure Inspection Technologies Services DE CVMexico Pure Technologies (Australia) Pty Ltd.Australia Pure Technologies (China) Ltd.China *Each of the named subsidiaries is not necessarily a “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X, and the Company has several additional subsidiaries not named above. Theunnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” at the end of the year covered by this report.NameJurisdiction ofOrganizationName Under Which DoingBusinessPure Technologies (Nanjing) LimitedChina Pure Technologies (Shanghai) LimitedChina Pure Technologies (UK) Ltd.England & Wales Pure Technologies Abu DhabiUAE Pure Technologies Canada Ltd.Canada Pure Technologies Korea LtdKorea Pure Technologies Ltd.Canada Pure Technologies U.S. Inc.Delaware PureHM Inc.Canada PureHM U.S. Inc.Delaware Rapid Biosensor Systems LimitEngland & Wales SELC Group Ltd.Ireland SELC Electronics LtdEngland & Wales SELC Ireland LtdIreland Sensus (UK Holdings) Ltd.England & Wales Sensus Australia Pty LtdAustralia Sensus Canada Inc.Canada Sensus Česká republika spol. s r.o.Czech Republic Sensus Chile SAChile Sensus de Mexico S. de R.L. de C.V.Mexico Sensus España SASpain Sensus France Holdings SASFrance Sensus France SASFrance Sensus GmbH HannoverGermany Sensus GmbH LudwigshafenGermany Sensus Italia SRLItaly Sensus Japan Kabushiki KaishaJapan Sensus Manufacturing (Shanghai) Co., Ltd.China Sensus Maroc S.A..Morocco Sensus Metering Systems (Fuzhou) Co., Ltd.China Sensus Metering Systems (LuxCo 2) S.A R.L.Luxemborg Sensus Metering Systems (LuxCo 3) S.A R.L.Luxemborg Sensus Metering Systems (LuxCo 4) S.A R.L.Luxemborg Sensus Metering Systems (LuxCo 5) S.A R.LLuxemborg Sensus Metering Systems IP Holdings, Inc.Delaware Sensus metrologicke sluzby s.r.o._SlovakiaSlovak Republic Sensus Polska sp. zooPoland Sensus Services Deutschland GmbHGermany Sensus Slovensko a.s.Slovakia Sensus South Africa (Proprietary) Ltd.South Africa Sensus SPAAlgeria Sensus Spectrum LLCDelaware *Each of the named subsidiaries is not necessarily a “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X, and the Company has several additional subsidiaries not named above. Theunnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” at the end of the year covered by this report.NameJurisdiction ofOrganizationName Under Which DoingBusinessSensus UK Systems LimitedEngland & Wales Sensus USA Inc.Delaware Sentec LimitedEngland & Wales Smith-Blair, Inc.Delaware Texas Turbine LLCDelawareXylem Texas Turbine LLCTideland Signal EMEA B.V.Netherlands Tideland Signal CorporationTexas Tideland Signal LimitedEngland and Wales Tideland Signal, LLCDelaware Tirinstal Investments LtdIreland UGI Global LimitedEngland & Wales Valor Water Analytics, Inc.Delaware Visenti Pte. LtdSingapore Water Asset Management, Inc.Delaware Water Process LimitedEngland & Wales Xylem (China) Company LimitedChina Xylem (Hong Kong) LimitedHong Kong Xylem (Nanjing) Co., LtdChina Xylem Analytics (Beijing) Co. LtdChina Xylem Analytics France S.A.S.France Xylem Analytics Germany GmbHGermany Xylem Analytics Germany Sales GmbH& Co. KGGermany Xylem Analytics IP Management GmbHGermany Xylem Analytics IP Management SCSLuxembourg Xylem Analytics LLCDelaware Xylem Analytics UK LTDEngland & Wales Xylem Australia Holdings PTY LTDNew South Wales Xylem Brasil Soluções para Água LtdaBrazil Xylem Canada CompanyNova Scotia Xylem Delaware, Inc.Delaware Xylem Denmark Holdings ApSDenmark Xylem Dewatering Solutions UK LtdEngland & Wales Xylem Dewatering Solutions, Inc.New JerseyGodwin Pumps of AmericaXylem Europe GmbHSwitzerland Xylem Financing S.a.r.lLuxembourg Xylem Global S.a.r.lLuxembourg Xylem Industriebeteiligungen GmbHGermany Xylem Industries S.a.r.l.Luxembourg Xylem Industries Singapore Pte. Ltd.Singapore Xylem International S.a.r.l.Luxembourg Xylem IP Holdings LLCDelaware Xylem IP UK S.a.r.l.Luxembourg *Each of the named subsidiaries is not necessarily a “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X, and the Company has several additional subsidiaries not named above. Theunnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” at the end of the year covered by this report.NameJurisdiction ofOrganizationName Under Which DoingBusinessXylem Lowara LimitedEngland & Wales Xylem Management GmbHGermany Xylem Manufacturing Austria GmbHAustria Xylem Manufacturing Middle East Region FZCOUAE Xylem Middle East Water Equipment Trading & Rental LLCUAE Xylem Russia LLCRussia Xylem Saudi Arabia LimitedSaudi Arabia Xylem Service Hungary KftHungary Xylem Service Italia SrlItaly Xylem Services Austria GmbHAustria Xylem Services GmbHGermany Xylem Shared Services Sp. Z.o.o.Poland Xylem Technologies & Partners S.C.SLuxembourg Xylem Technologies GmbHFrankfurt am Main Xylem Water Holdings LimitedEngland & Wales Xylem Water LimitedEngland & Wales Xylem Water Services LimitedEngland & Wales Xylem Water Solutions (Hong Kong) LimitedHong Kong Xylem Water Solutions Argentina S.R.L.Argentina Xylem Water Solutions Australia LimitedNew South Wales Xylem Water Solutions Austria GmbHAustria Xylem Water Solutions BelgiumBelgium Xylem Water Solutions Chile S.A.Chile Xylem Water Solutions Colombia SASColombia Xylem Water Solutions Denmark ApSDenmark Xylem Water Solutions Deutschland GmbHGermanyFlygtXylem Water Solutions España, S.A.Spain Xylem Water Solutions Florida LLCDelaware Xylem Water Solutions France SASFrance Xylem Water Solutions Global Services ABSweden Xylem Water Solutions Herford GmbHGermany Xylem Water Solutions Holdings France SASFrance Xylem Water Solutions India Private LimitedIndia Xylem Water Solutions Ireland Ltd.Ireland Xylem Water Solutions Italia S.R.LItalyFlygtXylem Water Solutions Korea Co., Ltd.Korea Xylem Water Solutions Magyarorszag KRTHungary Xylem Water Solutions Malaysia SDN. BHD.Malaysia Xylem Water Solutions Manufacturing ABSweden Xylem Water Solutions Metz SASFrance Xylem Water Solutions Mexico S.de R.L. de C.V.Mexico Xylem Water Solutions Middle East Region FZCOUAE *Each of the named subsidiaries is not necessarily a “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X, and the Company has several additional subsidiaries not named above. Theunnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” at the end of the year covered by this report.NameJurisdiction ofOrganizationName Under Which DoingBusinessXylem Water Solutions Muscat LLCOman Xylem Water Solutions Nederland BVNetherlandsFlygtXylem Water Solutions New Zealand LimitedNew Zealand Xylem Water Solutions Norge ASNorway Xylem Water Solutions Panama s.r.l.Panama Xylem Water Solutions Peru S.A.Peru Xylem Water Solutions Polska Sp.z.o.o.Poland Xylem Water Solutions Portugal Unipessoal Lda.Portugal Xylem Water Solutions Rugby LimitedEngland & Wales Xylem Water Solutions Singapore PTE Ltd.Singapore Xylem Water Solutions South Africa (Pty) Ltd.South Africa Xylem Water Solutions South Africa Holdings LLCDelaware Xylem Water Solutions Suomi OyFinland Xylem Water Solutions Sweden ABSweden Xylem Water Solutions U.S.A., Inc.Delaware Xylem Water Solutions UK Holdings LimitedEngland & Wales Xylem Water Solutions UK LimitedEngland & Wales Xylem Water Solutions Zelienople LLCDelaware Xylem Water Solutions(Shenyang) CO., LtdChina Xylem Water Systems (California), Inc.California Xylem Water Systems Hungary KFTHungary Xylem Water Systems International, Inc.Delaware Xylem Water Systems Japan CorporationJapan Xylem Water Systems Philippines Holding, Inc.Delaware Xylem Water Systems Texas Holdings LLCDelaware Xylem Water Systems U.S.A., LLCDelaware YSI (China) Ltd.Hong Kong YSI (Hong Kong) Ltd.Hong Kong YSI IncorporatedOhio YSI Instrumentos E Servicos Ambientais Ltda.Brazil YSI International, Inc.Ohio YSI Nanotech LimitedJapan *Each of the named subsidiaries is not necessarily a “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X, and the Company has several additional subsidiaries not named above. Theunnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” at the end of the year covered by this report.EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-207672 on Form S-3 and Registration Statement No. 333-177607on Form S-8 of our reports dated February 22, 2019, relating to the consolidated financial statements of Xylem Inc. and subsidiaries (the“Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of theCompany for the year ended December 31, 2018./s/ Deloitte & Touche LLPStamford, ConnecticutFebruary 22, 2019EXHIBIT 31.1CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Patrick K. Decker, certify that:1.I have reviewed this Annual Report on Form 10-K of Xylem Inc. for the period ended December 31, 2018;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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe 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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have:a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe 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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: February 22, 2019 /s/ Patrick K. Decker Patrick K. DeckerPresident and Chief Executive OfficerEXHIBIT 31.2CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, E. Mark Rajkowski, certify that:1.I have reviewed this Annual Report on Form 10-K of Xylem Inc. for the period ended December 31, 2018;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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe 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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have:a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe 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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: February 22, 2019 /s/ E. Mark Rajkowski E. Mark RajkowskiSenior Vice President and Chief Financial OfficerEXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Xylem Inc. (the “Company”) for the period ended December 31, 2018 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Patrick K. Decker, President and Chief Executive Officer of theCompany, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 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 theCompany./s/ Patrick K. Decker Patrick K. Decker President and Chief Executive Officer February 22, 2019 A signed original of this written statement required by Section 906 has been provided to Xylem Inc. and will be retained by Xylem Inc. andfurnished to the Securities and Exchange Commission or its staff upon request.EXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Xylem Inc. (the “Company”) for the period ended December 31, 2018 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, E. Mark Rajkowski, Senior Vice President and Chief Financial Officer ofthe Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 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 theCompany./s/ E. Mark Rajkowski E. Mark Rajkowski Senior Vice President and Chief Financial Officer February 22, 2019 A signed original of this written statement required by Section 906 has been provided to Xylem Inc. and will be retained by Xylem Inc. andfurnished to the Securities and Exchange Commission or its staff upon request.

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