# Xylem Inc. (XYL) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from Xylem Inc.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1524472/000152447224000006/xyl-20231231.htm Accession: 0001524472-24-000006 Filing date: 2024-02-28 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/XYL/ All MD&A years: /company/XYL/mda/ Previous year: /company/XYL/mda/fy2022/ (FY 2022) Next year: /company/XYL/mda/fy2024/ (FY 2024) ITEM 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business. Except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and “the Company” refer to Xylem Inc. and its subsidiaries. This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Overview Xylem 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 in utility, industrial, residential and commercial building services settings. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test, treatment and analysis of wastewater to the return of water to the environment. Our product and service offerings are organized into four reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water, Measurement and Control Solutions and Integrated Solutions and Services. •Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater and storm water to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. Additionally, our offerings use monitoring and control, smart and connected technologies to allow for remote monitoring of performance and enable products to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for our customers. In the Water Infrastructure segment, we provide the majority of our sales directly to customers along with strong applications expertise, while the remaining amount is through distribution partners. The Water Infrastructure segment also includes legacy-Evoqua's Applied Product Technologies ("APT") segment. APT provides a range of highly differentiated and scalable products and technologies with product offerings in the filtration and separation, disinfection, wastewater solutions, anode and electrochlorination technology, and aquatics technologies and solutions spaces. •Applied Water serves the water usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning, and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers and controls provide cooling to power plants and manufacturing facilities, circulation for food and beverage processing, as well as boosting systems for agricultural irrigation. In the Applied Water segment, we provide the majority of our sales through long-standing relationships with many of the leading independent distributors in the markets we serve, with the remainder going directly to customers. •Measurement and 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 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 and analyze water quality, flow and level in clean water, wastewater, and outdoor environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions. In the Measurement and Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners as well as direct sales depending on the regional availability of distribution channels and the type of product. •Integrated Solutions and Services serves the industrial and municipal sectors with tailored services and solutions in collaboration with the customers backed by life‑cycle services including on‑demand water, outsourced water, recycle / reuse, and emergency response service alternatives to improve operational reliability, performance, and environmental compliance. Key offerings within this segment also include 39 equipment systems for industrial needs (influent water, boiler feed water, ultrahigh purity, process water, wastewater treatment, and recycle / reuse), full-scale outsourcing of operations and maintenance, and municipal services, including odor and corrosion control services. Evoqua Acquisition On January 22, 2023, Xylem entered into a definitive agreement to acquire Evoqua, a leader in mission-critical water treatment solutions and services, in an all-stock transaction that reflected an implied enterprise value of approximately $7.5 billion. The transaction closed on May 24, 2023. See Note 3, "Acquisitions and Divestitures," to the consolidated financial statements for further information. Coinciding with the Evoqua acquisition, Xylem has updated our adjusted operating income and adjusted earnings per share to add back non-cash purchase accounting intangible amortization and recast 2022 amounts to reflect the change on a comparative basis Evoqua, a leader in North America water treatment, complements Xylem’s distinctive portfolio of solutions with advanced water and wastewater treatment capabilities, a powerful and extensive network of service professionals and access to a number of attractive industrial markets with resilient, recurring revenue streams. Key Performance Indicators and Non-GAAP Measures Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and to provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent 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 following non-GAAP measures to be key performance indicators, as well as the related reconciling items to the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures may not be comparable to similarly-titled measures reported by other companies. •"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales or discontinuance of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency 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 prior period 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 exclude restructuring and realignment costs, amortization of acquired intangible assets, gain or loss from sale of businesses, special charges and tax-related special items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below. 40 [[GREPCENT_TABLE]] [["(in millions, except per share data)","","2023","","2022"],["Net income and Earnings per share","","$","609","","","$","2.79","","","$","355","","","$","1.96"],["Restructuring and realignment","","106","","","0.49","","","34","","","0.19"],["Acquired intangible amortization","","176","","","0.81","","","72","","","0.40"],["Special charges","","138","","(a)","0.63","","","160","","(b)","0.88"],["Tax-related special items","","(115)","","","(0.53)","","","1","","","0.01"],["(Gain) loss from sale of business","","1","","","\u2014","","","(1)","","","(0.01)"],["Tax effects of adjustments (c)","","(90)","","","(0.41)","","","(51)","","","(0.28)"],["Adjusted net income and Adjusted earnings per share","","$","825","","","$","3.78","","","$","570","","","$","3.15"]] [[/GREPCENT_TABLE]] (a)The special charges in the year primarily relate to $126 million of acquisition and integration related costs. (b)The special charges in the year primarily relate to the U.K. pension settlement expense of $140 million and asset impairment charges of $14 million recorded in the period. (c)The tax effects of adjustments are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction. ▪"adjusted operating expenses" defined as operating expenses adjusted to exclude amortization of acquired intangible assets, restructuring and realignment costs and special charges. ▪"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue. ▪“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense, "EBITDA margin" defined as EBITDA divided by total revenue, "adjusted EBITDA" reflects the adjustment to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, gain or loss from sale of businesses and special charges, and "adjusted EBITDA margin" defined as adjusted EBITDA 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. ▪“special charges" defined as costs incurred by the Company, such as acquisition and integration related costs, non-cash impairment charges, and both operating and non-operating adjustments for costs related to the U.K. pension plan buy-out. ▪"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, excess tax benefits/losses and other discrete tax adjustments. ▪"free cash flow" defined as net cash from operating activities, as reported in the Statement of Cash Flows, less capital expenditures. Our definition of "free cash flow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow. [[GREPCENT_TABLE]] [["(in millions)","","2023","","2022"],["Net cash provided by operating activities","","$","837","","","$","596"],["Capital expenditures","","(271)","","","(208)"],["Non-discretionary tax payments (R&D tax law adoption)","","33","","","\u2014"],["Free cash flow","","$","599","","","$","388"],["Net cash used in investing activities","","$","(628)","","","$","(191)"],["Net cash provided (used) by financing activities","","$","(157)","","","$","(790)"]] [[/GREPCENT_TABLE]] 41 Executive Summary Xylem reported revenue of $7,364 million for 2023, an increase of $1,842 million, or 33.4%, from $5,522 million reported in 2022. On a constant currency basis, revenue increased by $1,867 million, or 33.8%, during the year. The increase at constant currency consists of revenue from acquisitions of $1,177 million and an increase in organic revenue of $690 million reflecting strong organic growth in all segments as well as across all major geographic regions. Operating income for 2023 was $652 million, reflecting an increase of $30 million, or 4.8%, compared to $622 million in 2022. Operating margin was 8.9% and 11.3% for 2023 and 2022, respectively. The increase in operating income for 2023 included an increase in special charges of $122 million, an increase in purchased intangible amortization of $104 million, and an increase in restructuring and realignment costs of $72 million as compared to 2022. Excluding the impact of these items, adjusted operating income was $1,072 million, with an adjusted operating margin of 14.6% in 2023 as compared to adjusted operating income of $744 million with an adjusted operating margin of 13.5% in 2022, an increase of 110 basis points. Additional financial highlights for 2023 include the following: •Net income of $609 million, or $2.79 per diluted share, up 42.3% ($825 million or $3.78 per diluted share on an adjusted basis, up 20.0% from 2022) •Net cash provided by operating activities of $837 million and free cash flow of $599 million, up 54% from 2022 •Orders of $7,501 million, up 19.9% from $6,257 million in 2022 (up 1.0% on an organic basis) •Dividends paid to shareholders increased 10% in 2023. Results of Operations [[GREPCENT_TABLE]] [["(in millions)","","2023","","2022","","","","2023 v. 2022"],["Revenue","","$","7,364","","","$","5,522","","","","","33.4","%"],["Gross profit","","2,717","","","2,084","","","","","30.4","%"],["Gross margin","","36.9","%","","37.7","%","","","","(80)","bp"],["Total operating expenses","","2,065","","","1,462","","","","","41.2","%"],["Expense to revenue ratio","","28.0","%","","26.5","%","","","","150","bp"],["Restructuring and realignment costs","","(102)","","","(30)","","","","","240.0","%"],["Acquired intangible asset amortization","","(176)","","","(72)","","","","","144.4","%"],["Special charges","","(106)","","","(16)","","","","","562.5","%"],["Adjusted operating expenses","","1,681","","","1,344","","","","","25.1","%"],["Adjusted operating expenses to revenue ratio","","22.8","%","","24.3","%","","","","(150)","bp"],["Operating income","","652","","","622","","","","","4.8","%"],["Operating margin","","8.9","%","","11.3","%","","","","(240)","bp"],["U.K. pension settlement expense","","\u2014","","","140","","","","","NM"],["Interest and other non-operating expense, net","","16","","","43","","","","","(62.8)","%"],["Gain/(loss) from sale of business","","(1)","","","1","","","","","(200.0)","%"],["Income tax expense","","26","","","85","","","","","(69.4)","%"],["Tax rate","","4.1","%","","19.2","%","","","","(1,510)","bp"],["Net income","","$","609","","","$","355","","","","","71.5","%"]] [[/GREPCENT_TABLE]] NM     Not Meaningful 2023 versus 2022 Revenue Revenue generated for 2023 was $7,364 million, an increase of $1,842 million, or 33.4%, compared to $5,522 million in 2022. On a constant currency basis, revenue grew 33.8% during 2023. The increase at constant currency consists of revenue from acquisitions of $1,177 million and an increase in organic revenue of $690 million, reflecting strong organic growth in all segments as well as across all major geographic regions. 42 The following table illustrates the impact from organic growth, recent acquisitions and divestitures, and foreign currency translation in relation to revenue during 2023: [[GREPCENT_TABLE]] [["","Water Infrastructure","","Applied Water","","Measurement and Control Solutions","","Integrated Solutions and Services","","Total Xylem"],["(in millions)","$ Change","% Change","","$ Change","% Change","","$ Change","% Change","","$ Change","% Change","","$ Change","% Change"],["2022 Revenue","$","2,364","","","","$","1,767","","","","$","1,391","","","","$","\u2014","","","","$","5,522"],["Organic Growth","255","","10.8","%","","96","","5.4","%","","339","","24.4","%","","\u2014","","NM","","690","","12.5","%"],["Acquisitions/(Divestitures)","362","","15.3","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","815","","NM","","1,177","","21.3","%"],["Constant Currency","617","","26.1","%","","96","","5.4","%","","339","","24.4","%","","815","","NM","","1,867","","33.8","%"],["Foreign currency translation (a)","(14)","","(0.6)","%","","(10)","","(0.5)","%","","(1)","","(0.1)","%","","\u2014","","NM","","(25)","","(0.4)","%"],["Total change in revenue","603","","25.5","%","","86","","4.9","%","","338","","24.3","%","","815","","NM","","1,842","","33.4","%"],["2023 Revenue","$","2,967","","","","$","1,853","","","","$","1,729","","","","$","815","","","","$","7,364"]] [[/GREPCENT_TABLE]] (a)Foreign currency translation impact for the year primarily due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Chinese Yuan, the Canadian Dollar and the Norwegian Krone Water Infrastructure Water Infrastructure revenue increased $603 million, or 25.5%, to $2,967 million in 2023 (26.1% increase on a constant currency basis) compared to 2022. Revenue growth was partially made up of the revenue contributed by acquisitions from APT of $362 million, with the remainder of the increase coming from organic revenue growth of $255 million, or 10.8%. Revenue was negatively impacted by $14 million of foreign currency translation. Organic growth for the year was driven by strength in both the utility and industrial end markets. The utilities end market experienced organic growth of $150 million led by strength in the U.S. driven by strong price realization, increased sales volume bolstered by backlog execution, and higher rental revenue. Western Europe also experienced strong organic growth due to demand from utility capital projects and strong price realization. The emerging markets grew organically due to increased project revenue. The industrial end market had $105 million of organic growth across all major geographic regions, due to strong price realization and increased sales volume in the U.S. and timing of capital projects and strong price realization in western Europe. From an application perspective, excluding the $362 million contributed by acquisitions, organic revenue growth was driven by our transport applications. Transport experienced $240 million of revenue growth. All three of our major geographic regions contributed to the organic revenue growth in transport, led by the U.S. due to strong backlog execution and price realization and higher volume in the dewatering business. Western Europe also experienced increases driven by strong price realization and delivery on capital projects. Organic revenue growth for the treatment application was $15 million for the year due to increased sales volume in the U.S. driven by strong backlog execution. Applied Water Applied Water revenue increased $86 million, or 4.9%, in 2023 (5.4% increase on a constant currency basis) compared to 2022. Revenue was negatively impacted by $10 million of foreign currency translation, with the change at constant currency coming entirely from organic growth during the year of $96 million. Organic growth was led by strength in building solutions, with commercial revenue growth of $97 million, driven by the U.S. with increased sales volume from backlog execution in the first half of the year and strong price realization, partially offset by the residential declines in revenue of $33 million primarily in the emerging markets, driven by softness in the Middle East, and volume declines in the U.S. The industrial water application had organic growth of $32 million, led by the emerging markets due to increased sales volume, and western Europe where we benefited from strong price realization. 43 Measurement and Control Solutions Measurement and Control Solutions revenue increased $338 million, or 24.3%, in 2023 (24.4% increase on a constant currency basis) compared to 2022. Revenue was negatively impacted by $1 million of foreign currency translation during the year, with the change at constant currency coming entirely from organic growth during the year of $339 million. We experienced organic revenue growth across all three major geographic regions and in both of the segment's end markets for the year, driven by $327 million of organic growth in the utility end market, primarily in the U.S., driven by increased sales volume and backlog execution, enabled by significant improvement of supply chain constraints, and $12 million in the industrial end market driven by strong backlog execution in our test business. From an application perspective, organic revenue growth during the year was led by growth in the water application of $229 million led by the U.S., where we saw increased sales volume, enabled by recovery on prior year component constraints, and western Europe, due to strong backlog execution. We also had organic revenue growth in the energy application of $110 million, driven by improved component availability and metrology sales in the U.S. Integrated Solutions and Services Integrated Solutions and Services revenue consists entirely of $815 million for the year ended December 31, 2023 contributed from the Evoqua acquisition. Orders/Backlog An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during 2023 increased by $1,244 million, or 19.9%, to $7,501 million (20.5% increase on a constant currency basis). Order intake increased due to $1,220 million of increased orders related to the Evoqua acquisition. The increase in orders was partially offset by $41 million of unfavorable foreign currency translation. Organic order growth for the year was $65 million, or 1.0%. The following table illustrates the impact from organic growth, recent acquisitions and divestitures, and foreign currency translation in relation to orders during 2023: [[GREPCENT_TABLE]] [["","Water Infrastructure","","Applied Water","","Measurement and Control Solutions","","Integrated Solutions and Services","","Total Xylem"],["(in millions)","$ Change","% Change","","$ Change","% Change","","$ Change","% Change","","$ Change","% Change","","$ Change","% Change"],["2022 Orders","$","2,607","","","","$","1,794","","","","$","1,856","","","","$","\u2014","","","","$","6,257"],["Organic Impact","124","","4.8","%","","(6)","","(0.3)","%","","(53)","","(2.9)","%","","\u2014","","NM","","65","","1.0","%"],["Acquisitions/(Divestitures)","352","","13.5","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","868","","NM","","1,220","","19.5","%"],["Constant Currency","476","","18.3","%","","(6)","","(0.3)","%","","(53)","","(2.9)","%","","868","","NM","","1,285","","20.5","%"],["Foreign currency translation (a)","(23)","","(0.9)","%","","(18)","","(1.0)","%","","\u2014","","\u2014","%","","\u2014","","NM","","(41)","","(0.7)","%"],["Total change in orders","453","","17.4","%","","(24)","","(1.3)","%","","(53)","","(2.9)","%","","868","","NM","","1,244","","19.9","%"],["2023 Orders","$","3,060","","","","$","1,770","","","","$","1,803","","","","$","868","","","","$","7,501"]] [[/GREPCENT_TABLE]] (a)Foreign currency translation impact for the year primarily due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Chinese Yuan, the Canadian Dollar and the Norwegian Krone 44 Water Infrastructure Water Infrastructure segment orders increased $453 million, or 17.4%, to $3,060 million, with $352 million in contributions from the acquisition of the APT business, and organic order growth of $124 million or 4.8%. Order intake for the period was negatively impacted by $23 million of foreign currency translation. Organic orders increased during the year primarily in the transport applications, led by the dewatering business in the U.S., where we benefited from strong price realization and demand, the emerging markets, where we had increased capital project orders, and western Europe where we saw increased demand and capital project orders. The treatment applications also saw organic growth primarily in the U.S. and in the emerging markets where we saw higher capital project orders in these regions. Applied Water Applied Water segment orders decreased $24 million, or 1.3%, to $1,770 million (flat on a constant currency basis). Order intake during the year was negatively impacted by $18 million of foreign currency translation, with organic orders being essentially flat. Weakness in the U.S. from lower demand and timing of orders was partially offset by strength in the emerging markets due to strong project orders and recovery from prior year COVID-19 impacts. Measurement and Control Solutions Measurement and Control Solutions segment orders decreased $53 million, or 2.9%, to $1,803 million, with no impact from foreign currency translation. Organic order weakness for the year was driven by the energy applications, particularly in the U.S., where we saw lower demand in gas metrology. Order declines were marginally offset by growth in the water applications, primarily in the U.S., and western Europe, driven by increased digital and service orders, as well as demand in our pipeline assessment services business. Integrated Solutions and Services The Integration Solutions and Services segment contributed total orders of $868 million for the year ended December 31, 2023 See Note 3, "Acquisitions and Divestitures," to the consolidated financial statements for further information. Backlog Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer 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 contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays occur from time to time. Total backlog was $5,088 million at December 31, 2023 and $3,605 million at December 31, 2022, an increase of 41.1%, with backlog from the acquisition of Evoqua contributing $1,268 million, or 35.2%, of the increase. We anticipate that more than 50% of our total backlog at December 31, 2023 will be recognized as revenue during 2024. Gross Margin Gross margin as a percentage of consolidated revenue decreased 80 basis points to 36.9% in 2023 as compared to 37.7% in 2022. The gross margin decline for the year included 60 basis points from increases in acquired intangible asset amortization and special charges as compared to the prior year. Additionally, the gross margin decline for the year included 530 basis points of negative operating impacts, driven by 230 basis points of inflation, 140 basis points of unfavorable impacts from the Evoqua acquisition, 80 basis points of unfavorable mix, and 30 basis points of increased spending on strategic investments. These impacts were partially offset by favorable impacts of 510 basis points, driven by 270 basis points of price realization and 210 basis points of productivity savings. 45 Operating Expenses [[GREPCENT_TABLE]] [["(in millions)","2023","","2022","","Change"],["Selling, general and administrative expenses","$","1,757","","","$","1,227","","","43.2","%"],["SG&A as a % of revenue","23.9","%","","22.2","%","","170","bp"],["Research and development expenses","232","","","206","","","12.6","%"],["R&D as a % of revenue","3.2","%","","3.7","%","","(50)","bp"],["Restructuring and asset impairment charges","76","","","29","","","162.1","%"],["Operating expenses","$","2,065","","","$","1,462","","","41.2","%"],["Expense to revenue ratio","28.0","%","","26.5","%","","150","bp"]] [[/GREPCENT_TABLE]] Selling, General and Administrative ("SG&A") Expenses SG&A expenses increased by $530 million (increase of 43.2%) to 23.9% of revenue in 2023, as compared to 22.2% of revenue in 2022. Cost increases were driven by $188 million of additional operational SG&A from the acquisition of Evoqua, increased special charges (mostly Evoqua acquisition related costs) and realignment costs of $115 million, increased acquired intangible asset amortization of $58 million, $54 million of inflation, and $51 million in increased spending on strategic investments. Research and Development ("R&D") Expenses R&D expense was $232 million, or 3.2% of revenue, in 2023 which was fairly consistent with the 2022 expense of $206 million, or 3.7% of revenue. Restructuring and Asset Impairment Charges Restructuring From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position itself. Restructuring charges were $72 million in 2023 as compared to $15 million in 2022. During 2023, we incurred these charges primarily as a result of our acquisition of Evoqua. Approximately $27 million of the charges related to stock-based compensation expense due to acceleration clauses in Evoqua's equity compensation agreements. Approximately $15 million of the charges represented the reduction of headcount related to the integration of Evoqua. Additionally, during 2023 we incurred $30 million of charges related to our efforts to reposition our businesses to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. The charges were incurred across all of our segments. During 2022, we incurred restructuring charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across the Water Infrastructure, Applied Water and Measurement and Control Solutions segments The following is a roll-forward of employee position eliminations associated with restructuring activities for the years ended December 31, 2023 and 2022: [[GREPCENT_TABLE]] [["","","2023","","2022"],["Planned reductions - January 1","","102","","","60"],["Additional planned reductions","","454","","","203"],["Actual reductions and reversals","","(443)","","","(161)"],["Planned reductions - December 31","","113","","","102"]] [[/GREPCENT_TABLE]] 46 The following table presents the total costs expected to be incurred, the amount incurred in the period, and the cumulative costs incurred to date for our 2023, 2022 and 2021 restructuring actions: [[GREPCENT_TABLE]] [["(in millions)","","Water Infrastructure","","Applied Water","","Measurement and Control Solutions","","Integrated Solutions and Services","","Corporate","","Total"],["Actions Commenced in 2023:"],["Total expected costs","","$","18","","","$","16","","","$","12","","","$","7","","","$","34","","","$","87"],["Costs incurred during 2023","","15","","","6","","","11","","","4","","","35","","","71"],["Total expected costs remaining","","$","3","","","$","10","","","$","1","","","$","3","","","$","(1)","","","$","16"],["Actions Commenced in 2022:"],["Total expected costs","","$","6","","","$","5","","","$","4","","","$","\u2014","","","$","\u2014","","","$","15"],["Costs incurred during 2022","","6","","","4","","","4","","","\u2014","","","\u2014","","","14"],["Costs incurred during 2023","","\u2014","","","1","","","\u2014","","","\u2014","","","\u2014","","","1"],["Total expected costs remaining","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Actions Commenced in 2021:"],["Total expected costs","","$","3","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","3"],["Costs incurred during 2021","","3","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","3"],["Costs incurred during 2022","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Costs incurred during 2023","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total expected costs remaining","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"]] [[/GREPCENT_TABLE]] The Water Infrastructure, Applied Water, Measurement and Control Solutions, Integrated Solutions and Services and Corporate actions commenced in 2023 consist primarily of severance charges. The actions are expected to continue through the end of 2024. The Water Infrastructure, Applied Water and Measurement and Control Solutions actions commenced in 2022 consist primarily of severance charges. The actions commenced in 2022 are complete. The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. The actions commenced in 2021 are complete. As a result of the actions initiated in 2023, we achieved savings of approximately $9 million in 2023 and estimate annual future net savings beginning in 2024 of approximately $51 million, resulting in $42 million of incremental savings from 2023 actions. Asset Impairment During the fourth quarter of 2023, we determined that internally developed in-process software within our Measurement and Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and we therefore recognized an impairment charge of $1 million. Refer to Note 12, "Goodwill and Other Intangible Assets," for additional information. During the third quarter of 2023, we recognized a $1 million impairment charge for certain fixed assets within our Measurement and Control Solutions segment. During the first quarter of 2023, we determined that internally developed in-process software within our Measurement and Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and we therefore recognized an impairment charge of $2 million. Refer to Note 12, "Goodwill and Other Intangible Assets," for additional information. During the third quarter of 2022, we determined that certain assets including software and customer relationships within our Measurement and Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $14 million. Refer to Note 12,"Goodwill and Other Intangible Assets," for additional information. 47 Operating Income and Adjusted EBITDA Operating income was $652 million (operating margin of 8.9%) during 2023, an increase of $30 million, or 4.8%, when compared to operating income of $622 million (operating margin of 11.3%) during the prior year. Operating margin included unfavorable impacts of 350 basis points from increases in special charges, acquired intangible asset amortization, and restructuring and realignment costs as compared to the prior year. Additionally, operating margin included 780 basis points of expansion from favorable operating impacts, consisting of a 370 basis point increase from price realization, 280 basis points from productivity savings and 130 basis points from favorable volume. Margin expansion was offset by 670 basis points of unfavorable impacts driven by 310 basis points of inflation, 110 basis points of increased spending on strategic investments, 80 basis points of unfavorable mix, and 50 basis points of increased employee related costs. Excluding special charges, acquired intangible asset amortization, and restructuring and realignment costs, adjusted operating income was $1,072 million (adjusted operating margin of 14.6%) for 2023 as compared to adjusted operating income of $744 million (adjusted operating margin of 13.5%) during the prior year. Adjusted EBITDA was $1,392 million (adjusted EBITDA margin of 18.9%) during 2023, an increase of $452 million, or 48.1%, when compared to adjusted EBITDA of $940 million (adjusted EBITDA margin of 17.0%) during the prior year. The increase in adjusted EBITDA margin was primarily due to the same factors impacting adjusted operating margin noted above; however, adjusted EBITDA was not negatively impacted by the relative impact of depreciation and software amortization expense. 48 The table below provides a reconciliation of total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin: [[GREPCENT_TABLE]] [["(In millions)","2023","","2022","","Change"],["Water Infrastructure"],["Operating income","$","419","","","$","418","","","0.2","","%"],["Operating margin","14.1","%","","17.7","%","","(360)","","bp"],["Restructuring and realignment costs","22","","","11","","","100.0","","%"],["Purchase accounting intangible amortization","49","","","4","","","1,125.0","","%"],["Special charges","29","","","\u2014","","","NM","%"],["Adjusted operating income","$","519","","","$","433","","","19.9","","%"],["Adjusted operating margin","17.5","%","","18.3","%","","(80)","","bp"],["Applied Water"],["Operating income","$","310","","","$","258","","","20.2","","%"],["Operating margin","16.7","%","","14.6","%","","210","","bp"],["Restructuring and realignment costs","14","","","13","","","7.7","","%"],["Purchase accounting intangible amortization","\u2014","","","\u2014","","","NM","%"],["Special charges","\u2014","","","\u2014","","","NM","%"],["Adjusted operating income","$","324","","","$","271","","","19.6","","%"],["Adjusted operating margin","17.5","%","","15.3","%","","220","","bp"],["Measurement and Control Solutions"],["Operating income","$","113","","","$","2","","","5,550.0","","%"],["Operating margin","6.5","%","","0.1","%","","640","","bp"],["Restructuring and realignment costs","20","","","10","","","100.0","","%"],["Purchase accounting intangible amortization","66","","","68","","","(2.9)","","%"],["Special charges","4","","","14","","","(71.4)","","%"],["Adjusted operating income","$","203","","","$","94","","","116.0","","%"],["Adjusted operating margin","11.7","%","","6.8","%","","490","","bp"],["Integrated Solutions and Services"],["Operating income","$","8","","","$","\u2014","","","NM","%"],["Operating margin","1.0","%","","\u2014","%","","100","","bp"],["Restructuring and realignment costs","15","","","\u2014","","","NM","%"],["Purchase accounting intangible amortization","61","","","\u2014","","","NM","%"],["Special charges","21","","","\u2014","","","NM","%"],["Adjusted operating income","$","105","","","$","\u2014","","","NM","%"],["Adjusted operating margin","12.9","%","","\u2014","%","","NM"],["Corporate and other"],["Operating loss","$","(198)","","","$","(56)","","","253.6","","%"],["Restructuring and realignment costs","35","","","\u2014","","","NM","%"],["Special charges","84","","","2","","","4,100.0"],["Adjusted operating loss","$","(79)","","","$","(54)","","","46.3","","%"],["Total Xylem"],["Operating income","$","652","","","$","622","","","4.8","","%"],["Operating margin","8.9","%","","11.3","%","","(240)","","bp"],["Restructuring and realignment costs","106","","","34","","","211.8","","%"],["Purchase accounting intangible amortization","176","","","72","","","144.4","","%"],["Special charges","138","","","16","","","762.5","","%"],["Adjusted operating income","$","1,072","","","$","744","","","44.1","","%"],["Adjusted operating margin","14.6","%","","13.5","%","","110","","bp"]] [[/GREPCENT_TABLE]] NM    Not Meaningful 49 The table below provides a reconciliation of net income to consolidated EBITDA and adjusted EBITDA: [[GREPCENT_TABLE]] [["(in millions)","Year Ended December 31,"],["","2023","","2022","","Change"],["Net Income","$","609","","","$","355","","","72","","%"],["Net Income margin","8.3","%","","6.4","%","","190","","bp"],["Depreciation","193","","","111","","","74","","%"],["Amortization","243","","","125","","","94","","%"],["Interest expense, net","21","","","34","","","(38)","","%"],["Income tax expense","26","","","85","","","(69)","","%"],["EBITDA","$","1,092","","","$","710","","","54","","%"],["Share-based compensation","60","","","37","","","62","","%"],["Restructuring and realignment","103","","","34","","","203","","%"],["U.K. pension settlement expense","\u2014","","","140","","","100","","%"],["Special charges","136","","","20","","","580","","%"],["Gain from sale of business","1","","","(1)","","","(200)","","%"],["Adjusted EBITDA","$","1,392","","","$","940","","","48","","%"],["Adjusted EBITDA margin","18.9","%","","17.0","%","","190","","bp"]] [[/GREPCENT_TABLE]] The tables below provide a reconciliation of each segment's operating income (loss) to EBITDA and adjusted EBITDA: [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023"],["(in millions)","","Water Infrastructure","","Applied Water Systems","","Measurement and Control Solutions","","Integrated Solutions and Services"],["Operating Income","","$","419","","","$","310","","","$","113","","","$","8"],["Operating margin","","14.1","%","","16.7","%","","6.5","%","","1.0","%"],["Depreciation","","55","","","19","","","32","","","65"],["Amortization","","55","","","2","","","107","","","65"],["Other non-operating expense","","3","","","(2)","","","(4)","","","\u2014"],["EBITDA","","$","532","","","$","329","","","$","248","","","$","138"],["Share-based compensation","","15","","","4","","","7","","","7"],["Restructuring and realignment","","22","","","13","","","18","","","15"],["Special charges","","29","","","\u2014","","","4","","","21"],["Loss/(Gain) from sale of business","","\u2014","","","\u2014","","","1","","","\u2014"],["Adjusted EBITDA","","$","598","","","$","346","","","$","278","","","$","181"],["Adjusted EBITDA margin","","20.2","%","","18.7","%","","16.1","%","","22.2","%"]] [[/GREPCENT_TABLE]] 50 [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2022"],["(in millions)","","Water Infrastructure","","Applied Water Systems","","Measurement and Control Solutions","","Integrated Solutions Services"],["Operating Income","","$","418","","","$","258","","","$","2","","","$","\u2014"],["Operating margin","","17.7","%","","14.6","%","","0.1","%","","NM"],["(Loss)/Gain from sale of business","","\u2014","","","\u2014","","","1","","","\u2014"],["Depreciation","","44","","","17","","","33","","","\u2014"],["Amortization","","9","","","2","","","104","","","\u2014"],["Other non-operating expense","","(4)","","","(2)","","","(2)","","","\u2014"],["EBITDA","","$","467","","","$","275","","","$","138","","","$","\u2014"],["Share-based compensation","","2","","","4","","","6","","","\u2014"],["Restructuring and realignment","","11","","","13","","","10","","","\u2014"],["Special charges","","\u2014","","","\u2014","","","14","","","\u2014"],["Loss/(Gain) from sale of business","","\u2014","","","\u2014","","","(1)","","","\u2014"],["Adjusted EBITDA","","$","480","","","$","292","","","$","167","","","$","\u2014"],["Adjusted EBITDA margin","","20.3","%","","16.5","%","","12.0","%","","NM"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","2023 versus 2022"],["(in millions)","","Water Infrastructure","","Applied Water Systems","","Measurement and Control Solutions","","Integrated Solutions and Services"],["Operating Income (Loss)","","$","1","","","$","52","","","$","111","","","$","8"],["Operating margin","","(360)","bps","","210","bps","","640","bps","","NM"],["(Loss)/Gain from sale of business","","\u2014","","","\u2014","","","(1)","","","\u2014"],["Depreciation","","11","","","2","","","(1)","","","65"],["Amortization","","46","","","\u2014","","","3","","","65"],["Other non-operating expense","","7","","","\u2014","","","(2)","","","\u2014"],["EBITDA","","$","65","","","$","54","","","$","110","","","$","138"],["Share-based compensation","","13","","","\u2014","","","1","","","7"],["Restructuring and realignment","","11","","","\u2014","","","8","","","15"],["Special charges","","29","","","\u2014","","","(10)","","","21"],["Loss/(Gain) from sale of business","","\u2014","","","\u2014","","","2","","","\u2014"],["Adjusted EBITDA","","$","118","","","$","54","","","$","111","","","$","181"],["Adjusted EBITDA margin","","(0.1)","%","","2.2","%","","4.1","%","","NM"]] [[/GREPCENT_TABLE]] 51 Water Infrastructure Operating income was $419 million for our Water Infrastructure segment (operating margin of 14.1%) during 2023, an increase of $1 million, or 0.2%, when compared to operating income of $418 million (operating margin of 17.7%) during the prior year, or a total decrease of 360 basis points of operating margin. Operating margin declines included unfavorable impacts of 280 basis points from an increase in acquired intangible asset amortization, special charges and restructuring and realignment costs as compared to the prior year. Additionally, operating margin declines included 840 basis points from unfavorable operating impacts, driven by 330 basis points of inflation, 160 basis points of unfavorable mix, 150 basis points of increased spending on strategic investments, 40 basis points of employee-related expenses and 40 basis points of negative operating impact from the impact of the Evoqua acquisition. Operating margin declines were offset by 760 basis points of favorable impacts, consisting of 420 basis points of price realization, 230 basis points from productivity savings and 110 basis points of favorable volume. Excluding acquired intangible asset amortization, special charges and restructuring and realignment costs, adjusted operating income was $519 million (adjusted operating margin of 17.5%) during 2023 as compared to adjusted operating income of $433 million (adjusted operating margin of 18.3%) during the prior year. Adjusted EBITDA was $598 million (adjusted EBITDA margin of 20.2%) during 2023, an increase of $118 million, or 24.6%, when compared to adjusted EBITDA of $480 million (adjusted EBITDA margin of 20.3%) during the prior year. The slight decrease in adjusted EBITDA margin was primarily due to the same factors impacting the decrease in adjusted operating margin; however, adjusted EBITDA was not negatively impacted by the relative impact of the increase in stock based compensation expense. Applied Water Operating income was $310 million for our Applied Water segment (operating margin of 16.7%) during 2023, an increase of $52 million, or 20.2%, when compared to operating income of $258 million (operating margin of 14.6%) during the prior year, or a total increase of 210 basis points of operating margin. Operating margin expansion was partially offset by unfavorable impacts of 10 basis points from increases in restructuring and realignment costs as compared to the prior year. Operating margin increases included 820 basis points of favorable operating impacts, consisting of 470 basis points of price realization and 350 basis points from productivity savings. Margin expansion was partially offset by negative operating impacts of 600 basis points, consisting of 320 basis points of inflation, 100 basis points of unfavorable volume, 80 basis points of increased spending on strategic investments and 50 basis points of increased employee related costs. Excluding restructuring and realignment costs, adjusted operating income was $324 million (adjusted operating margin of 17.5%) during 2023 as compared to adjusted operating income of $271 million (adjusted operating margin of 15.3%) during the prior year. Adjusted EBITDA was $346 million (adjusted EBITDA margin of 18.7%) during 2023, an increase of $54 million, or 18.5%, when compared to adjusted EBITDA of $292 million (adjusted EBITDA margin of 16.5%) during the prior year. The increase in adjusted EBITDA margin was due to the same factors impacting the increase in adjusted operating margin. Measurement and Control Solutions Operating income was $113 million for our Measurement and Control Solutions (operating margin of 6.5%) during 2023, an increase of $111 million, or 5,550.0%, when compared to operating income of $2 million (operating margin of 0.1%) during the prior year, or a total increase of 640 basis points of operating margin. Operating margin increases included favorable impacts of 150 basis points from a decrease in special charges, acquired intangible asset amortization, and restructuring and realignment costs as compared to the prior year. Additionally, the operating margin increase included 1,310 basis points from favorable operating impacts consisting of 630 basis points from favorable volume, 350 basis points from productivity savings and 330 basis points of price realization. Favorable impacts were partially offset by 820 basis points of unfavorable impacts driven by 370 basis points of inflation, 130 basis points of increased inventory management costs, 70 basis points of unfavorable mix, 70 basis points of increased spending on strategic investments, 40 basis points of increased employee related costs. Excluding special charges, acquired intangible asset amortization, and restructuring and realignment costs, adjusted operating income was $203 million (adjusted operating margin of 11.7%) during 2023 as compared to adjusted operating income of $94 million (adjusted operating margin of 6.8%) during the prior year. Adjusted EBITDA was $278 million (adjusted EBITDA margin of 16.1%) during 2023, an increase of $111 million, or 66.5%, when compared to adjusted EBITDA of $167 million (adjusted EBITDA margin of 12.0%) during the prior year. The increase in adjusted EBITDA margin was due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA was not favorably impacted by the relative impact of depreciation and software amortization expense. 52 Integrated Solutions and Services Operating income was $8 million for our Integrated Solutions and Services segment during 2023 (operating margin of 1.0%). Excluding amortization of acquired intangible asset amortization, special charges and restructuring and realignment costs, adjusted operating income was $105 million  (adjusted operating margin of 12.9%). Adjusted EBITDA was $181 million for our Integrated Solutions and Services segment during 2023 (adjusted EBITDA margin of 22.2%). Corporate and other Operating loss for corporate and other increased $142 million, or 253.6%, compared to the prior year. The increase in operating loss for the year was primarily due to higher special charges and restructuring and realignment costs as compared to the prior year. Excluding special charges and restructuring and realignment costs, adjusted operating loss increased $25 million, or 46.3%, compared to the prior year. The increase in adjusted operating loss is primarily related to increased operating expense due to the acquisition of Evoqua, increased employee costs and spending on strategic investments. Interest Expense Interest expense was $49 million and $50 million for 2023 and 2022, respectively. The decrease in interest expense was primarily driven by a reduction of interest expense incurred during 2022 related to our 2.250% Senior Notes due 2023 that were paid off in December 2022, and reduced expense generated by cross currency swaps. Partially offsetting these items was interest expense on several debt facilities, including a term loan entered into in May 2023 for use in funding the acquisition of Evoqua, securitization and equipment financing facilities assumed as part of our acquisition of Evoqua. See Note 15, "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 Expense The income tax provision for 2023 was $26 million at an effective tax rate of 4.1% as compared to $85 million at an effective tax rate of 19.2% in 2022. The 2023 effective tax rate differs from that of 2022 primarily due to the impact of audit settlements and tax rate changes in the current period. See Note 7, "Income Taxes", of our consolidated financial statements for a description of our credit facilities and long-term debt and related interest. Liquidity and Capital Resources The following table summarizes our sources and uses of cash: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(in millions)","2023","","2022","","Change"],["Operating activities","$","837","","","$","596","","","$","241"],["Investing activities","(628)","","","(191)","","","(437)"],["Financing activities","(157)","","","(790)","","","633"],["Foreign exchange (a)","23","","","(20)","","","43"],["Total","$","75","","","$","(405)","","","$","480"]] [[/GREPCENT_TABLE]] (a)The favorable impact of foreign exchange as compared to 2022 is primarily due to strengthening of the Euro, Chinese Yuan and the Canadian Dollar. Sources and Uses of Liquidity Operating Activities During 2023, net cash provided by operating activities was $837 million, compared to $596 million in 2022. The $241 million year-over-year increase was primarily driven by higher cash earnings and improved working capital driven by reduction of safety stock. These increases were partially offset by the payment of transaction costs associated with the acquisition of Evoqua and the investment in a distribution agreement of select technology in 2023, as well as increased payments for taxes and restructuring versus the prior year. Investing Activities Cash used in investing activities was $628 million in 2023, compared to $191 million in 2022. This increase in cash used of $437 million reflects the acquisition of Evoqua, increased capital expenditures and cash paid for equity investments. Cash received from the sales of businesses and cash received from the termination of acquired interest rate swaps partially offset these items. 53 Financing Activities Cash used in financing activities was $157 million in 2023, compared to $790 million in 2022. The year-over-year decrease in cash used was mainly driven by lower debt repayments, with the early payment in December 2022 of the Senior Notes due in March 2023, cash received from a new term loan facility in 2023, as well as an increase cash received from the exercise of employee stock options and a reduction of repurchases of common stock. Higher dividend payments partially offset these items. Funding and Liquidity Strategy Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. We continually evaluate aspects of our spending, including capital expenditures, strategic investments and dividends. Historically, we have generated operating cash flow sufficient to fund our primary cash needs. If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. Our securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note 15, "Credit Facilities and Debt", of our consolidated financial statements for a description of limitations on obtaining additional funding. We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis. In addition, our existing committed credit facilities and access to the public debt markets would provide further liquidity if required. Based on our current global cash positions, cash flows from operations and access to the capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other obligations in both the U.S. and outside of the U.S. over the next twelve months. Currently, we have available liquidity of approximately $2 billion, consisting of $1 billion of cash and $1 billion of available credit facilities as disclosed in Note 15, "Credit Facilities and Debt", of our consolidated financial statements. Contractual Obligations Material contractual obligations arising in the normal course of business primarily consist of debt obligations and related interest payments, lease obligations and unconditional purchase obligations. Refer Note 15, “Credit Facilities and Debt” and Note 11, “Leases” of the consolidated financial statements for related to these matters. The Company has future unconditional purchase commitments which are legally binding and that specify all significant terms including price and/or quantity. Total future commitments within the next twelve months for these obligations is $438 million, excluding contracts that can be canceled without penalty. Credit Facilities and Long-Term Contractual Commitments See Note 15, "Credit Facilities and Debt" of our consolidated financial statements for a description of our credit facilities and long-term debt. Non-U.S. Operations As we continue to grow our operations in the emerging markets and elsewhere outside of the U.S., we expect to continue to generate significant revenue from non-U.S. operations and expect that a substantial portion of our cash will be held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when we believe it is cost effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. Off-Balance Sheet Arrangements We are a party to certain off-balance sheet arrangements including certain guarantees. For discussion of these arrangements, see Note 20, “Commitments and Contingencies” of the consolidated financial statements. 54 Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant accounting policies used in the preparation of the consolidated financial statements are discussed in Note 1, “Summary of Significant Accounting Policies,” of the consolidated financial statements. Accounting estimates and assumptions discussed in this section are those that we consider most critical to an understanding of our financial statements because they are inherently uncertain, involve significant judgments, include areas where different estimates reasonably could have been used, and changes in the estimates that are reasonably possible could materially impact the financial statements. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management’s estimates under different assumptions or conditions. Revenue Recognition. Xylem recognizes revenue in a manner that depicts the transfer of promised goods and services to customers in an amount that reflects the consideration to which it expects to be entitled for providing those goods and services. For each arrangement with a customer, we identify the contract and the associated performance obligations within the contract, determine the transaction price of that contract, allocate the transaction price to each performance obligation and recognize revenue as each performance obligation is satisfied. The satisfaction of performance obligations in a contract is based upon when the customer obtains control over the asset. Depending on the nature of the performance obligation, control transfers either at a particular point in time, or over time, which determines the pattern of revenue recognition. For product sales, other than long-term construction-type contracts, we recognize revenue once control has passed at a point in time, which is generally when products are shipped. In instances where contractual terms include a provision for customer acceptance, revenue is recognized when either (i) we have previously demonstrated that the product meets the specified criteria based on either seller or customer-specified objective criteria or (ii) upon formal acceptance received from the customer where the product has not been previously demonstrated to meet customer-specified objective criteria. We recognize revenue on product sales to channel partners, including resellers, distributors or value-added solution providers, at the point in time when the risks and rewards, possession, and title have transferred to the customer, which usually occurs at the point of delivery. Revenue from performance obligations related to services is primarily recognized over time, as the performance obligations are satisfied. In these instances, the customer consumes the benefit of the service as Xylem performs. Certain businesses also enter into long-term construction-type sales contracts where revenue is recognized over time. In these instances, revenue is recognized using a measure of progress that applies the input method based on costs incurred in relation to total estimated costs. We also recognize revenue for certain of these arrangements using the output method and measure progress based on shipments of product where control has transferred to the customer. For all contracts with customers, we determine the transaction price in the arrangement and allocate the transaction price to each performance obligation identified in the contract. Judgment is required to determine the appropriate unit of account, and we separate out the performance obligations if they are capable of being distinct and are distinct within the context of the contract. The transaction price is adjusted for our estimate of variable consideration, which may include a right of return, discounts, rebates, penalties and retainage. To estimate variable consideration, we apply the expected value method or the most likely amount method, based on whichever method most appropriately predicts the amount of consideration we expect to be entitled to. The method applied is typically based on historical experience and known trends. We constrain the amounts of variable consideration that are included in the transaction price, to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when uncertainties around the variable consideration are resolved. Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse. Based on the evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than not we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes to our estimate of the amount we are more likely than not to realize in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income, as appropriate. 55 In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates. We have recorded net foreign withholding taxes and state income taxes on earnings that are expected to be repatriated to the U.S. parent. We have not recorded any deferred taxes on the amounts that the Company currently does not intend to repatriate. The determination of deferred taxes on this amount is not practicable. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Furthermore, we recognize the tax benefit from an uncertain tax position only if based on the technical merits of the position it is more likely than not that the tax position will be sustained on examination by the taxing authorities or upon completion of the litigation process. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. We adjust our liability for uncertain tax positions in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional tax expense would result. If a payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. 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 over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the purchase method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. These assumptions and estimates include a market participant’s use of the asset and the appropriate discount rates for a market 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 not limited to, the cash flows that an asset is expected to generate in the future, the cost to build/recreate certain technology, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and 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 or changes in circumstances indicate the carrying value of an asset may not be recoverable. We also review the carrying value of our finite-lived intangible assets for potential impairment when impairment indicators arise. We conduct our annual impairment test as of the first day of the fourth quarter. For goodwill, the estimated fair value of each reporting unit is compared to the carrying value of the net assets assigned to that reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of the reporting unit exceeds its estimated fair value, then an impairment charge is recognized for that excess up to the amount of recorded goodwill. We estimate the fair value of our reporting units using an income approach based on the discounted value of estimated cash flows. Our projected cash flows are discounted using weighted costs of capital and are derived using revenue growth rates and operating margin estimates, taking into consideration industry and market conditions. In instances where we have completed an acquisition shortly before our annual impairment assessment we perform a qualitative assessment to determine if a quantitative assessment is necessary. We estimate the fair value of our intangible assets with indefinite lives using either the income approach or the market approach. Under the income approach, we calculate fair value based on the present value of estimated future cash flows. Under the market approach, we calculate fair value based on recent sales and selling prices of similar assets. 56 Determining the fair value of a reporting unit or an indefinite-lived intangible asset is judgmental in nature and involves the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions and identification of appropriate market comparable data. In addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units when determining the carrying value of each reporting unit also require judgment. Goodwill is tested for impairment at either the operating segment level identified in Note 21, “Segment and Geographic Data,” of the consolidated financial statements, or one level below. The fair values of our reporting units and indefinite-lived intangible assets are based on estimates and assumptions that are believed to be reasonable. Significant changes to these estimates and assumptions could adversely impact our conclusions. Actual future results may differ from those estimates. The risks around impairment of our assets are included in our risk factor disclosures referenced under “Item 1A. Risk Factors". During the fourth quarter of 2023, we performed our annual impairment assessment and determined that our goodwill reporting units either did not need to be assessed quantitatively or the estimated fair values of our goodwill reporting units were substantially in excess of each of their carrying values. However, future goodwill impairment tests could result in a charge to earnings. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances require us to do so. We determined that no material impairment of the indefinite-lived intangibles existed as of the measurement date in 2023. However, future indefinite-lived intangible impairment tests could result in a charge to earnings. We will continue to evaluate indefinite-lived intangibles on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances indicate there may be a potential impairment. Post-retirement Benefit Plans. Company employees around the world participate in numerous defined benefit plans. The determination of projected benefit obligations and the recognition of expenses related to these plans are dependent on various assumptions. These assumptions primarily relate to discount rates, expected long-term rates of return on plan assets, rate of future compensation increases, mortality, years of service and other factors (some of which are disclosed in Note 16, “Post-retirement Benefit Plans,” of the consolidated financial statements). 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 for plans with all or substantially all inactive participants, over the average remaining life expectancy. Significant Assumptions Management develops each assumption using relevant Company experience, in conjunction with market-related data for each individual country in which such plans exist. All assumptions are reviewed annually with third-party consultants and are adjusted as necessary. The table below provides the weighted average assumptions used to estimate our defined benefit pension obligations and costs as of and for the years ended 2023 and 2022. [[GREPCENT_TABLE]] [["","2023","","2022"],["","U.S.","","Int\u2019l","","U.S.","","Int\u2019l"],["Benefit Obligation Assumptions"],["Discount rate","5.00","%","","3.55","%","","5.25","%","","4.13","%"],["Rate of future compensation increase","NM","","2.87","%","","NM","","2.79","%"],["Net Periodic Benefit Cost Assumptions"],["Discount rate","5.25","%","","4.13","%","","3.00","%","","1.55","%"],["Expected long-term return on plan assets","6.00","%","","5.85","%","","5.50","%","","2.79","%"],["Rate of future compensation increase","NM","","2.79","%","","NM","","2.84","%"]] [[/GREPCENT_TABLE]] NM    Not meaningful. The pension benefits for future service for all the U.S. pension plans are based on years of service and not impacted by future compensation increases. We determine the expected long-term rate of return on plan assets by evaluating both historical returns and estimates of future returns. Specifically, the Company analyzes the estimated future returns based on independent estimates of asset class returns and evaluates historical broad market returns over long-term timeframes based on the strategic asset allocation, which is detailed in Note 16, “Post-retirement Benefit Plans” of the consolidated financial statements. 57 For the recognition of net periodic pension cost, the calculation of the expected return on plan assets is generally derived by applying the expected long-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 at the measurement date over the last five years. The use of fair value, rather than a calculated value, could materially affect net periodic pension cost. 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 2024 is estimated at 5.84%. We estimate that every 25 basis point change in the expected return on plan assets impacts the expense by less than $1 million. The discount rate reflects our expectation of the present value of expected future cash payments for benefits at the measurement date. A decrease in the discount rate increases the present value of benefit obligations and increases pension expense. We base the discount rate assumption on current investment yields of high-quality fixed income investments during the retirement benefits maturity period. The pension discount rate was determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero and 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-point discount rate matching the plan’s characteristics. Our weighted average discount rate for all pension plans effective January 1, 2024, is 3.79%. We estimate that every 25 basis point change in the discount rate impacts the expense by less than $1 million. The rate of future compensation increase assumption reflects our long-term actual experience and future and near-term outlook. Effective January 1, 2024, our expected rate of future compensation increase is 2.99% for all pension plans. The estimated impact of a 25 basis point change in the expected rate of future compensation is less than $1 million. We currently anticipate making contributions to our pension and post-retirement benefit plans in the range of $31 million to $37 million during 2024. Approximately $8 million of contributions are expected to be made in the first quarter. Funded Status Funded status is derived by subtracting the respective year-end values of the projected benefit obligations from the fair value of plan assets. We estimate that every 25 basis point change in the discount rate impacts the funded status by approximately $9 million. Fair Value of Plan Assets The plan assets of our pension plans comprise a broad range of investments, including domestic and foreign equity securities, interests in hedge funds, fixed income investments, insurance contracts, and cash and cash equivalents. A portion of our pension benefit plan assets portfolio comprises investments in hedge funds that are generally measured at net asset value. However, in certain instances, the values reported by the asset managers were not current at the measurement date. Accordingly, we made estimate adjustments to the last reported value where necessary to measure the assets at fair value at the measurement date. These adjustments consider information received from the asset managers, as well as general market information. The adjustment recorded at December 31, 2023 and 2022 for these assets represented less than 1% of total plan assets in each respective year. Asset values for other positions were generally measured using market observable prices. We estimate that a 5.00% change in asset values will impact funded status by approximately $11 million. New Accounting Pronouncements See Note 2, “Recently Issued Accounting Pronouncements,” of the consolidated financial statements for a complete discussion of recent accounting pronouncements. 58 2024 Business Outlook We anticipate total revenue growth in the range of 14% to 15% in 2024, with organic revenue growth anticipated to be in the range of 3% to 5%. The following is a summary of the 2024 organic revenue outlook by segment. •In the Water Infrastructure segment, we expect organic revenue growth in the mid-single-digits in 2024, driven by our mission-critical applications, as well as strong capital project demand. We will continue to monitor softness within China. •In the Applied Water segment, we expect organic revenue declines in the low-single-digits in 2024, due to decreased demand in the industrial and buildings solutions applications and headwinds due to normalizing backlog levels. •We expect Measurement and Control Solutions segment organic revenue growth in the low-double-digits in 2024, supported by our strong backlog. We expect demand for our AMI solutions to remain strong in 2024. Additionally, we have a positive outlook in our test and measurement businesses. •We expect organic revenue growth in the mid-single-digits in the Integrated Solutions and Services segment in 2024, driven by growth in our capital and service businesses and our strong backlog. Effective January 1, 2024, we unified our Integrated Solutions and Services segment, the dewatering business within our Water Infrastructure segment and the assessment services business within our Measurement and Control Solutions segment to form a new segment called Water Solutions and Services. Certain recast financial information for the new reportable segments will be provided in the first quarter of 2024. The integration of Evoqua is on track with our integration plan, and we will continue to strategically execute restructuring and realignment actions in an effort to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. During 2023, we incurred $72 million and $34 million in restructuring and realignment costs, respectively. During 2024, we currently expect to incur between $50 million and $70 million in restructuring and realignment costs. We are strongly positioned to deliver on our 2024 commitments with commercial and operational momentum. Our comprehensive platform provides critical solutions in our largest end markets. Our 2024 commitments are supported by robust backlog, resilient end markets, and recurring service revenue to support growth. Beyond 2024, we remain on track to deliver our longer-term strategic and financial milestones. 59