The accompanying notes to the unaudited pro forma condensed combined financial information;

The separate unaudited condensed consolidated financial statements of Xylem as of and for the three months ended March 31, 2023 and the related notes, included in Xylem’s Form 10-Q for the three months ended March 31, 2023;

The separate audited consolidated financial statements of Xylem as of and for the fiscal year ended December 31, 2022 and the related notes, included in Xylem’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022;

The separate unaudited consolidated financial statements of Evoqua as of and for the three months ended March 31, 2023 and the related notes, included in Evoqua’s Form 10-Q for the three months ended March 31, 2023; and

The separate audited consolidated financial statements of Evoqua as of and for the fiscal year ended September 30, 2022 and the related notes, included in Evoqua’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

ASSETS

Current assets:

Cash and cash equivalents

Receivables, net

Inventories

Prepaid and other current assets

Current assets held for sale

Total current assets

Property, plant and equipment, net

Goodwill

Other intangible assets, net

Other non-current assets

Non-current assets held for sale

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accrued and other current liabilities

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

Total current liabilities

Long-term debt, net

Accrued post-retirement benefit obligations

Deferred income tax liabilities

Other non-current liabilities held for sale

Other non-current accrued liabilities

Total liabilities

Stockholders’ equity:

Common stock

Capital in excess of par value

Retained earnings

Treasury stock

Accumulated other comprehensive loss

Total stockholders’ equity

Non-controlling interest

Total equity

Total liabilities and stockholders’ equity

Revenue

Cost of revenue

Gross profit

Selling, general and administrative expenses

Research and development expenses

Restructuring and asset impairment charges

Operating income

Interest expense

Other non-operating income, net

Income before taxes

Income tax expense (benefit)

Net income

Earnings per share:

Basic

Diluted

Weighted average number of shares:

Basic

Diluted

Revenue

Cost of revenue

Gross profit

Selling, general and administrative expenses

Research and development expenses

Restructuring and asset impairment charges

Operating income

Interest expense

UK pension settlement expense

Other non-operating income, net

Gain on sale of businesses

Income before taxes

Income tax expense (benefit)

Net income

Earnings per share:

Basic

Diluted

Weighted average number of shares:

Basic

Diluted

Evoqua Historical
Consolidated Balance Sheet

Line Items

Cash and cash equivalents

Contract assets

Receivables, net

Inventories, net

Prepaid and other current assets

Current assets held for sale

Property, plant, and equipment, net

Goodwill

Intangible assets, net

Deferred income taxes, net of valuation allowance

Operating lease right-of-use assets, net

Other non-current assets

Non-current assets held for sale

Accounts payable

Current portion of debt, net of deferred financing fees and discounts

Contract liabilities

Product warranties

Income tax payable

Accrued expenses and other liabilities

Long-term debt, net of deferred financing fees and discounts

Product warranties

Obligation under operating leases

Other non-current liabilities

Deferred income taxes

Non-current liabilities held for sale

Common stock

Treasury stock

Additional paid-in capital

Retained earnings (deficit)

Accumulated other comprehensive income, net of tax

Represents a reclassification of $(115) million of Contract assets to Receivables, net

Represents a reclassification of $(38) million of Property, plant & equipment, net to Other non-current assets to align presentation for financing leases with that of Xylem

Represents a reclassification of $(10) million of Property, plant & equipment, net to Other intangible assets, net to align presentation for intangibles with that of Xylem

Represents a reclassification of $(3) million of Deferred income taxes, net to Other non-current assets

Represents a reclassification of $(57) million of Operating lease right-of-use assets, net to Other non-current assets

Represents a reclassification of $(76) million of Contract liabilities to Accrued and other current liabilities

Represents a reclassification of $(7) million of Product warranties to Accrued and other current liabilities

Represents a reclassification of $(3) million of Income tax payable to Accrued and other current liabilities

Represents a reclassification of $(3) million of Product warranties to Other non-current accrued liabilities

Represents a reclassification of $(46) million of Obligation under operating leases to Other non-current accrued liabilities

Represents a reclassification of $9 million of Other non-current liabilities to Accrued post-retirement benefit obligations

Evoqua Historical

Consolidated Statement of Operations

Line Items

Xylem Historical
Consolidated Income Statement

Line Items

Revenue from product sales

Revenue from services

Cost of product sales

Cost of services

General and administrative expense

Sales and marketing expense

Other operating expense, net

Research and development expense

Interest expense

Income tax benefit (expense)

Represents a reclassification of $(293) million of Revenue from product sales to Revenue

Represents a reclassification of $(185) million of Revenue from services to Revenue

Represents a reclassification of $(201) million of Cost of product sales to Cost of revenue

Represents a reclassification of $(123) million of Cost of services to Cost of revenue

Represents a reclassification of $(2) million of Cost of product sales to Selling, general, and administrative expenses to align presentation for sales commissions with that of Xylem

Represents a reclassification of $(78) million of General and administrative expense to Selling, general, and administrative expenses

Represents a reclassification of $(43) million of Sales and marketing expense to Selling, general, and administrative expenses

Represents a reclassification of $(2) million of Other operating expense, net to Selling, general, and administrative expenses

Evoqua Historical
Consolidated Statement of Operations
Line Items

Revenue from product sales

Revenue from services

Cost of product sales

Cost of services

General and administrative expense

Sales and marketing expense

Other operating income

Research and development expense

Interest expense

Income tax benefit (expense)

Represents a reclassification of $(1,052) million of Revenue from product sales to Revenue

Represents a reclassification of $(685) million of Revenue from services to Revenue

Represents a reclassification of $(730) million of Cost of product sales to Cost of revenue

Represents a reclassification of $(461) million of Cost of services to Cost of revenue

Represents a reclassification of $(10) million of Cost of product sales to Selling, general, and administrative expenses to align presentation for sales commissions with that of Xylem

Represents a reclassification of $(261) million of General and administrative expense to Selling, general, and administrative expenses

Represents a reclassification of $(161) million of Sales and marketing expense to Selling, general, and administrative expenses

Represents a reclassification of $5 million of Other operating income to Selling, general, and administrative expenses

Preliminary calculation of estimated Merger Consideration

(in millions, except share price and exchange ratio)

Stock Consideration

Shares of Evoqua as of May 23, 2023

Exchange ratio

Xylem Common Stock issued

Xylem share price on May 23, 2023

Estimated value of Xylem Common Stock to be issued to Evoqua stockholders pursuant to the Merger Agreement (i)

Estimated replacement Xylem equity awards for Evoqua equity awards (ii)

Estimated repayment of Evoqua debt (iii)

Preliminary fair value of estimated total Merger Consideration

The Stock Consideration component of the Merger Consideration is computed based on 122,456,450 total outstanding shares of Evoqua Common Stock as of May 23, 2023, multiplied by the 0.48 exchange ratio and the Xylem common stock closing share price of $104.14 on May 23, 2023.

Consideration for replacement of Evoqua outstanding equity awards. All outstanding Evoqua equity awards for continuing employees were replaced by Xylem’s equity awards with substantially the same general terms and conditions. The final value reflects the price of Xylem Common Stock and the number of Evoqua awards outstanding at the Closing Date.

The cash paid by Xylem to repay Evoqua’s term loan and revolving credit facility of $469 million and $150 million, respectively. The unaudited pro forma condensed combined financial information currently reflects the utilization of cash on hand and the Transaction Financing to repay Evoqua’s term loan and revolving credit facility in connection with the Closing Date. Refer to footnote 4(a).

Description (in millions)

Preliminary fair value of estimated total Merger Consideration

Assets

Cash and cash equivalents (i) (iii)

Receivables, net

Inventories

Prepaid and other current assets (iii)

Current assets held for sale (iv)

Property, plant and equipment, net

Other intangible assets, net

Other non-current assets (ii) (iii)

Non-current assets held for sale (iv)

Total assets

Liabilities

Accounts payable

Accrued and other current liabilities (iv)

Short-term borrowings and current maturities of long-term debt (iii)

Long-term debt, net (iii)

Accrued post-retirement benefits

Deferred income tax liabilities (v)

Other non-current liabilities held for sale (iv)

Other non-current accrued liabilities

Total liabilities

Less: Net assets

Goodwill

Adjusted for an estimated $64 million of transaction costs incurred by Evoqua through the Closing Date. Refer to footnote 4(a)(iv).

As a result of the Merger, Xylem will be required to assess the ability to realize the benefit of certain Evoqua deferred tax assets. Any resulting change in valuation allowances associated with Evoqua deferred tax assets will be recorded in purchase accounting. No change in valuation allowances has been reflected within this unaudited pro forma condensed combined financial information.

Adjusted to eliminate an estimated $607 million of Evoqua debt, net of $9 million of unamortized debt issuance costs that were repaid by Xylem in connection with the Closing Date using cash on hand and existing Xylem credit facilities. Additionally, reflects the elimination of $21 million and $16 million from Prepaid and other current assets and Other non-current assets, respectively, related to the interest rate swap settled in connection with the repayment of existing Evoqua indebtedness. Refer to footnotes 4(a) and 4(j).

At March 31, 2023, Evoqua had certain assets and liabilities classified as held for sale and carried at the lesser of cost or fair value less costs to sell. Adjustments to Evoqua’s historical balances reflect these assets and liabilities held for sale that have been acquired or assumed by Xylem at fair value less costs to sell.

Deferred tax liabilities were derived based on the step up in fair value of certain acquired tangible and intangible assets.

Reflects adjustment to Cash and cash equivalents:

Description (in millions)

Line Item

Sources:

Proceeds from Commercial Paper

Proceeds from New Term Loan (i)

Settlement of interest rate swap (ii)

Uses:

Settlement of Evoqua’s indebtedness (iii)

Goodwill

Estimated transaction costs (iv)

Pro forma net adjustment to cash and cash equivalents

The New Term Loan proceeds have been converted from EUR to USD using an exchange rate of 1.08. The debt issuance costs associated with the New Term Loan were immaterial.

Reflects the settlement of derivative assets of $37 million, which represents the value as of March 31, 2023 of the interest rate swap related to the Transaction Financing being repaid in connection with the Closing Date.

The cash paid by Xylem to repay Evoqua’s term loan and revolving credit facility of $469 million and $150 million, respectively.

These transaction costs consist of legal advisory, financial advisory, accounting and consulting costs of Xylem and Evoqua of $45 million and $64 million, respectively. Refer to footnotes 4(m) and 3, respectively.

Reflects the preliminary purchase accounting adjustment of $18 million to Receivables, net for the estimated fair value of receivables acquired based on the acquisition method of accounting.

Represents the adjustment of acquired inventories to its preliminary estimated fair value. After the Closing Date, the step up in inventories to fair value will increase cost of goods sold as the inventories are sold which, for purposes of the unaudited pro forma condensed combined financial information is assumed to occur within twelve months after the Closing Date. Refer to footnote 5(a).

At March 31, 2023, Evoqua had certain assets and liabilities classified as held for sale and carried at the lesser of cost or fair value less costs to sell. Adjustments reflect these assets and liabilities held for sale that have been acquired or assumed by Xylem at fair value less costs to sell.

Reflects the preliminary purchase accounting adjustment for the estimated fair value of the acquired property, plant and equipment based on the acquisition method of accounting.

Description

Machinery and equipment

Equipment held for lease or rental

Land, buildings and improvements

Construction work in progress

Total

Eliminate historical Evoqua property, plant and equipment

Pro forma net adjustment to property, plant and equipment

Reflects the elimination of Evoqua’s historical goodwill and the capitalization of the preliminary goodwill for the estimated Merger Consideration in excess of the fair value of the net assets acquired in connection with the Merger.

Description (in millions)

Fair value of consideration transferred in excess of the preliminary fair value of assets acquired and liabilities assumed (i)

Elimination of Evoqua’s historical goodwill

Pro forma net adjustment to goodwill

Refer to the table in footnote 3 above for the calculation of the fair value of consideration transferred in excess of the preliminary fair value of assets acquired and liabilities assumed based on the preliminary allocation of the estimated Merger Consideration to the identifiable tangible and intangible assets acquired and liabilities assumed of Evoqua.

Reflects the preliminary purchase accounting adjustment for the estimated fair value of intangible assets acquired based on the acquisition method of accounting.

Description

Trademarks

Proprietary technology and patents

Customer and distributor relationships

Backlog

Software

Total

Eliminate historical Evoqua intangible assets

Pro forma net adjustment to intangibles, net

Refer to the table in footnote 3 above for the calculation of the fair value of consideration transferred in excess of the preliminary fair value of assets acquired and liabilities assumed based on the preliminary allocation of the estimated Merger Consideration to the identifiable tangible and intangible assets acquired and liabilities assumed of Evoqua.

Reflects the preliminary purchase accounting adjustment of $11 million to Other non-current assets for operating lease right-of-use assets acquired based on the acquisition method of accounting.

Reflects the preliminary purchase accounting adjustment of $11 million to Accrued and other current liabilities for the estimated fair value of current liabilities assumed based on the acquisition method of accounting.

Represents adjustments of $2 million and $7 million to Short-term borrowings and current maturities of long-term debt and Long-term debt, net, respectively, for the elimination of deferred financing costs on Evoqua’s indebtedness that was repaid by Xylem in connection with Closing Date. Refer to footnote 4(a) for the repayment of existing Evoqua indebtedness and the issuance of the Transaction Financing.

Reflects the originating deferred tax asset and liability of $6 million and $564 million, respectively, resulting from pro forma fair value adjustments of the acquired assets and assumed liabilities based on an estimate of the applicable statutory tax rate of 25% with the respective estimated purchase price allocation. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-merger activities, including cash needs, the geographical mix of income and changes in tax law and finalization of the purchase price allocation. Because the tax rates used for the unaudited pro forma condensed combined financial information are estimated, the blended rate will likely vary from the actual effective rate in periods subsequent to the Closing Date. This determination is preliminary and subject to change based upon the final determination of the fair value of the acquired assets and assumed liabilities. The unaudited pro forma condensed combined financial information does not include adjustments for potential changes in the combined company’s ability to realize deferred tax assets.

Reflects the preliminary purchase accounting adjustment of $2 million to Other non-current accrued liabilities for the estimated fair value of non-current liabilities assumed based on the acquisition method of accounting.

Reflects adjustments to Stockholders’ equity:

Description (in millions)

Value of shares of Xylem common stock issued to Evoqua stockholders

Estimated replacement Xylem equity awards for Evoqua Equity Awards attributable to pre-combination service

Xylem transaction costs (i)

Elimination of Evoqua’s historical stockholders’ equity

Pro forma net adjustment to total equity

Reflects the adjustment to recognize estimated legal advisory, financial advisory, accounting, and consulting costs for Xylem resulting in an adjustment to Retained earnings. Refer to footnote 4(a).

Reflects the adjustments to Cost of revenue for the estimated step-up in fair value of inventories recognized through Cost of revenue during the twelve months after the Closing Date, the amortization of intangible assets and the incremental depreciation expense from the fair value adjustment to property, plant and equipment.

(in millions)

Inventory fair value step-up recognized through Cost of revenue (i)

Amortization of acquired intangible assets (ii)

Removal of historical Evoqua depreciation of property, plant and equipment

Recognition of depreciation of acquired property, plant and equipment (iii)

Net pro forma transaction accounting adjustment to Cost of revenue

Represents incremental cost of revenue associated with the step-up in fair value of the acquired inventory as discussed in footnote 4(c) above. These costs are non-recurring in nature and not anticipated to affect the condensed combined income statement beyond twelve months after the Closing Date.

The amortization of intangible assets is calculated on a straight-line basis. The amortization is based on the periods over which the economic benefits of the intangible assets are expected to be realized, which are subject to adjustment as additional information becomes available. Refer to footnote 4(g) for additional information on the useful lives of the acquired intangible assets expected to be recognized. Amortization expense is allocated among Cost of revenue, Selling, general and administrative expenses (“SG&A”) and Research and development expense based upon the nature of the activities associated with the expected use of the intangible assets.

Represents the recognition of depreciation expense on a straight-line basis based on the estimated fair value of the acquired property, plant and equipment as discussed in footnote 4(e) above. Depreciation expense is allocated to Cost of revenue and Selling, general and administrative expenses (“SG&A”) based upon the nature of the activities associated with the expected use of the property, plant, and equipment.

Reflects the adjustments to SG&A including the amortization of the estimated fair value of intangibles, the depreciation of property, plant and equipment, the preliminary incremental stock-based compensation expense for Xylem replacement equity awards and the estimated transaction costs expected to be incurred in connection with the Merger.

(in millions)

Removal of historical Evoqua amortization of intangible assets

Amortization of acquired intangible assets (i)

Removal of historical Evoqua depreciation of property, plant and equipment

Depreciation of acquired property, plant and equipment (ii)

Removal of historical Evoqua stock-based compensation expense

Record stock-based compensation expense (iii)

Xylem transaction costs (iv)

Net pro forma transaction accounting adjustment to SG&A

The amortization of intangible assets is calculated on a straight-line basis. The amortization is based on the periods over which the economic benefits of the intangible assets are expected to be realized, which are subject to adjustment as additional information becomes available. Refer to footnote 4(g) for additional information on the useful lives of the acquired intangible assets expected to be recognized. Amortization expense is allocated among Cost of revenue, SG&A and Research and development expense based upon the nature of the activities associated with the expected use of the intangible assets.

Represents the recognition of depreciation expense based on the estimated fair value of the acquired property, plant and equipment as discussed in footnote 4(e) above. Depreciation expense is allocated to Cost of revenue and SG&A based upon the nature of the activities associated with the use of the property, plant, & equipment.

Represents the recognition of stock-based compensation expense resulting from the estimated differences between historical amounts recorded in the financial statements and the estimated preliminary fair value related to the modification of outstanding Evoqua equity awards that will be replaced and converted into Xylem equity awards per the terms of the Merger Agreement. The stock-based compensation expense for the year ended December 31, 2022 includes the estimated impact of certain equity award accelerations related to double trigger change in control provisions.

Represents the additional transaction costs incurred by Xylem subsequent to the three months ended March 31, 2023. These costs will not affect Xylem’s income statement beyond twelve months after the Closing Date.

Reflects the adjustments to Research and development expenses (“R&D”) including the amortization of the estimated fair value of intangibles.

(in millions)

Removal of historical Evoqua amortization of intangible assets

Amortization of acquired intangible assets (i)

Net pro forma transaction accounting adjustment to R&D

The amortization of intangible assets is calculated on a straight-line basis. The amortization is based on the periods over which the economic benefits of the intangible assets are expected to be realized, which are subject to adjustment as additional information becomes available. Refer to footnote 4(g) for additional information on the useful lives of the acquired intangible assets expected to be recognized. Amortization expense is allocated among Cost of revenue, SG&A and R&D based upon the nature of the activities associated with the expected use of the intangible assets.

The pro forma adjustments for the tax provision utilize a blended statutory income tax rate of 25% for the three months ended March 31, 2023 and the year ended December 31, 2022. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-merger activities, including cash needs, the geographical mix of income and changes in tax law. Because the tax rates used for the unaudited pro forma condensed combined financial information are estimated, the blended rate will likely vary from the actual effective rate in periods subsequent to the Closing Date. This determination is preliminary and subject to change based upon the final determination of the fair value of the acquired assets and liabilities assumed.

Reflects the net adjustment to interest expense related to the elimination of the historical interest from Evoqua’s term loan and revolving credit facility that was repaid by Xylem in connection with the Closing Date and the incremental interest from the Transaction Financing:

Description

(in millions)

Recognition of additional interest expense for Transaction Financing:

Commercial Paper (i)

New Term Loan

Elimination of historical interest expense for Evoqua debt repaid by Xylem:

Term Loan (ii)

Revolving Credit Facility (ii)

Pro forma net adjustment to interest expense

The Commercial Paper will be repaid within three months of issuance using cash flow from operations.

Reflects the elimination of historical interest expense and the related interest rate swap settled in connection with the repayment of existing Evoqua indebtedness.

The pro forma basic net income per share attributable to common stock is calculated using (i) the historical basic weighted average shares of Xylem Common Stock outstanding and (ii) the issuance of shares in connection with the Merger. Pro forma diluted net income per share attributable to common stock is calculated using (i) the historical diluted weighted average shares of Xylem common stock outstanding, (ii) the issuance of shares in connection with the Merger and (iii) the replacement of outstanding Evoqua equity awards with Xylem equity awards. The pro forma basic and diluted weighted average shares outstanding are as follows:

Description (in millions)

Numerator:

Pro forma net income attributable to common stock

Denominator:

Historical Xylem weighted average shares outstanding – basic

Issuance of Xylem shares to Evoqua stockholders pursuant to the Merger

Vested Xylem replacement awards to Evoqua equity awards

Pro forma weighted average shares – basic

Historical Xylem dilutive common stock equivalents

Xylem replacement awards to Evoqua equity awards common stock equivalents

Pro forma weighted average shares – diluted

Pro forma net income per share attributable to common stock:

Basic

Diluted