Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.90M
2: EX-10.1 Material Contract HTML 37K
3: EX-10.2 Material Contract HTML 31K
4: EX-10.3 Material Contract HTML 55K
5: EX-10.4 Material Contract HTML 94K
6: EX-10.5 Material Contract HTML 56K
7: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
8: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
9: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
10: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
16: R1 Cover Page HTML 78K
17: R2 Recently Issued Accounting Pronouncements HTML 31K
18: R3 Condensed Consolidated Income Statements HTML 108K
(Unaudited)
19: R4 Condensed Consolidated Statements of Comprehensive HTML 70K
(Loss) Income (Unaudited)
20: R5 Condensed Consolidated Balance Sheets (Unaudited) HTML 142K
21: R6 Condensed Consolidated Balance Sheets (Unaudited) HTML 37K
(Parenthetical)
22: R7 Condensed Consolidated Statements of Cash Flows HTML 116K
(Unaudited)
23: R8 Background and Basis of Presentation HTML 32K
24: R9 Revenue HTML 95K
25: R10 Restructuring Charges HTML 89K
26: R11 Income Taxes HTML 33K
27: R12 Earnings Per Share HTML 52K
28: R13 Inventories HTML 34K
29: R14 Goodwill and Other Intangible Assets HTML 68K
30: R15 Derivative Financial Instruments HTML 62K
31: R16 Accrued and Other Current Liabilities HTML 37K
32: R17 Credit Facilities and Debt HTML 56K
33: R18 Post-retirement Benefit Plans HTML 52K
34: R19 Equity HTML 105K
35: R20 Share-Based Compensation Plans HTML 93K
36: R21 Capital Stock HTML 29K
37: R22 Accumulated Other Comprehensive Income (Loss) HTML 92K
38: R23 Commitments and Contingencies HTML 42K
39: R24 Segment Information HTML 74K
40: R25 Subsequent Events HTML 28K
41: R26 Background and Basis of Presentation (Policies) HTML 31K
42: R27 Recently Issued Accounting Pronouncements HTML 31K
(Policies)
43: R28 Revenue (Tables) HTML 93K
44: R29 Restructuring Charges (Tables) HTML 91K
45: R30 Earnings Per Share (Tables) HTML 52K
46: R31 Inventories (Tables) HTML 35K
47: R32 Goodwill and Other Intangible Assets (Tables) HTML 71K
48: R33 Derivative Financial Instruments (Tables) HTML 56K
49: R34 Accrued and Other Current Liabilities (Tables) HTML 38K
50: R35 Credit Facilities and Debt (Tables) HTML 44K
51: R36 Post-retirement Benefit Plans (Tables) HTML 48K
52: R37 Equity (Tables) HTML 101K
53: R38 Share-Based Compensation Plans (Tables) HTML 97K
54: R39 Accumulated Other Comprehensive Income (Loss) HTML 92K
(Tables)
55: R40 Commitments and Contingencies (Tables) HTML 36K
56: R41 Segment Information (Tables) HTML 69K
57: R42 Background and Basis of Presentation (Details) HTML 28K
58: R43 Recently Issued Accounting Pronouncements HTML 35K
(Textuals) (Details)
59: R44 Revenue - Disaggregation of Revenue (Details) HTML 80K
60: R45 Revenue (Details) HTML 45K
61: R46 Revenue (Narrative) (Details) HTML 33K
62: R47 Restructuring Charges (Textuals) (Details) HTML 41K
63: R48 Restructuring Charges (Restructuring Charges) HTML 42K
(Details)
64: R49 Restructuring Charges (Accrual Rollfoward) HTML 49K
(Details)
65: R50 Restructuring Charges (Estimated Restructuring HTML 47K
Costs) (Details)
66: R51 Income Taxes (Textuals) (Details) HTML 34K
67: R52 Earnings Per Share (Calculations for EPS) HTML 74K
(Details)
68: R53 Earnings Per Share (Summary of Antidilutive HTML 35K
Securities) (Details)
69: R54 Inventories (Details) HTML 36K
70: R55 Goodwill and Other Intangible Assets (Goodwill HTML 40K
Rollforward) (Details)
71: R56 Goodwill and Other Intangible Assets (Summary of HTML 59K
Intangible Assets) (Details)
72: R57 Goodwill and Other Intangible Assets (Textual) HTML 36K
(Details)
73: R58 Derivative Financial Instruments (Effect of HTML 54K
Deriative Instruments on Income Statement and
Statement of Comprehensive Income) (Details)
74: R59 Derivative Financial Instruments (Balance Sheet HTML 40K
Location of Derivative Instruments) (Details)
75: R60 Derivative Financial Instruments (Textual) HTML 61K
(Details)
76: R61 Accrued and Other Current Liabilities (Details) HTML 42K
77: R62 Credit Facilities and Debt (Summary of Debt HTML 55K
Outstanding) (Details)
78: R63 Credit Facilities and Debt (Textuals) (Details) HTML 102K
79: R64 Post-retirement Benefit Plans (Summary of Net HTML 47K
Periodic Benefit Cost) (Details)
80: R65 Post-retirement Benefit Plans (Textuals) (Details) HTML 43K
81: R66 Equity - Summary of Shareholders' Equity (Details) HTML 86K
82: R67 Share-Based Compensation Plans (Textuals) HTML 54K
(Details)
83: R68 Share-Based Compensation Plans (Summary of Stock HTML 81K
Options Grant) (Details)
84: R69 Share-Based Compensation Plans (Stock Option Fair HTML 39K
Value Assumptions) (Details)
85: R70 Share-Based Compensation Plans (Summary of HTML 56K
Restricted Stock Unit Grants) (Details)
86: R71 Share-Based Compensation Plans Share-Based HTML 47K
Compensation Plans (Summary of ROIC Performance
Share Unit Grants) (Details)
87: R72 Share-Based Compensation Plans (Summary of HTML 56K
Performance-Based Share Grants) (Details)
88: R73 Share-Based Compensation Plans (TSR HTML 38K
Performance-Based Shares Fair Value Assumptions)
(Details)
89: R74 Share-Based Compensation Plans - Summary of REV HTML 45K
Performance Share Unit Grants (Details)
90: R75 Capital Stock (Textuals) (Details) HTML 43K
91: R76 Accumulated Other Comprehensive Income (Loss) HTML 78K
(Details)
92: R77 Commitments and Contingencies (Summary of HTML 35K
Warranties) (Details)
93: R78 Commitments and Contingencies (Textual) (Details) HTML 33K
94: R79 Segment Information (Summary of Operations by HTML 73K
Segment) (Details)
95: R80 Segment Information (Textuals) (Details) HTML 28K
96: R81 Subsequent Events (Details) HTML 31K
99: XML IDEA XML File -- Filing Summary XML 182K
97: XML XBRL Instance -- xyl-20230331_htm XML 2.42M
98: EXCEL IDEA Workbook of Financial Reports XLSX 155K
12: EX-101.CAL XBRL Calculations -- xyl-20230331_cal XML 172K
13: EX-101.DEF XBRL Definitions -- xyl-20230331_def XML 693K
14: EX-101.LAB XBRL Labels -- xyl-20230331_lab XML 1.63M
15: EX-101.PRE XBRL Presentations -- xyl-20230331_pre XML 1.10M
11: EX-101.SCH XBRL Schema -- xyl-20230331 XSD 176K
100: JSON XBRL Instance as JSON Data -- MetaLinks 481± 744K
101: ZIP XBRL Zipped Folder -- 0001524472-23-000018-xbrl Zip 457K
(Address of principal executive offices) (Zip code)
i(202)i869-9150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name
of each exchange of which registered
iCommon Stock, par value $0.01 per share
iXYL
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
As of April 28, 2023, there were i180,616,578
outstanding shares of the registrant’s common stock, par value $0.01 per share.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. iBackground
and Basis of Presentation
Background
Xylem Inc. (“Xylem” or the “Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment.
Xylem operates in ithree segments, Water Infrastructure, Applied Water and Measurement & Control
Solutions. See Note 18, "Segment Information," to the condensed consolidated financial statements for further segment background information.
Except as otherwise indicated or unless the context otherwise requires, "Xylem,""we,""us,""our" and the "Company" refer to Xylem Inc. and its subsidiaries.
i
Basis of Presentation
The interim condensed consolidated financial
statements reflect our financial position and results of operations in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions between our businesses have been eliminated.
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair statement of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently
applied the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Annual Report") in preparing these unaudited condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 2022 Annual Report. Certain prior year amounts have been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional
information becomes available. Estimates and assumptions are used for, but not limited to, post-retirement obligations and assets, revenue recognition, income taxes, valuation of intangible assets, goodwill and indefinite-lived intangible impairment testing and contingent liabilities. Actual results could differ from these estimates.
Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends on December 31. For ease of presentation, the condensed consolidated financial statements included herein are described as ending on the last day of the calendar quarter.
In September 2022, the Financial Accounting Standards
Board issued Accounting Standards Update (“ASU”) 2022-04, "Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations." This guidance requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The new standard does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. The ASU became effective January 1, 2023, except for the rollforward requirement, which becomes effective January 1, 2024. The disclosures related to our adoption of the standard are included below:
The Company facilitates the opportunity for suppliers
to participate in voluntary supply chain financing programs with third-party financial institutions. Xylem agrees on commercial terms, including payment terms, with suppliers regardless of program participation. The company does not determine the terms or conditions of the arrangement between suppliers and the third-party financial institutions. Participating suppliers are paid directly by the third-party financial institution. Xylem pays the third-party financial institution the stated amount of confirmed invoices from its designated suppliers at the original invoice amount on the original maturity dates of the invoices, ranging from i45-i180
days. Xylem does not pay fees related to these programs. Xylem or the third-party financial institutions may terminate the agreements upon at least i30 days’ notice. As of March 31, 2023, the total outstanding balance under these programs is $i121 million
presented on our Condensed Consolidated Balance Sheet within "Accounts payable."
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This guidance requires an acquirer to apply the guidance in ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract
liabilities in a business combination, rather than using fair value. The ASU is effective for fiscal years beginning after December 15, 2022 and we adopted this guidance as of January 1, 2023. The guidance will be applied prospectively to business combinations after the adoption. The adoption of this guidance did not impact our financial condition or results of operations. We are currently evaluating the impact of the guidance in light of the proposed acquisition of Evoqua Water Technologies Corp. (“Evoqua”) pursuant to the Agreement and Plan of Merger dated as of January 22, 2023.
/
Note
3. iRevenue
Disaggregation of Revenue
iThe following table illustrates the
sources of revenue:
The
following table reflects revenue from contracts with customers by application.
Three Months Ended
March 31,
(in millions)
2023
2022
Water
Infrastructure
Transport
$
i436
$
i393
Treatment
i88
i90
Applied
Water
Commercial Building Services
i183
i161
Residential
Building Services
i70
i73
Industrial
Water
i200
i191
Measurement
& Control Solutions
Water
i334
i265
Energy
i72
i49
Total
$
i1,383
$
i1,222
The
following table reflects revenue from contracts with customers by geographical region.
Three Months Ended
March 31,
(in millions)
2023
2022
Water
Infrastructure
United States
$
i176
$
i147
Western
Europe
i190
i186
Emerging
Markets (a)
i105
i101
Other
i53
i49
Applied
Water
United States
i244
i221
Western
Europe
i104
i94
Emerging
Markets (a)
i73
i80
Other
i32
i30
Measurement
& Control Solutions
United States
i257
i181
Western
Europe
i77
i69
Emerging
Markets (a)
i48
i44
Other
i24
i20
Total
$
i1,383
$
i1,222
(a)Emerging
Markets includes results from the following regions: Eastern Europe, the Middle East and Africa, Latin America and Asia Pacific (excluding Japan, Australia and New Zealand, which are presented in "Other")
We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract
liabilities relate to payments received in advance of performance under the contracts. Changes in contract assets and liabilities are due to our performance under the contract. iThe table below provides contract
assets, contract liabilities, and significant changes in contract assets and liabilities:
(a)Excludes
receivable balances, which are disclosed on the Condensed Consolidated Balance Sheets
Performance obligations
Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of March 31, 2023, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $i447
million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following i60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.
10
Note
4. iRestructuring 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. During the three months ended March 31, 2023, we incurred restructuring costs of $i6 million.
We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. The charges included the reduction of headcount across all segments.
During the three ended March 31, 2022, we incurred restructuring charges that were less than $1 million.
iThe
following table presents the components of restructuring expense and asset impairment charges:
Three Months Ended
March 31,
(in millions)
2023
2022
By
component:
Severance and other charges
$
i6
$
i—
Total
restructuring costs
$
i6
$
i—
Asset
impairment charges
i2
i—
Total
restructuring and asset impairment charges
$
i8
$
i—
By
segment:
Water Infrastructure
$
i2
$
i—
Applied
Water
i1
i—
Measurement
& Control Solutions
i5
i—
/
i
The
following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within "Accrued and other current liabilities" and "Other non-current accrued liabilities", for the three months ended March 31, 2023 and 2022:
(in millions)
2023
2022
Restructuring
accruals - January 1
$
i10
$
i7
Restructuring
costs, net
i6
i—
Cash
payments
(i6)
(i3)
Asset
impairment
i—
i—
Restructuring
accruals - March 31
$
i10
$
i4
By
segment:
Water Infrastructure
$
i1
$
i—
Applied
Water
i—
i—
Measurement
& Control Solutions
i4
i3
Regional
selling locations (a)
i3
i1
Corporate
and other
i2
i—
(a)Regional
selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense that was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.
/
11
i
The
following table presents expected restructuring spend in 2023 and thereafter:
(in millions)
Water Infrastructure
Applied
Water
Measurement & Control Solutions
Corporate
Total
Actions
Commenced in 2023:
Total expected costs
$
i1
$
i1
$
i4
$
i—
$
i6
Costs
incurred during Q1 2023
i1
i1
i3
i—
i5
Total
expected costs remaining
$
i—
$
i—
$
i1
$
i—
$
i1
/
During
2023, we also incurred charges of $1 million within the Water Infrastructure segment related to actions commenced in prior years.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2023 consist primarily of severance charges. The Water Infrastructure and Applied Water actions are complete and the Measurement & Control Solutions actions are expected to continue through the end of 2023.
Asset Impairment
During the first quarter of 2023, we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and we therefore recognized an impairment charge of $i2 million.
Refer to Note 8, "Goodwill and Other Intangible Assets," for additional information.
Note 5. iIncome Taxes
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted
by the level and mix of earnings and losses by tax jurisdiction and discrete items.
The income tax provision for the three months ended March 31, 2023 was $i27 million resulting in an effective tax rate of i21.7%,
compared to a $i16 million expense resulting in an effective tax rate of i16.4% for the same period in 2022. The effective tax rate for the three month period ended March
31, 2023 was higher than the U.S. federal statutory rate primarily due to the impact of earnings mix and nondeductible transaction costs.
Unrecognized Tax Benefits
During 2019, Xylem’s Swedish subsidiary received a tax assessment for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. Xylem filed an appeal with the Administrative Court of Växjö, which rendered a decision adverse to Xylem in June 2022 for SEKi800 million
(approximately $i77 million), consisting of the full tax assessment amount plus penalties and interest. Xylem has appealed this decision with the intermediate appellate court, the Administrative Court of Appeal (the “Court”). At this time, management, in consultation with external legal advisors, continues to believe it is more likely than not that Xylem will prevail on the proposed assessment and will continue to vigorously defend our position through the appellate process. The appeal to the Court is expected to take approximately
one year; however, there can be no assurance as to the timing of the Court’s decision. Both parties will have the ability to seek appeal of the Court’s decision to the Supreme Administrative Court of Sweden. There can be no assurance that the final determination by the authorities will not be materially different than our position. As of March 31, 2023, we do not have any unrecognized tax benefits related to this uncertain tax position.
12
Note 6. iEarnings
Per Share
i
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
Weighted
average common shares outstanding — Basic
i180,396
i180,231
Plus
incremental shares from assumed conversions: (b)
Dilutive effect of stock options
i622
i587
Dilutive
effect of restricted stock units and performance share units
i301
i203
Weighted
average common shares outstanding — Diluted
i181,319
i181,021
Basic
earnings per share
$
i0.55
$
i0.45
Diluted
earnings per share
$
i0.54
$
i0.45
(a)Restricted
stock units containing rights to non-forfeitable dividends that participate in undistributed earnings with common stockholders are considered participating securities for purposes of computing earnings per share.
(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share
units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 14, "Share-Based Compensation Plans," to the condensed consolidated financial statements for further detail on the performance share units.
Three Months Ended
March
31,
(in thousands)
2023
2022
Stock options
i1,357
i1,355
Restricted
stock units
i332
i330
Performance
share units
i241
i233
/
Note
7. iInventories
The components of total inventories are summarized as follows: i
Amortization
expense related to finite-lived intangible assets was $i32 million and $i30 million for the three-month periods ended March 31,
2023 and 2022, respectively.
During the first quarter of 2023, we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and we therefore recognized an impairment charge of $i2 million.
Note
9. iDerivative Financial Instruments
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions, and we principally manage our exposures to these risks through management of our core business activities. Certain of our foreign operations expose us to fluctuations of foreign interest rates and exchange rates that may impact revenue, expenses, cash
receipts, cash payments, and the value of our stockholders' equity. We enter into derivative financial instruments to protect the value or fix the amount of certain cash flows in terms of the functional currency of the business unit with that exposure and also reduce the volatility in stockholders' equity.
Cash Flow Hedges of Foreign Exchange Risk
We are exposed to fluctuations in various foreign currencies against our functional currencies. We use foreign currency derivatives, including currency forward agreements, to manage our exposure to fluctuations in the various exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.
14
Certain
business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures for which we enter into cash flow hedges relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling $i517 million and $i255
million as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase U.S. Dollar and sell Canadian Dollar, purchase Polish Zloty and sell Euro, sell Canadian Dollar and purchase Euro, and sell Australian Dollar and purchase Euro. The purchased notional amounts associated with these currency derivatives are $i219
million, $i144 million, $i58 million, $i26
million, $i26 million, $i25 million and $i19
million, respectively. As of December 31, 2022 the purchased notional amounts associated with these currency derivatives were $i105 million, $i73 million,
$i29 million, $i13 million, $i13 million,
$i13 million and $i9 million, respectively.
Hedges of Net Investments in Foreign Operations
We are exposed
to changes in foreign currencies impacting our net investments held in foreign subsidiaries.
Cross-Currency Swaps
Beginning in 2015, we entered into cross-currency swaps to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. During the second quarter of 2019, third quarter of 2020, and second quarter of 2022 we entered into additional cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was $i1,653
million and $i1,616 million as of March 31, 2023 and December 31, 2022, respectively.
Foreign Currency Denominated Debt
On March 11, 2016, we issued i2.250%
Senior Notes of €i500 million aggregate principal amount due March 2023. On December 12th, 2022 our Senior Notes due March 2023 were settled with cash on hand for a total of $527 million.
Previously, the entirety of the outstanding balance was designated as a hedge of a net investment in certain foreign subsidiaries. On June 2, 2022, we de-designated
the entirety of the outstanding balance of the €i500 million i2.250% Senior Notes, or $i533 million
from the net investment hedge relationship.
iThe table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income:
Amount
of loss reclassified from OCL into Cost of revenue
i2
i—
Net
Investment Hedges
Cross-Currency Swaps
Amount of gain (loss) recognized in OCL
$
(i22)
$
i1
Amount
of income recognized in Interest expense
i7
i6
Foreign
Currency Denominated Debt
Amount of gain recognized in OCL
$
i—
$
i8
/
As
of March 31, 2023, $i3 million of net gains on cash flow hedges are expected to be reclassified into earnings in the next 12 months.
15
As of March 31, 2023, no gains or losses
on the net investment hedges are expected to be reclassified into earnings over their duration.
The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and are determined through the use of models that consider various assumptions including yield curves, time value and other measurements.
iThe fair values of our derivative contracts currently included in our hedging
program were as follows:
Less:
short-term borrowings and current maturities of long-term debt
i—
i—
Total
long-term debt
$
i1,881
$
i1,880
(a)The
fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due 2026 was $i479 million and $i470
million as of March 31, 2023 and December 31, 2022 respectively. The fair value of our Senior Notes due 2028 was $i443 million and $i430
million as of March 31, 2023 and December 31, 2022, respectively. The fair value of our Senior Notes due 2031 was $i424 million and $i406
million as of March 31, 2023 and December 31, 2022, respectively. The fair value of our Senior Notes due 2046 was $i352 million and $i333
million as of March 31, 2023 and December 31, 2022, respectively.
(b)The debt issuance costs and unamortized discount are recognized as a reduction in the carrying value of the Senior Notes in the Condensed Consolidated Balance Sheets and are being amortized to interest expense in our Condensed Consolidated Income Statements over the expected remaining terms of the Senior Notes.
/
Senior Notes
On June 26, 2020, we issued i1.950%
Senior Notes of $i500 million aggregate principal amount due January 2028 (the “Senior Notes due 2028”) and i2.250% Senior Notes of $i500 million
aggregate principal amount due January 2031 (the “Senior Notes due 2031" and, together with the Senior Notes due 2028, the “Green Bond”).
The Green Bond includes covenants that restrict our ability, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Green Bond at any time, at our option, subject to certain conditions, at specified redemption prices, plus accrued and unpaid interest to the redemption date.
If a change of control triggering event (as defined in the applicable Green Bond indenture)
occurs, we will be required to make an offer to purchase the notes at a price equal to i101% of their principal amount plus accrued and unpaid interest to the date of repurchase.
Interest on the Green Bond is payable on January 30 and July 30 of each year. As of March 31, 2023, we are in compliance with all covenants for the Green Bond.
On March 11, 2016, we issued i2.250%
Senior Notes of €i500 million aggregate principal amount due March 2023 (the "Senior Notes due 2023"). On October 11, 2016, we issued i3.250%
Senior Notes of $i500 million aggregate principal amount due October 2026 (the “Senior Notes due 2026”) and i4.375% Senior Notes of $i400
million aggregate principal amount due October 2046 (the “Senior Notes due 2046” and, together with the Senior Notes due 2021, the Senior Notes due 2023 and the Senior Notes due 2026, the “Senior Notes”). On December 12th, 2022 our Senior Notes due 2023 were settled with cash on hand for a total of $527 million.
The Senior Notes include covenants that restrict our ability, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price
equal to the principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may also redeem the Senior Notes in certain other circumstances, as set forth in the applicable Senior Notes indenture.
17
If a change of control triggering event (as defined in the applicable Senior Notes indenture) occurs, we will be required to make an offer to purchase the Senior Notes at a price equal to i101%
of their principal amount plus accrued and unpaid interest to the date of repurchase.
Interest on the Senior Notes due 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of March 31, 2023, we are in compliance with all covenants for the Senior Notes.
Credit Facilities
2019 iFive-Year Revolving Credit Facility
On March 5, 2019, Xylem entered into
a iFive-Year Revolving Credit Facility (the “2019 Credit Facility”) with Citibank, N.A., as Administrative Agent, and a syndicate of lenders. The 2019 Credit Facility provided for an aggregate principal amount of up to $i800
million (available in U.S. Dollars and in Euros), with increases of up to $i200 million for a maximum aggregate principal amount of $i1
billion at the request of Xylem and with the consent of the institutions providing such increased commitments. On March 1, 2023, Xylem terminated the 2019 Credit Facility among the Company, certain lenders and Citibank, N.A. as Administrative Agent as a result of signing the 2023 Five-Year Revolving Credit Facility.
2023 Five-Year Revolving Credit Facility
On March 1, 2023, Xylem entered into a ifive
year revolving credit facility (the "2023 Credit Facility") with Citibank, N.A., as Administrative Agent, and a syndicate of lenders. The 2023 Credit Facility provides for an aggregate principal amount of up to $i1 billion (available in U.S. Dollars and in Euros), with increases of up to $i300 million
for a maximum aggregate principal amount of $i1.3 billion at the request of Xylem and with the consent of the institutions providing such increased commitments.
Interest on all loans under the 2023 Credit Facility is payable either quarterly or at the expiration of any Term SOFR or EURIBOR interest period applicable thereto. Borrowings accrue interest at a rate equal to, at Xylem's election, a base rate or an adjusted Term SOFR or EURIBOR rate plus an applicable margin.
The 2023 Credit Facility includes customary provisions for implementation of replacement rates for Term SOFR-based and EURIBOR-based loans. The 2023 Credit Facility also includes a pricing grid that determines the applicable margin based on Xylem's credit rating, with a further adjustment based on Xylem's achievement of certain Environmental, Social and Governance ("ESG") key performance indicators. Xylem will also pay quarterly fees to each lender for such lender's commitment to lend accruing on such commitment at a rate based on Xylem's credit rating, whether such commitment is used or unused, as well as a quarterly letter of credit fee accruing on the letter of credit exposure of such lender during the preceding quarter at a rate based on the credit rating of Xylem with a further adjustment based on Xylem's achievement of certain ESG key performance indicators.
The 2023 Credit Facility requires that Xylem maintain
a consolidated total debt to consolidated EBITDA ratio (or maximum leverage ratio), which will be based on the last four fiscal quarters. In accordance with the terms of the agreement to the 2023 Credit Facility, Xylem may not exceed a maximum leverage ratio of i4.00 to 1.00 for a period of four consecutive fiscal quarters beginning with the fiscal quarter during which a material acquisition is consummated and a maximum leverage ratio of i3.50
to 1.00 thereafter for a minimum of four fiscal quarters before another material acquisition is consummated. In addition, the 2023 Credit Facility contains a number of customary covenants, including limitations on the incurrence of secured debt and debt of subsidiaries, liens, sale and lease-back transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. The 2023 Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the 2023 Credit Facility, subject to certain requirements and conditions set forth in the 2023 Credit Facility. As of March 31, 2023, the 2023 Credit Facility was undrawn and we are in compliance with all revolver covenants.
18
Commercial Paper
U.S. Dollar Commercial Paper Program
Our U.S. Dollar commercial paper program generally serves as a means of short-term funding with a $i600 million maximum issuing balance and a combined limit of $i1
billion inclusive of the 2023 Credit Facility. As of March 31, 2023 and December 31, 2022, none of the Company's $i600 million U.S. Dollar commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.
Euro Commercial Paper Program
On June
3, 2019, Xylem entered into a Euro commercial paper program with ING Bank N.V., as administrative agent, and a syndicate of dealers. The Euro commercial paper program provides for a maximum issuing balance of up to €i500 million (approximately $i544
million) which may be denominated in a variety of currencies. The maximum issuing balance may be increased in accordance with the Dealer Agreement. As of March 31, 2023 and December 31, 2022, none of the Company's Euro commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.
Note 12. iPost-retirement
Benefit Plans
iThe components of net periodic benefit cost for our defined benefit pension plans are as follows:
Three
Months Ended
March 31,
(in millions)
2023
2022
Domestic defined benefit pension plans:
Service cost
$
i1
$
i1
Interest
cost
i1
i1
Expected
return on plan assets
(i1)
(i2)
Amortization
of net actuarial loss
i—
i1
Net
periodic benefit cost
$
i1
$
i1
International
defined benefit pension plans:
Service cost
$
i2
$
i3
Interest
cost
i4
i4
Expected
return on plan assets
(i3)
(i4)
Amortization
of actuarial (gain) loss
(i1)
i3
Net
periodic benefit cost
$
i2
$
i6
Total
net periodic benefit cost
$
i3
$
i7
/
The
components of net periodic benefit cost, other than the service cost component are included in the line item "Other non-operating income, net" in the Condensed Consolidated Income Statements.
The total net periodic benefit cost for other post-retirement employee benefit plans was less than$iiii1///
million, including net credits recognized into "Other comprehensive income (loss)" of less than $iiii1///
million, for both the three months ended March 31, 2023 and 2022, respectively.
We contributed $i5 million to our defined benefit plans for the three months ended March 31, 2023 and 2022. Additional contributions ranging between approximately $i14
million and $i18 million are expected to be made during the remainder of 2023.
19
Note 13. iEquity
i
The following table shows the changes in stockholders' equity for the three months ended March 31, 2023:
Share-based compensation expense was $i12
million and $i9 million during the three months ended March 31, 2023 and 2022, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $i10
million, $i41 million and $i21
million, respectively, at March 31, 2023 and is expected to be recognized over a weighted average period of i2.3, i2.3
and i2.4 years, respectively. The amount of cash received from the exercise of stock options was $i7
million and $i1 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there were approximately i3 million
shares of common stock available for future awards.
Stock Option Grants
iThe following is a summary of the changes in outstanding stock options for the three months ended March 31, 2023:
The
total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the three months ended March 31, 2023 was $i7.0 million.
Stock Option Fair Value
The fair value of
each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including employee exercise patterns, stock price volatility and changes in dividends. iThe following are weighted-average assumptions for 2023 grants:
Volatility
i27.30
%
Risk-free
interest rate
i4.25
%
Dividend yield
i1.31
%
Expected
term (in years)
i5.4
Weighted-average fair value / share
$
i29.06
Expected
volatility is calculated based on an analysis of historic volatility measures for Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.
21
Restricted Stock Unit Grants
iThe
following is a summary of restricted stock unit activity for the three months ended March 31, 2023. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant:
Performance share units awarded under the long-term incentive plan vest based upon performance by the Company over a three-year period against targets approved by the Leadership Development & Compensation Committee ("LDCC") of the Company's Board of Directors prior to the grant date.
For the 2023-2025 performance period, the LDCC approved granting performance share units under two plan designs: (I) on the basis of the Evoqua acquisition closing by 1/22/2024 ("Combined Company" Design) or (II) on the basis that the Evoqua acquisition does not close by 1/22/2024 ("Xylem Stand-Alone" Design).
The Xylem Stand-Alone Design makes no change
to our existing grant structure in which performance share units are awarded at 100% of target with actual payout contingent upon the achievement of a pre-set, three-year adjusted Return on Invested Capital ("ROIC") performance target for ROIC performance share unit grants, a pre-set third-year revenue target for Revenue performance share unit grants and a three-year relative TSR performance for TSR performance share unit grants.
For simplicity, the performance share unit grants tied to the ROIC performance target will be referred to as the “ROIC performance share unit grants” prior to the acquisition closing.
The Combined Company Design would replace the ROIC metric with a pre-set, third-year adjusted earnings before interest, taxes, depreciation and amortization expense (“EBITDA”) performance target for the combined company.
ROIC
Performance Share Unit Grants
i
The following is a summary of ROIC performance share unit grants for the three months ended March 31, 2023. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant:
(a)
Includes ROIC performance share unit awards forfeited during the period as a result of the final performance condition not being achieved on vest date.
/
22
TSR Performance Share Unit Grants
The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the three months ended March 31, 2023:
(a)
Represents an increase in the number of original TSR performance share units awarded based on the final market condition achievement at the end of the performance period of such awards.
i
The fair value of TSR performance share units was calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free
rate of return, the expected dividend yield and other award design features. The following are weighted-average assumptions for 2023 grants:
Volatility
i35.9
%
Risk-free
interest rate
i4.66
%
/
Revenue
Performance Share Unit Grants
i
The following is a summary of our Revenue performance share unit grants for the three months ended March 31, 2023:
The
fair value of the Revenue performance share unit awards is determined using the closing price of our common stock on date of grant. The shares will vest contingent upon the achievement of a pre-set, three-year Revenue target.
/
Note 15. iCapital
Stock
For the three months ended March 31, 2023 and March 31, 2022, the Company repurchased less than i0.1 million shares of common stock for $i8
million and less than i0.6 million shares of common stock for $i51 million, respectively. Repurchases include share repurchase programs
approved by the Board of Directors and repurchases in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. The details of repurchases by each program are as follows:
23
On August 24, 2015, our Board of Directors authorized the repurchase of up to $i500
million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our stockholders and maintains our focus on growth. There were no shares repurchased under the program for the three months ended March 31, 2023. For the three months ended March 31, 2022, we repurchased approximately i0.5 million shares for $i45 million.
There are up to $i182 million in shares that may still be purchased under this plan as of March 31, 2023.
Aside from the aforementioned repurchase program, we repurchased less than i0.1
million shares and approximately i0.1 million shares for $i8 million and $i6
million for the three months ended March 31, 2023 and 2022, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units.
Note 16. iAccumulated Other Comprehensive Loss
i
The
following table provides the components of AOCL for the three months ended March 31, 2023:
From time to time, we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations of previously-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, property damage, personal injury, privacy, employment, labor and pension,
government contract issues and commercial or contractual disputes.
See Note 5, "Income Taxes," of our condensed consolidated financial statements for a description of a pending tax litigation matter.
Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claims, we do not believe it is reasonably possible that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of operations, or financial condition. We have estimated and accrued $i4 million
and $i5 million as of March 31, 2023 and December 31, 2022, respectively, for these general legal matters.
Guarantees
We obtain certain stand-by letters of credit, bank guarantees, surety bonds and insurance letters of credit from third-party financial institutions in the ordinary course of business when required under contracts
or to satisfy insurance-related requirements. As of March 31, 2023 and December 31, 2022, the amount of surety bonds, bank guarantees, insurance letters of credit, stand-by letters of credit as well as revenue and customs guarantees was $i426 million and $i451
million, respectively.
Environmental
In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned and/or operated by Xylem or for which we are responsible, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation.
These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.
Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Our accrued liabilities for these environmental matters represent our best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis. We have estimated and accrued $i4
million as of March 31, 2023 and December 31, 2022 for environmental matters.
It is difficult to estimate the final costs of investigation and remediation due to various factors, including incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the extent of investigation or remediation and our share, if any, of liability for such conditions, the selection of alternative remedial approaches, and changes in environmental standards and regulatory requirements. We believe the total amount accrued is reasonable based on existing facts and circumstances.
25
Warranties
iWe
warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and specific non-performance. The table below provides changes in the combined current and non-current product warranty accruals over each period:
(in millions)
2023
2022
Warranty accrual – January 1
$
i54
$
i57
Net
charges for product warranties in the period
i6
i5
Settlement
of warranty claims
(i6)
(i6)
Foreign
currency and other
i1
i—
Warranty
accrual - March 31
$
i55
$
i56
/
Note
18. iSegment Information
Our business has ithree reportable segments: Water Infrastructure, Applied Water and Measurement
& Control Solutions. The Water Infrastructure segment focuses on the transportation and treatment of water, offering a range of products including water, wastewater and storm water pumps, treatment equipment, and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on the residential, commercial and industrial markets. The Applied Water segment's major products include pumps, valves, heat exchangers, controls and dispensing equipment. The Measurement & Control Solutions segment focuses on developing advanced technology solutions that enable intelligent use and conservation of critical water and energy resources as well as analytical instrumentation used in the testing of water. The Measurement & Control Solutions segment's major products include smart metering, networked communications, measurement and control technologies, critical infrastructure technologies, software and services including cloud-based analytics,
remote monitoring and data management, leak detection and pressure monitoring solutions and testing equipment.
iAdditionally, we have Regional selling locations, which consist primarily of selling and marketing organizations and related support services, that offer products and services across our reportable segments. Corporate and other consists of corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs, as well as charges
related to certain matters, such as environmental matters, that are managed at a corporate level and are not included in the business segments in evaluating performance or allocating resources.
26
The accounting policies of each segment are the same as those described in the Summary of Significant Accounting Policies section of Note 1 in the 2022 Annual Report. The following table contains financial information for each reportable segment:
Three
Months Ended
March 31,
(in millions)
2023
2022
Revenue:
Water Infrastructure
$
i589
$
i533
Applied
Water
i453
i425
Measurement
& Control Solutions
i406
i314
Total
$
i1,448
$
i1,272
Operating
Income (Loss):
Water Infrastructure
$
i70
$
i74
Applied
Water
i83
i59
Measurement
& Control Solutions
i20
(i10)
Corporate
and other
(i42)
(i12)
Total
operating income
$
i131
$
i111
Interest
expense
$
i9
$
i13
Other
non-operating income, net
i4
(i1)
Gain
from sale of business
i—
i1
Income
before taxes
$
i126
$
i98
Depreciation
and Amortization:
Water Infrastructure
$
i14
$
i13
Applied
Water
i5
i5
Measurement
& Control Solutions
i34
i34
Regional
selling locations (a)
i5
i4
Corporate
and other
i2
i2
Total
$
i60
$
i58
Capital
Expenditures:
Water Infrastructure
$
i14
$
i17
Applied
Water
i8
i4
Measurement
& Control Solutions
i18
i21
Regional
selling locations (b)
i6
i5
Corporate
and other
i3
i2
Total
$
i49
$
i49
(a)Depreciation
and amortization expense incurred by the Regional selling locations was included in an overall allocation of Regional selling location costs to the segments; however, a certain portion of that expense was not specifically identified to a segment. That expense is captured in this Regional selling location line.
(b)Represents capital expenditures incurred by the Regional selling locations not allocated to the segments.
Note 19. iSubsequent
Events
On April 26, 2023the Company closed the minority investment contemplated by the previously disclosed agreement with Global Omnium Idrica, S.L. ("Idrica,") a leader in water data management and analytics, and entered into an agreement to distribute Idrica’s GoAigua technology globally. The investment was funded with cash on hand for approximately €i100 million
(approximately $i110 million).
27
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes, included elsewhere in this report on Form 10-Q (this "Report").
This Report contains “forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “anticipate,”“estimate,”“expect,”“project,”“intend,”“plan,”"contemplate,""predict,"“forecast,”“likely,”“believe,”“target,”“will,”“could,”“would,”“should,”"potential,""may" and similar expressions or their negative, may, but are not necessary to,
identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements that: are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals (including those related to our social, environmental and other sustainability goals); or address possible or future results of operations or financial performance, including statements relating to orders, revenues, operating margins and earnings per share growth.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many
of which are beyond our control. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector spending, inflation, interest rates and related monetary policy by governments in response to inflation, and the strength of the residential and commercial real estate markets, on economic activity and our operations; geopolitical events, including the war between Russia and Ukraine, and regulatory, economic and other risks associated with our global sales and operations, including with respect to domestic content requirements applicable to projects with governmental funding; the global impact of the COVID-19 pandemic on the macroeconomy and our business, operations,
growth, and financial condition; actual or potential other epidemics, pandemics or global health crises; availability, shortage or delays in receiving electronic components (in particular, semiconductors), parts and raw materials from our supply chain; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, energy supply, supply chain shortages, logistics challenges, tight labor markets, prevailing price changes, tariffs and other factors; demand for our products, disruption, competition or pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; our ability to retain and attract senior management and other diverse and key talent, as well as competition for overall talent and labor; difficulty predicting our financial results; defects,
security, warranty and liability claims, and recalls with respect to products; availability, regulation or interference with radio spectrum used by certain of our products; uncertainty related to restructuring and realignment actions and related costs and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; volatility in served markets or impacts on our business and operations due to weather conditions, including the effects of climate change; fluctuations in foreign currency exchange rates; our ability to borrow or refinance our existing indebtedness, and uncertainty around the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, our products, competition, and
the environment and climate change; changes in our effective tax rates or tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).
Additionally, risks and uncertainties relating to our plans to acquire Evoqua could cause our actual results to differ, perhaps materially, from those indicated by these forward-looking statements, including: the risk that the conditions to the closing of the transaction are not satisfied, including the risk that required approvals of the transaction from the shareholders of Xylem, stockholders of Evoqua or
from regulators are not obtained; litigation relating to the transaction; uncertainties as to the timing of the consummation of the transaction and the ability of each party to consummate the transaction; risks that the proposed transaction disrupts the current plans or operations of Xylem or Evoqua; the ability of Xylem and Evoqua to retain and hire key personnel; competitive responses to the proposed transaction; the need to incur additional or unexpected costs, charges or expenses related to the transaction or integration of the combined companies; potential adverse reactions or changes to relationships with customers, suppliers, distributors and other business partners resulting from the announcement
28
or completion of the transaction; impacts to our share price and dilution
of shareholders' ownership; the combined company’s ability to achieve the synergies expected from the transaction, as well as delays, challenges and expenses associated with integrating the combined company’s existing businesses.
Forward-looking and other statements in this Report regarding our environmental and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or are required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking social, environmental and sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. All forward-looking statements made herein are based on information currently available to us as of the date of this Report. We undertake
no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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 of scarcity, resilience, and affordability 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 three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure,
Applied Water and Measurement & Control Solutions.
•Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move 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.
•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
& Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control capabilities 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 water 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 & 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.
29
Evoqua Acquisition
On January 22, 2023, Xylem entered into a definitive agreement under which Xylem will acquire Evoqua, a leader in mission-critical water treatment solutions and services, in an all-stock transaction that reflects an implied enterprise value of approximately $7.5 billion. The transaction, which is anticipated to close in mid-2023, is subject to approval by shareholders of Xylem and stockholders of Evoqua, the receipt of required regulatory approvals and other customary closing conditions.
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.
Executive Summary
Xylem reported revenue for the first quarter of 2023 of $1,448 million, an increase of 13.8% compared to $1,272 million reported in the first quarter of 2022. On a constant currency basis, revenue increased by $221 million, or 17.4%, driven by strong organic revenue growth across all three segments and in all of our major geographic regions.
We generated operating income of $131 million (margin of 9.0%) during the first quarter of 2023, as compared to $111 million (margin of 8.7%) in 2022. Operating income in the first quarter
of 2023 included an increase in special charges of $24 million and an unfavorable impact from increased restructuring and realignment costs of $7 million as compared to the first quarter of 2022. Excluding the impact of special charges and restructuring and realignment costs, adjusted operating income was $167 million (adjusted margin of 11.5%) during the first quarter of 2023 as compared to $116 million (adjusted margin of 9.1%) in 2022. The increase in adjusted operating margin was primarily due to price realization, productivity savings and favorable volume. These impacts were partially offset by inflation, unfavorable mix, increased employee related costs, increased spending on strategic investments and increased inventory management costs.
Additional financial highlights for the quarter ended March 31, 2023 include the following:
•Orders
of $1,570 million, down 8.5% from $1,715 million in the prior year period, and down 5.4% on an organic basis.
•Earnings per share of $0.54, up 20% compared to prior year ($0.72, up 53% versus prior year, on an adjusted basis).
•Net income as a percent of revenue of 6.8%, up 40 basis points compared to 6.4% in the prior year. EBITDA margin of 13.0%, down 10 basis points when compared to 13.1% in the prior year (16.3% on an adjusted basis, up 210 basis points)
•Net cash flow used in operating activities of $19 million for the three months ended March 31, 2023, a decrease of $62 million during the same period of the prior year. Negative free cash flow of $35 million, an improvement of $95 million from the prior year.
30
Key
Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, free cash flow, 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, special charges, gain or loss from sale of businesses and tax-related special items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below.
Three
Months Ended
March 31,
(in millions, except for per share data)
2023
2022
Net income & Earnings per share
$
99
$
0.54
$
82
$
0.45
Restructuring
and realignment
11
0.06
4
0.02
Special charges
25
(a)
0.15
2
0.01
Tax-related
special items
—
—
(1)
—
(Gain) loss from sale of business
—
—
(1)
—
Tax
effects of adjustments (b)
(5)
(0.03)
(2)
(0.01)
Adjusted net income & Adjusted earnings per share
$
130
$
0.72
$
84
$
0.47
(a)
The special charges in the quarter primarily relate to acquisition and integration costs related to the pending acquisition of Evoqua.
(b) 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.
31
•"adjusted operating expenses" and "adjusted gross profit" defined as operating expenses and gross profit, respectively, adjusted to exclude 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, special charges and gain or loss from sale of businesses, 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 Condensed Consolidated 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.
Three Months Ended
March 31,
(in millions)
2023
2022
Net
cash used by operating activities
$
(19)
$
(81)
Capital expenditures
(49)
(49)
Cash paid in excess of tax provision for R&D law change adoption
33
—
Free cash flow
$
(35)
$
(130)
Net
cash used in investing activities
$
(37)
$
(43)
Net cash provided (used) by financing activities
$
(63)
$
(106)
32
2023 Outlook
We
are updating our total revenue growth and organic revenue growth to be in the range of 8% to 9% in 2023. The following is a summary of our organic revenue performance and the organic revenue outlook by end market.
•Utilities revenue increased by approximately 23% in the first quarter on an organic basis driven by strength across all major geographic regions. For the remainder of 2023, we now expect organic revenue growth in the low teens. On the clean water side, we continue to expect improvements in chip supply throughout 2023 allowing for large deal deployments already secured in our backlog. Additionally, we can expect continued momentum for water quality products and increased demand for pipeline assessment services due to aging infrastructure and climate challenges. We expect wastewater utilities to remain focused on mission-critical applications in wastewater. Long-term capital expenditure outlook
is strong due to aging infrastructure and the emerging markets’ continued advancement.
•Industrial revenue increased by approximately 13% in the first quarter on an organic basis driven by strength across all major geographic regions. For 2023, we now expect organic revenue growth in the mid-single-digits. We expect to see continued strong growth in our dewatering business, driven by healthy mining demand and strategic growth investments. We expect demand in light industrial to remain resilient in the emerging markets and to moderate in developed markets.
•In the commercial markets, organic revenue increased by approximately 16% in the first quarter on an organic basis driven by strength in the U.S. and western Europe. For the remainder of 2023, we now expect organic revenue growth in the mid-single-digits. We expect sustained demand
across replacement products and energy efficient related projects, partially offset by moderation in new construction, a smaller portion of our portfolio.
•In the residential markets, organic revenue decreased by approximately 2% in the first quarter on an organic basis predominately driven by project timing in the emerging markets. This market is primarily driven by solid replacement revenue serviced through our distribution network. For 2023, we continue to expect a low-single-digit organic revenue decline due to normalizing demand in the U.S., partially offset by continued resilience in the emerging markets.
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 expect to incur approximately $25 million and $35 million in restructuring and realignment costs.
33
Results of Operations
Three
Months Ended
March 31,
(in millions)
2023
2022
Change
Revenue
$
1,448
$
1,272
13.8
%
Gross
profit
546
467
16.9
%
Gross margin
37.7
%
36.7
%
100
bp
Total
operating expenses
415
356
16.6
%
Expense to revenue ratio
28.7
%
28.0
%
70
bp
Restructuring
and realignment costs
11
4
175.0
%
Special
charges
25
1
2,400.0
%
Adjusted operating expenses
379
351
8.0
%
Adjusted
operating expenses to revenue ratio
26.2
%
27.6
%
(140)
bp
Operating income
131
111
18.0
%
Operating
margin
9.0
%
8.7
%
30
bp
Interest
and other non-operating expense, net
5
14
(64.3)
%
Gain from sale of business
—
1
(100.0)
%
Income
tax expense
27
16
68.8
%
Tax rate
21.7
%
16.4
%
530
bp
Net
income
$
99
$
82
20.7
%
NM - Not meaningful change
Revenue
Revenue generated during the three months ended March 31, 2023 was $1,448 million, reflecting an
increase of $176 million, or 13.8%, compared to the same prior year period. On a constant currency basis, revenue grew 17.4% for the three months ended March 31, 2023. The increase on a constant currency basis was driven by organic revenue growth of $221 million, reflecting strong organic growth across all three segments and in all of our major geographic regions.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to revenue during the three months ended March 31, 2023:
Water
Infrastructure
Applied Water
Measurement & Control Solutions
Total Xylem
(in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
2022
Revenue
$
533
$
425
$
314
$
1,272
Organic Growth
81
15.2
%
41
9.6
%
99
31.5
%
221
17.4
%
Divestitures
—
—
%
—
—
%
—
—
%
—
—
%
Constant
Currency
81
15.2
%
41
9.6
%
99
31.5
%
221
17.4
%
Foreign currency translation (a)
(25)
(4.7)
%
(13)
(3.1)
%
(7)
(2.2)
%
(45)
(3.5)
%
Total
change in revenue
56
10.5
%
28
6.6
%
92
29.3
%
176
13.8
%
2023 Revenue
$
589
$
453
$
406
$
1,448
(a)Foreign
currency translation impact for the year due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Chinese Yuan and the Canadian Dollar.
34
Water Infrastructure
Water Infrastructure revenue increased $56 million, or 10.5%, for the first quarter of 2023 (15.2% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $25 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $81 million. Organic growth for the quarter was driven by strength in both the utility and industrial end markets. The utilities end market experienced organic growth of $46 million led by strength
in the U.S. driven by strong price realization, solid backlog coming into the year and higher demand in our rental business. Western Europe also experienced strong organic growth due to robust demand in utilities' capital spending coupled with good price realization. The industrial end market had $35 million of organic growth across all major geographic regions, particularly in the emerging markets, driven by projects in both Latin America and Africa, and in western Europe and the U.S. due to good price realization.
From an application perspective, organic revenue growth was almost entirely driven from our transport applications. Transport experienced $79 million of revenue growth, across all three of our major geographic regions, particularly in the U.S. where we experienced strong price realization, had solid backlog coming into the year and experienced higher rental demand in our dewatering business. Western Europe also experienced
strong price realization along with demand from utility capital projects. Transport also grew in emerging markets, driven by projects in our dewatering business, particularity in Latin America and Africa. Organic revenue for the treatment application was $2 million for the quarter.
Applied Water
Applied Water revenue increased $28 million, or 6.6%, for the first quarter of 2023 (9.6% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $13 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $41 million. Organic growth was driven by strength in the commercial and industrial end markets/applications, whereas the residential end market/application was down slightly versus the comparable period. Organic revenue growth in the first quarter was led by strength in commercial
building services of $26 million, particularly in the U.S. where we benefited from strong price realization and backlog execution, and in western Europe, driven by strong price realization. Industrial water had strong organic growth in the quarter of $16 million, across all three of our major geographic regions, driven primarily by western Europe due to good price realization and healthy demand. The U.S. benefited from good price realization and the emerging markets saw healthy demand for the quarter. Residential building services was down $1 million organically for the quarter.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $92 million, or 29.3%, for the first quarter of 2023 (31.5% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $7 million of foreign currency translation, with the
change at constant currency coming entirely from organic growth of $99 million, or 31.5%. The segment experienced organic revenue growth across all three major geographic regions and in both of the segment's end markets for the quarter, driven by $91 million of organic growth in the utility end market, primarily in the U.S., due to strong backlog execution, enabled by recovery on prior year component constraints and strong price realization. The industrial end market saw $8 million organic revenue growth driven by backlog execution in our test business.
From an application perspective, organic revenue growth during the quarter was driven by both the water and energy applications. The water application had strong organic growth of $76 million, driven by strength in the U.S. due to lapping of prior year component constraints, strong price realization, and strength in our test and pipeline assessment services businesses. Better
component availability and higher demand in western Europe also contributed to the growth. The energy applications experienced growth of $23 million, driven by our metrology business in the U.S. as well as lapping of prior year electronic component shortages.
35
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 the first quarter of 2023 were $1,570 million, a decrease of
$145 million, or 8.5%, over the prior year (5.4% decrease on a constant currency basis). Order intake was negatively impacted by $53 million of foreign currency translation. The decrease on a constant currency basis for the quarter primarily consisted of organic order declines of $92 million, or 5.4%, as compared to the prior year.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three months ended March 31, 2023:
Water
Infrastructure
Applied Water
Measurement & Control Solutions
Total Xylem
(in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
2022
Orders
$
660
$
505
$
550
$
1,715
Organic Impact
8
1.2
%
(4)
(0.8)
%
(96)
(17.5)
%
(92)
(5.4)
%
Acquisitions/(Divestitures)
—
—
%
—
—
%
—
—
%
—
—
%
Constant
Currency
8
1.2
%
(4)
(0.8)
%
(96)
(17.5)
%
(92)
(5.4)
%
Foreign currency translation (a)
(29)
(4.4)
%
(18)
(3.6)
%
(6)
(1.1)
%
(53)
(3.1)
%
Total
change in orders
(21)
(3.2)
%
(22)
(4.4)
%
(102)
(18.5)
%
(145)
(8.5)
%
2023 Orders
$
639
$
483
$
448
$
1,570
(a)Foreign
currency translation impact for the quarter due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Chinese Yuan and the Canadian Dollar.
Water Infrastructure
Water Infrastructure segment orders decreased $21 million, or 3.2%, to $639 million (1.2% increase on a constant currency basis) for the first quarter of 2023 as compared to the prior year. Order intake for the quarter was negatively impacted by $29 million of foreign currency translation. Organic orders increased during the quarter primarily in the transport applications, driven by strong project orders and dewatering strength in the emerging markets, and in the U.S., partially offset by reduced order intake in western Europe. The treatment application saw a slight decrease in orders driven by western Europe
where we had project orders in the prior year which did not recur and order declines in Russia.
Applied Water
Applied Water segment orders decreased $22 million, or 4.4%, to $483 million (0.8% decrease on a constant currency basis) for the first quarter of 2023 as compared to the prior year. Order intake for the quarter was negatively impacted by $18 million of foreign currency translation. Weakness in the U.S. from lapping strong demand in the prior year, partially offset by strength in the emerging markets as a result of strong project orders.
Measurement & Control Solutions
Measurement & Control Solutions segment orders decreased $102 million, or 18.5%, to $448 million (17.5% decrease on a constant currency basis) for the first quarter of 2023 as compared to the prior year. Order weakness
for the quarter was negatively impacted by $6 million of foreign currency translation. The organic order declines of $96 million in the current quarter are lapping strong organic order growth of 25% in the prior year. The order weakness for the quarter was driven by the energy applications due to strong orders in the prior year to mitigate electronic component shortages and longer lead times. The water application also experienced reduced order intake driven by lapping of large project orders in the prior year.
36
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 $3,743 million at March 31, 2023, an increase of $191 million or 5.4%, as compared to March 31, 2022 backlog of $3,552 million, and an increase of $138 million or 3.8%, as compared to December 31, 2022 backlog of $3,605 million,
driven by the order intake in the quarter outpacing revenue. We anticipate that approximately 50% of the backlog at March 31, 2023 will be recognized as revenue in the remainder of 2023. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue increased 100 basis points to 37.7% for the three months ended March 31, 2023, as compared to 36.7% for the comparative 2022 period. The gross margin increase for the quarter included favorable impacts of 880 basis points, driven by 490 basis points of price realization, 240 basis points of productivity savings and 150 basis points of favorable volume. Favorable impacts in the quarter were partially offset by 780 basis points of negative impacts, driven by 410 basis points of inflation,
150 basis points of unfavorable mix, 60 basis points of inventory management costs and 50 basis points of increased spending on strategic investments.
Operating Expenses
The following table presents operating expenses for the three months ended March 31, 2023 and 2022:
Three
Months Ended
March 31,
(in millions)
2023
2022
Change
Selling, general and administrative expenses
$
354
$
304
16.4
%
SG&A
as a % of revenue
24.4
%
23.9
%
50
bp
Research and development expenses
53
52
1.9
%
R&D
as a % of revenue
3.7
%
4.1
%
(40)
bp
Restructuring and asset impairment charges
8
—
NM
Operating
expenses
$
415
$
356
16.6
%
Expense to revenue ratio
28.7
%
28.0
%
70
bp
Selling,
General and Administrative ("SG&A") Expenses
SG&A expenses increased by $50 million to $354 million, or 24.4% of revenue, in the first quarter of 2023, as compared to $304 million, or 23.9% of revenue, in the comparable 2022 period. Increases in SG&A primarily consisted of $23 million related to acquisition and integration costs, $14 million of inflation and $12 million of investments in strategic growth initiatives.
Research and Development ("R&D") Expenses
R&D expense was $53 million, or 3.7% of revenue, in the first quarter of 2023, as compared to $52 million, or 4.1% of revenue in the comparable 2022 period. The R&D spend has remained fairly consistent year over year.
37
Restructuring
and Asset Impairment Charges
Restructuring
During the three months ended March 31, 2023, we incurred restructuring costs of $6 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. The charges included the reduction of headcount across all segments.
During the three months ended March 31, 2022, we did not incur any restructuring charges.
The following is a roll-forward for the three months ended March 31, 2023
and 2022 of employee position eliminations associated with restructuring activities:
2023
2022
Planned reductions - January 1
102
60
Additional
planned reductions
73
—
Actual reductions and reversals
(82)
(25)
Planned reductions - March 31
93
35
The following table presents
expected restructuring spend in 2023 and thereafter relating to actions commenced in 2023:
(in millions)
Water Infrastructure
Applied
Water
Measurement & Control Solutions
Corporate
Total
Actions
Commenced in 2023:
Total expected costs
$
1
$
1
$
4
$
—
$
6
Costs
incurred during Q1 2023
1
1
3
—
5
Total
expected costs remaining
$
—
$
—
$
1
$
—
$
1
During
2023, we also incurred charges of $1 million within the Water Infrastructure segment, related to actions commenced in prior years.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2023 consist primarily of severance charges. The Water Infrastructure and Applied Water actions are complete and the Measurement & Control Solutions actions are expected to continue through the end of 2023.
We currently expect to incur between $6 million and $10 million in restructuring costs for the full year. These restructuring costs are primarily related to efforts to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers.
Asset Impairment
During the first quarter
of 2023, we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and recognized an impairment charge of $2 million. Refer to Note 8, "Goodwill and Other Intangible Assets," for additional information.
38
Operating Income and Adjusted EBITDA
Operating income was $131 million (operating margin of 9.0%) during the first quarter of 2023, an increase of $20 million, or 18.0%, when compared to operating income of $111 million (operating margin of 8.7%) during the prior year. Operating margin included unfavorable impacts of 210 basis points from increases in special
charges and restructuring and realignment costs as compared to the prior year. Additionally, operating margin included 1,380 basis points of expansion from favorable operating impacts, consisting of a 700 basis point increase from price realization, 340 basis points from productivity savings and 340 basis points from favorable volume. Margin expansion was offset by 1,140 basis points of unfavorable impacts driven by 520 basis points of inflation, 160 basis points of increased employee related costs, 150 basis points of unfavorable mix, 140 basis points of increased spending on strategic investments and 80 basis points of increased inventory management costs. Excluding special charges and restructuring and realignment costs, adjusted operating income was $167 million (adjusted operating margin of 11.5%) for the first quarter of 2023 as compared to adjusted operating income of $116 million (adjusted operating margin of 9.1%) during the comparable quarter in the prior year.
Adjusted
EBITDA was $236 million (adjusted EBITDA margin of 16.3%) during the first quarter of 2023, an increase of $55 million, or 30%, when compared to adjusted EBITDA of $181 million (adjusted EBITDA margin of 14.2%) during the comparable quarter in 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 margin excludes the impact of depreciation and amortization expense, which had a favorable impact on adjusted operating margin year over year.
39
The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:
Three
Months Ended
March 31,
(in millions)
2023
2022
Change
Water Infrastructure
Operating
income
$
70
$
74
(5.4)
%
Operating margin
11.9
%
13.9
%
(200)
bp
Restructuring
and realignment costs
3
1
200.0
%
Special charges
—
—
NM
Adjusted
operating income
$
73
$
75
(2.7)
%
Adjusted operating margin
12.4
%
14.1
%
(170)
bp
Applied
Water
Operating income
$
83
$
59
40.7
%
Operating
margin
18.3
%
13.9
%
440
bp
Restructuring and realignment costs
3
1
200.0
%
Special
charges
—
—
NM
Adjusted operating income
$
86
$
60
43.3
%
Adjusted
operating margin
19.0
%
14.1
%
490
bp
Measurement & Control Solutions
Operating
income (loss)
$
20
$
(10)
300.0
%
Operating margin
4.9
%
(3.2)
%
810
bp
Restructuring
and realignment costs
5
2
150.0
%
Special charges
2
—
NM
Adjusted
operating income
$
27
$
(8)
437.5
%
Adjusted operating margin
6.7
%
(2.5)
%
920
bp
Corporate
and other
Operating loss
$
(42)
$
(12)
(250.0)
%
Special
charges
23
1
2,200.0
%
Adjusted operating loss
$
(19)
$
(11)
72.7
%
Total
Xylem
Operating income
$
131
$
111
18.0
%
Operating
margin
9.0
%
8.7
%
30
bp
Restructuring and realignment costs
11
4
175.0
%
Special
charges
25
1
2,400.0
%
Adjusted operating income
$
167
$
116
44.0
%
Adjusted
operating margin
11.5
%
9.1
%
240
bp
NM - Not meaningful percentage change
40
The table below provides a reconciliation
of net income to consolidated EBITDA and adjusted EBITDA:
Operating income for our Water Infrastructure segment was $70 million (operating margin of 11.9%) during the first quarter of 2023, a decrease of $4 million, or 5.4%, when compared to operating income of $74 million (operating margin of 13.9%) during the prior year, or a total decrease of 200 basis points. Operating margin declines included unfavorable impacts of 30 basis points from increases in restructuring and realignment costs as compared to the prior year. Additionally, operating margin declines included 1,350 basis points of unfavorable operating impacts, driven by 510 basis points of inflation, 280 basis points of unfavorable mix, 180 basis points of increased spending on strategic investments, 120 basis points of employee related costs, 110 basis points of unfavorable foreign currency impacts, and 60 basis points due to inventory management costs. Margin declines were offset by 1,180 basis points from
favorable operating impacts consisting of 760 basis points of price realization, 240 basis points of productivity savings and 180 basis points of favorable volume. Excluding restructuring and realignment costs, adjusted operating income was $73 million (adjusted operating margin of 12.4%) for the first quarter of 2023 as compared to adjusted operating income of $75 million (adjusted operating margin of 14.1%) for the first quarter of 2022.
42
Adjusted EBITDA was $89 million (adjusted EBITDA margin of 15.1%) for the first quarter of 2023, an increase of $4 million, or (0.8)%, when compared to adjusted EBITDA of $85 million (adjusted EBITDA margin of 15.9%) during the prior year. The adjusted EBITDA margin was impacted by the same offsetting factors impacting the adjusted
operating margin; however, adjusted EBITDA margin expansion includes a benefit from a year over year reduction in other non-operating expense.
Applied Water
Operating income for our Applied Water segment was $83 million (operating margin of 18.3%) during the first quarter of 2023, an increase of $24 million, or 40.7%, when compared to operating income of $59 million (operating margin of 13.9%) during the prior year, or a total increase of 440 basis points. Operating margin expansion included unfavorable impacts of 50 basis points from increases in restructuring and realignment costs as compared to the prior year. Additionally, operating margin expansion included 1,320 basis points from favorable operating impacts, driven by 790 basis points from price realization, 380 basis points from productivity savings and 120 basis points of favorable mix. Margin expansion was offset by negative
operating impacts of 830 basis points consisting of 570 basis points of inflation, 130 basis points of increased inventory management costs, 70 basis points of increased spending on strategic investments and 60 basis points of unfavorable volume. Excluding restructuring and realignment costs, adjusted operating income was $86 million (adjusted operating margin of 19.0%) for the first quarter of 2023 as compared to adjusted operating income of $60 million (adjusted operating margin of 14.1%) for the first quarter of 2022.
Adjusted EBITDA was $91 million (adjusted EBITDA margin of 20.1%) for the first quarter of 2023, an increase of $26 million, or 4.8%, when compared to adjusted EBITDA of $65 million (adjusted EBITDA margin of 15.3%) during the prior year. The increase in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin.
Measurement
& Control Solutions
Operating income for our Measurement & Control Solutions segment was $20 million (operating margin of 4.9%) during the first quarter of 2023, an increase of $30 million, or 300.0%, when compared to operating loss of $10 million (operating margin of (3.2)%) during the prior year, or a total increase of 810 basis points. Operating margin expansion included unfavorable impacts of 110 basis points from increases in special charges and restructuring and realignment costs as compared to the prior year. Additionally, operating margin expansion included 2,000 basis points of favorable operating impacts, driven by 1,220 basis points of favorable volume, 460 basis points of price realization and 320 basis points of productivity savings. Margin expansion was offset by negative operating impacts of 1080 basis points driven by 430 basis points of inflation, 260 basis points of unfavorable mix, 110 basis points
of increased spending on strategic investments and 120 basis points of increased employee related costs. Excluding special charges and restructuring and realignment costs, adjusted operating income was $27 million (adjusted operating margin of 6.7%) for the first quarter of 2023 as compared to adjusted operating loss of $8 million (adjusted operating margin of (2.5)%) for the first quarter of 2022.
Adjusted EBITDA was $63 million (adjusted EBITDA margin of 15.5%) for the first quarter of 2023, an increase of $36 million, or 6.9%, when compared to adjusted EBITDA of $27 million (adjusted EBITDA margin of 8.6%) 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 margin did not benefit from the relative impact of depreciation and amortization expense.
Corporate
and Other
Operating loss for corporate and other increased $30 million, or (250.0)%, during the first quarter of 2023 compared to the prior year period. The increase in operating loss for the three months ended March 31, 2023 was primarily due to acquisition and integration costs related to the pending acquisition of Evoqua. The timing of corporate initiatives, higher employee benefit costs and increased strategic investments also contributed to the higher operating loss. Excluding acquisition and integration costs and other special charges, the operating loss for corporate and other increased $8 million.
Interest Expense
Interest expense was $9 million and $13 million for the three months ended March 31, 2023 and 2022,
respectively. The decrease in interest expense was primarily driven by interest expense incurred during 2022 related to our 2.250% Senior Notes due 2022 that were paid off in December 2022 and interest income related to additional net investment hedges executed in during 2023. See Note 9, “Derivative Financial Instruments” and Note 11, "Credit Facilities and Debt," of our condensed consolidated financial statements for a description of our net investment hedges and credit facilities and long-term debt, respectively.
43
Income Tax Expense
The income tax provision for the three months ended March 31, 2023 was $27 million resulting in an effective tax rate of 21.7%,
compared to a $16 million expense resulting in an effective tax rate of 16.4% for the same period in 2022. The effective tax rate for the three months ended March 31, 2023 differs from the same period in 2022 due to the impact of earnings mix and nondeductible transaction costs recorded in the current period.
Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
Three
Months Ended
March 31,
(in millions)
2023
2022
Change
Operating activities
$
(19)
$
(81)
$
62
Investing
activities
(37)
(43)
6
Financing activities
(63)
(106)
43
Foreign exchange (a)
12
(2)
14
Total
$
(107)
$
(232)
$
125
(a)The
impact is primarily due to strengthening of the Euro and Polish Zloty partially offset by weakening of the Canadian Dollar.
Sources and Uses of Liquidity
Operating Activities
Cash used by operating activities was $19 million for the three months ended March 31, 2023 as compared to $81 million in the comparable prior year period. The reduction in cash used was primarily driven by reduced purchases of inventory, reflecting lower safety stock, lower build up of accounts receivable reflecting improved collections, higher cash earnings and lower interest payments. Reductions in trade payables, reflecting reduced investments in inventory balances and higher income tax payments partially offset these items.
Investing Activities
Cash
used in investing activities was $37 million for the three months ended March 31, 2023 as compared to $43 million in the comparable prior year period. The reduction in spending was driven by cash paid for investments in the first quarter of 2022 that did repeat during the current year and increased cash received from cross-currency swaps. Reduced cash received from investments partially offset these items.
Financing Activities
Cash used by financing activities was $63 million for the three months ended March 31, 2023 as compared to cash used of $106 million in the comparable prior year period. The reduction in cash used was primarily driven by the lower repurchases of common stock.
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.
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 11, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.
44
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. during the year. Currently, we have available liquidity of approximately $1.8 billion, consisting of $800 million of cash and $1 billion of available credit facilities as disclosed in Note 11, "Credit Facilities and Debt", of our condensed consolidated financial statements.
Risks related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our 2022 Annual Report.
See Note 11, "Credit Facilities and Debt," of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.
Non-U.S. Operations
We generated approximately 51% and
55% of our revenue from non-U.S. operations for the three months ended March 31, 2023 and 2022, respectively. 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 and our, 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. As of March 31, 2023, we have provided a deferred tax liability of $6 million for net foreign withholding taxes and state income taxes on $478 million of earnings expected to be repatriated to the U.S. parent as deemed necessary in the future.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements,
which have been prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We believe the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2022 Annual Report describes the critical accounting estimates used in preparation of the condensed consolidated financial statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in the information concerning our critical accounting estimates as stated in our 2022 Annual
Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the information concerning market risk as stated in our 2022 Annual Report.
45
ITEM 4. CONTROLS AND PROCEDURES
Our management,
with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes
in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
46
PART II
ITEM 1. LEGAL PROCEEDINGS
From
time to time, we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations of previously-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes. See Note 17, "Commitments and Contingencies," to the condensed consolidated financial statements for further information and any updates.
ITEM 1A. RISK FACTORS
There
have been no material changes from the risk factors previously disclosed in "Item 1A. Risk Factors" of our 2022 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended March 31, 2023:
(IN
MILLIONS, EXCEPT PER SHARE AMOUNTS) PERIOD
TOTAL NUMBER OF SHARES PURCHASED
AVERAGE PRICE PAID PER SHARE (a)
TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b)
APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b)
1/1/23 - 1/31/23
—
—
—
$182
2/1/23
- 2/28/23
—
—
—
$182
3/1/23 - 3/31/23
—
—
—
$182
This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares
tendered to satisfy tax withholding obligations in connection with employee equity awards.
(a)Average price paid per share is calculated on a settlement basis.
(b)On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our stockholders and maintains our focus on growth. There were no shares repurchased under this program for the three months ended March 31, 2023. There are up to $182 million in shares that may still be purchased under this plan as of March 31, 2023.
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not
be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference.
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
This Exhibit is intended to be furnished in accordance
with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference.
48
Exhibit
Number
Description
Location
101.0
The
following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Income Statements, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements
The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104.0
The
cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2023 formatted in Inline XBRL and contained in Exhibit 101.0.
# Management contract or compensatory plan or arrangement
49
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.