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(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
i2.250% Senior Notes due 2023
iXYL23
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 October 28, 2022, there were i180,221,532
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, 2021 ("2021 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 2021 Annual Report.
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. The global outbreak of the novel coronavirus ("COVID-19") disease in March 2020, declared a pandemic by the World Health Organization, has created significant global volatility, uncertainty and related macroeconomic disruption. The COVID-19 pandemic and macroeconomic conditions have also caused increased uncertainty in estimates and assumptions affecting the condensed consolidated financial statements. 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.
7
Note 2. Recently Issued Accounting Pronouncements
Pronouncements Not Yet Adopted
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 becomes effective January 1, 2023, except for the rollforward requirement, which becomes effective January 1, 2024. Early adoption is permitted. We will reflect the impact of these disclosure updates in our Form 10-Q for the quarterly period ended March 31, 2023.
Note 3. iRevenue
Disaggregation
of Revenue
i
The following table illustrates the sources of revenue:
The
following table reflects revenue from contracts with customers by application.
Three Months Ended
Nine Months Ended
September 30,
September
30,
(in millions)
2022
2021
2022
2021
Water Infrastructure
Transport
$
i410
$
i390
$
i1,235
$
i1,173
Treatment
i103
i106
i297
i306
Applied
Water
Commercial Building Services
i171
i152
i479
i454
Residential
Building Services
i82
i71
i233
i211
Industrial
Water
i205
i177
i600
i542
Measurement
& Control Solutions
Water
i278
i253
i822
i824
Energy
i70
i65
i186
i216
Total
$
i1,319
$
i1,214
$
i3,852
$
i3,726
/
8
The
following table reflects revenue from contracts with customers by geographical region.
Three Months Ended
Nine Months Ended
September 30,
September
30,
(in millions)
2022
2021
2022
2021
Water Infrastructure
United States
$
i155
$
i137
$
i467
$
i402
Western
Europe
i172
i175
i548
i538
Emerging
Markets (a)
i135
i137
i356
i391
Other
i51
i47
i161
i148
Applied
Water
United States
i235
i197
i675
i593
Western
Europe
i90
i90
i285
i281
Emerging
Markets (a)
i100
i81
i258
i240
Other
i33
i32
i94
i93
Measurement
& Control Solutions
United States
i221
i189
i614
i625
Western
Europe
i55
i59
i183
i202
Emerging
Markets (a)
i48
i46
i142
i141
Other
i24
i24
i69
i72
Total
$
i1,319
$
i1,214
$
i3,852
$
i3,726
(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 September 30, 2022, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $i567
million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following ithree years. 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.
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 and nine months ended September 30, 2022, we incurred restructuring costs of
$i3 million and $i9 million, respectively. We incurred these charges primarily as a continuation of our efforts
to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across all segments.
During the three and nine months ended September 30, 2021, we recognized net restructuring (recoveries) expense of $(i2) million and charges of $i6 million,
respectively, of which $(i2) million and $i4 million, respectively, relate to actions previously announced in 2020 and earlier. These
charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment and accrual recoveries in our Measurement & Control Solutions segment.
10
iThe following table presents the components of restructuring expense and asset impairment charges:
Three
Months Ended
Nine Months Ended
September 30,
September 30,
(in millions)
2022
2021
2022
2021
By component:
Severance
and other charges
$
i3
$
i1
$
i9
$
i9
Asset
impairment
i—
i—
i—
i1
Reversal
of restructuring accruals
i—
(i3)
i—
(i4)
Total
restructuring costs
$
i3
$
(i2)
$
i9
$
i6
Asset
impairment charges
i12
i—
i13
i1
Total
restructuring and asset impairment charges
$
i15
$
(i2)
$
i22
$
i7
By
segment:
Water Infrastructure
$
i2
$
i—
$
i4
$
i7
Applied
Water
i—
i1
i1
i2
Measurement
& Control Solutions
i13
(i3)
i17
(i2)
/
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 nine months ended September 30, 2022 and 2021:
(in millions)
2022
2021
Restructuring
accruals - January 1
$
i7
$
i29
Restructuring
costs, net
i9
i6
Cash
payments
(i7)
(i21)
Asset
impairment
i—
(i1)
Foreign
currency and other
(i1)
(i2)
Restructuring
accruals - September 30
$
i8
$
i11
By
segment:
Water Infrastructure
$
i1
$
i1
Applied
Water
i—
i2
Measurement
& Control Solutions
i3
i6
Regional
selling locations (a)
i2
i2
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 2022 and thereafter:
(in millions)
Water Infrastructure
Applied
Water
Measurement & Control Solutions
Corporate
Total
Actions
Commenced in 2022:
Total expected costs
$
i4
$
i1
$
i3
$
i—
$
i8
Costs
incurred during Q1 2022
i—
i—
i—
i—
i—
Costs
incurred during Q2 2022
i2
i1
i2
i—
i5
Costs
incurred during Q3 2022
i2
i—
i1
i—
i3
Total
expected costs remaining
$
i—
$
i—
$
i—
$
i—
$
i—
Actions
Commenced in 2021:
Total expected costs
$
i3
$
i—
$
i1
$
i—
$
i4
Costs
incurred during 2021
i3
i—
i—
i—
i3
Costs
incurred during Q1 2022
i—
i—
i—
i—
i—
Costs
incurred during Q2 2022
i—
i—
i—
i—
i—
Costs
incurred during Q3 2022
i—
i—
i—
i—
i—
Total
expected costs remaining
$
i—
$
i—
$
i1
$
i—
$
i1
/
During
the second quarter of 2022, we also incurred charges of $i1 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2021.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2022 consist primarily of severance charges. The actions commenced in 2022 are complete.
The Water Infrastructure and Measurement & Control Solutions actions commenced in 2021 consist primarily
of severance charges. The Water Infrastructure actions are complete and the Measurement & Control Solutions actions are expected to continue through the first quarter of 2023.
Asset Impairment
During the third quarter of 2022, we determined that certain assets including software and customer relationships within our Measurement & Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $i12 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 September 30, 2022 was $i5 million resulting in an effective tax rate of i27.8%,
compared to a $i19 million expense resulting in an effective tax rate of i13.9% for the same period in 2021. The income tax provision for the nine months ended September
30, 2022 was $i45 million resulting in an effective tax rate of i17.8%, compared to a $i71
million expense resulting in an effective tax rate of i18.3% for the same period in 2021. The effective tax rate for the three month period ended September 30, 2022 was higher than the U.S. federal statutory rate primarily due to the impact of earnings mix. The effective tax rate for the nine month period ended September 30, 2022 was lower than the U.S. federal statutory rate primarily due to favorable earnings mix, partially offset by the Global Intangible Low Taxed
Income ("GILTI") inclusion.
12
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 Vaxjo, which rendered a decision adverse to Xylem in June 2022 for SEKi788 million
(approximately $i70 million USD), 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 September 30, 2022, we have not recorded any unrecognized tax benefits related to this uncertain tax position.
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
i180,217
i180,236
i180,201
i180,203
Plus
incremental shares from assumed conversions: (b)
Dilutive effect of stock options
i523
i949
i516
i880
Dilutive
effect of restricted stock units and performance share units
i199
i457
i153
i405
Weighted
average common shares outstanding — Diluted
i180,939
i181,642
i180,870
i181,488
Basic
earnings per share
$
i0.07
$
i0.63
$
i1.14
$
i1.74
Diluted
earnings per share
$
i0.07
$
i0.63
$
i1.14
$
i1.73
(a)Restricted
stock unit awards 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
Nine
Months Ended
September 30,
September 30,
(in thousands)
2022
2021
2022
2021
Stock options
i1,508
i1,031
i1,496
i1,169
Restricted
stock units
i413
i251
i368
i285
Performance
share units
i333
i315
i279
i338
/
13
Note
7. iInventories
The components of total inventories are summarized as follows: i
Amortization
expense related to finite-lived intangible assets was $i31 million and $i93 million for the three and nine-month periods ended September 30,
2022, respectively, and $i31 million and $i96 million for the three and nine month periods ended September 30,
2021, respectively.
During the third quarter of 2022, the Company assessed whether the carrying amounts of certain long-lived assets within the Measurement & Control Solutions segment may not be recoverable. Our assessment resulted in an impairment charge of $i12 million, primarily related to software and customer relationships. The charge was calculated using an income approach, which is
considered a Level 3 input for fair value measurement, and is reflected in “Restructuring and asset impairment charges” in our Condensed Consolidated Income Statements.
14
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.
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 $i130
million and $i301 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, 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,
sell Canadian Dollar and purchase Euro, sell Australian Dollar and purchase Euro, and to purchase Polish Zloty and sell Euro. The purchased notional amounts associated with these currency derivatives are $i50 million, $i39
million, $i16 million, $i8 million, $i6
million, $i6 million and $i5 million, respectively. As of December 31, 2021 the purchased notional amounts associated with these currency derivatives
are $i130 million, $i88 million, $i31 million,
$i14 million, $i14 million, $i13 million
and $i11 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 $i1,469 million and $i1,151
million as of September 30, 2022 and December 31, 2021, 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 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. Previously, the entirety of the outstanding balance, or $i563
million as of December 31, 2021, net of unamortized discount, was designated as a hedge of a net investment in certain foreign subsidiaries.
Fair Value Hedges of Foreign Exchange Risk
The de-designation of our i2.250% Senior Notes of €i500
million resulted in exposure to fluctuations in the Euro-U.S. Dollar exchange rate. We use currency forward agreements to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.
On June 2, 2022, we entered into a currency forward agreement with a total notional amount of €i500 million, designating the agreement as a
fair value hedge of our Euro denominated notes. As of September 30, 2022, the total notional amount of the fair value hedge was $i483 million.
15
Effectiveness of derivatives designated as fair value hedges is assessed using the spot method. The changes in the fair value of these derivatives due to movements in spot exchange rates are
recorded in Selling, general and administrative Expenses. Changes in the fair value of the i2.250% Senior Notes of €i500 million related to spot exchange rates are also recorded in Selling,
general and administrative expenses. Changes in the spot-forward differential and counterparty non-performance risk of the derivatives are excluded from the assessment of hedge effectiveness and will be recognized in Accumulated other comprehensive loss ("AOCL"). Amounts in AOCL are recognized in earnings, specifically Interest expense, using a systematic and rational method over the life of the hedging instrument.
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) recognized in Selling, general and administrative expenses
$
(i39)
$
i—
$
(i50)
$
i—
Amount
recognized in Interest expense
$
(i1)
$
i—
$
(i2)
$
i—
/
As
of September 30, 2022, $i17 million of net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.
As of September 30, 2022, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration.
As
of September 30, 2022, $i2 million of net gains on the fair value hedges are expected to be reclassified into earnings in the next 12 months.
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.
16
iThe
fair values of our derivative contracts currently included in our hedging program were as follows:
Our
long-term debt, due in 2023, was de-designated from the hedging relationship in June 2022. The fair value of the long-term debt designated as a net investment hedge was $i577 million as of December 31, 2021.
Note 10. iAccrued
and Other Current Liabilities
iThe components of total Accrued and other current liabilities are as follows:
Less:
short-term borrowings and current maturities of long-term debt
i483
i—
Total
long-term debt
$
i1,880
$
i2,440
(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 2023 was $i477 million and $i577
million as of September 30, 2022 and December 31, 2021, respectively. The fair value of our Senior Notes due 2026 was $i465 million and $i537
million as of September 30, 2022 and December 31, 2021 respectively. The fair value of our Senior Notes due 2028 was $i424 million and $i497
million as of September 30, 2022 and December 31, 2021, respectively. The fair value of our Senior Notes due 2031 was $i400 million and $i496
million as of September 30, 2022 and December 31, 2021, respectively. The fair value of our Senior Notes due 2046 was $i332 million and $i481
million as of September 30, 2022 and December 31, 2021, 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 September 30, 2022, 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”).
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.
18
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 2021 was payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable on March 11 of each year. Interest on the Senior Notes due 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of September 30, 2022, 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 provides 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.
Interest on all loans under the 2019 Credit Facility is payable either quarterly or at the expiration of any LIBOR or EURIBOR interest period applicable thereto. Borrowings accrue interest at a rate equal to, at Xylem's election, a base rate or an adjusted LIBOR or EURIBOR rate plus an applicable margin. The 2019 Credit Facility includes customary provisions for implementation of replacement rates for LIBOR-based and EURIBOR-based loans. The 2019 Credit Facility also includes a pricing grid that determines the applicable margin based on Xylem's credit rating, with a further adjustment depending on Xylem's annual Sustainalytics Environmental, Social and Governance ("ESG") score, determined based on the methodology in effect as of March 5, 2019. 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 our 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 (as adjusted for the ESG score).
The 2019 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; and in addition 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 2019
Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the 2019 Credit Facility, subject to certain requirements and conditions set forth in the 2019 Credit Facility. As of September 30, 2022, the 2019 Credit Facility was undrawn and we are in compliance with all revolver covenants.
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 $i800 million inclusive of the 2019 Credit Facility. As of September 30, 2022 and December 31, 2021, 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 $i483
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 September 30, 2022 and December 31, 2021, 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.
19
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
Nine Months Ended
September 30,
September 30,
(in millions)
2022
2021
2022
2021
Domestic defined benefit pension plans:
Service
cost
$
i1
$
i1
$
i2
$
i2
Interest
cost
i—
—
i2
i2
Expected
return on plan assets
(i1)
(i2)
(i4)
(i5)
Amortization
of net actuarial loss
i1
i1
i2
i3
Net
periodic benefit cost
$
i1
$
—
$
i2
$
i2
International
defined benefit pension plans:
Service cost
$
i3
$
i4
$
i10
$
i11
Interest
cost
i4
i2
i11
i8
Expected
return on plan assets
(i4)
(i3)
(i11)
(i10)
Amortization
of net actuarial loss
i3
i5
i9
i13
U.K.
pension settlement expense
i140
i—
i140
—
Net
periodic benefit cost
$
i146
$
i8
$
i159
$
i22
Total
net periodic benefit cost
$
i147
$
i8
$
i161
$
i24
/
The
components of net periodic benefit cost, other than the service cost component and the U.K, pension settlement expense 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 of less than $iiii1///
million, for both the three and nine months ended September 30, 2022 and 2021, respectively.
We contributed $i15 million and $i16
million to our defined benefit plans during the nine months ended September 30, 2022 and 2021, respectively. Additional contributions ranging between approximately $i3 million and $i7
million are expected to be made during the remainder of 2022.
The Company initiated the process for a full buy-out of its largest defined benefit plan in the U.K. in 2019. During the first quarter of 2020, the Company purchased a bulk annuity policy as a plan asset to facilitate the termination and buy-out of the plan. The buyout was completed in September 2022, at which point the remaining benefit obligations were transferred to the insurer and we were relieved of any further obligation. As a result, we recorded a pension settlement charge of £i123 million
(approximately $i140 million), primarily consisting of unrecognized actuarial losses.
20
Note
13. iEquity
iThe following table shows the changes in stockholders' equity for the nine months ended September 30,
2022:
Share-based compensation expense was $i10
million and $i28 million during the three and nine months ended September 30, 2022, respectively, and $i8 million and $i25
million during the three and nine months ended September 30, 2021, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $i7 million, $i31
million and $i15 million, respectively, at September 30, 2022 and is expected to be recognized over a weighted average period of i1.8,
i1.9 and i2.2
years, respectively. The amount of cash received from the exercise of stock options was $i6 million and $i15 million for the nine months
ended September 30, 2022 and 2021, respectively.
Stock Option Grants
iThe following is a summary of the changes in outstanding stock options for the nine months ended September 30, 2022:
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 nine months ended September 30, 2022 was $i3.2 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 2022 grants:
Volatility
i26.20
%
Risk-free
interest rate
i1.59
%
Dividend yield
i1.38
%
Expected
term (in years)
i5.6
Weighted-average fair value / share
$
i19.86
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.
23
Restricted Stock Unit Grants
iThe
following is a summary of restricted stock unit activity for the nine months ended September 30, 2022. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant:
The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the nine months ended September 30, 2022. 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.
TSR Performance Share Unit Grants
The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the nine months ended September 30, 2022:
(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.
24
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 2022 grants:
Volatility
i33.3
%
Risk-free
interest rate
i1.44
%
/
Revenue
Performance Share Unit Grants
i
The following is a summary of our Revenue performance share unit grants for the nine months ended September 30, 2022:
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 and nine months ended September 30, 2022, the Company repurchased less than i0.1 million shares of common stock for less than $i1
million and approximately i0.6 million shares of common stock for $i52 million, respectively. For the three and nine months ended September
30, 2021, the Company repurchased less than i0.1 million shares of common stock for less than $i1 million
and approximately i0.7 million shares of common stock for $i68 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:
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 September 30, 2022. For the nine months ended September 30, 2022, we repurchased i0.5 million shares for approximately $i46 million.
There were no shares repurchased under the program for the three months ended September 30, 2021. For the nine months ended September 30, 2021, we repurchased approximately i0.6 million shares for $i60 million.
There are up to $i182 million in shares that may still be purchased under this plan as of September 30, 2022.
Aside from the aforementioned repurchase program, we repurchased less than i0.1
million shares and approximately i0.1 million shares for less than $i1 million and approximately $i6
million for the three and nine months ended September 30, 2022, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. Likewise, we repurchased less than i0.1 million shares and approximately i0.1 million
shares for $i1 million and $i8 million for the three and nine months ended September
30, 2021, respectively.
25
Note 16. iAccumulated Other Comprehensive Loss
iThe
following table provides the components of AOCL for the nine months ended September 30, 2022:
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.
27
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
$i5 million and $i4 million as of September 30, 2022 and December 31,
2021, 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 September 30, 2022 and December 31, 2021, the amount of surety bonds, bank guarantees, insurance letters of credit, stand-by letters of credit as well as revenue and customs guarantees was $i435
million and $i415 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 $i4 millionand$i3
million as of September 30, 2022 and December 31, 2021 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.
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)
2022
2021
Warranty accrual – January 1
$
i57
$
i65
Net
charges for product warranties in the period
i18
i23
Settlement
of warranty claims
(i19)
(i25)
Foreign
currency and other
(i4)
(i1)
Warranty
accrual - September 30
$
i52
$
i62
/
28
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.
29
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 2021 Annual Report. The following table contains financial information for each reportable segment:
Three
Months Ended
Nine Months Ended
September 30,
September 30,
(in millions)
2022
2021
2022
2021
Revenue:
Water
Infrastructure
$
i574
$
i547
$
i1,696
$
i1,625
Applied
Water
i458
i400
i1,312
i1,207
Measurement
& Control Solutions
i348
i318
i1,008
i1,040
Total
$
i1,380
$
i1,265
$
i4,016
$
i3,872
Operating
Income (Loss):
Water Infrastructure
$
i104
$
i101
$
i286
$
i265
Applied
Water
i77
i60
i197
i190
Measurement
& Control Solutions
(i2)
i7
(i17)
i29
Corporate
and other
(i11)
(i16)
(i41)
(i39)
Total
operating income
$
i168
$
i152
$
i425
$
i445
Interest
expense
$
i12
$
i21
$
i37
$
i63
U.K.
pension settlement expense
i140
i—
i140
i—
Other
non-operating income, net
i1
i2
i2
i1
Gain
from sale of business
i—
i—
i1
i2
Income
before taxes
$
i17
$
i133
$
i251
$
i385
Depreciation
and Amortization:
Water Infrastructure
$
i12
$
i12
$
i39
$
i38
Applied
Water
i4
i5
i14
i17
Measurement
& Control Solutions
i35
i38
i103
i111
Regional
selling locations (a)
i5
i6
i14
i15
Corporate
and other
i2
i1
i6
i5
Total
$
i58
$
i62
$
i176
$
i186
Capital
Expenditures:
Water Infrastructure
$
i19
$
i18
$
i49
$
i42
Applied
Water
i6
i4
i14
i11
Measurement
& Control Solutions
i19
i19
i61
i60
Regional
selling locations (b)
i5
i4
i15
i12
Corporate
and other
i4
i2
i9
i2
Total
$
i53
$
i47
$
i148
$
i127
(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.
30
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. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by impacts from changes in international conditions, including as a result of the war between Russia and Ukraine, coronavirus (“COVID-19”) pandemic and macroeconomic conditions, including inflation. 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; continued uncertainty around the ongoing impacts 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; 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 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, 2021 ("2021 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).
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
31
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 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 technologies and critical infrastructure technologies
that allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. We also provide analytical instrumentation used to measure and analyze water quality, flow and level in clean water, wastewater, surface water and coastal 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.
COVID-19 Pandemic Update and Macroeconomic
Conditions
Our markets and operations have largely demonstrated resilience against the effects of the pandemic. However, we have experienced, and may continue to experience, shortages in the supply of components, including electronics, particularly semiconductors ("chips"), parts and raw materials. For example, China has adopted and continues to rely upon a “zero-COVID” policy pursuant to which it has declared a number of total and partial lockdowns in cities throughout China that has, and may continue to adversely affect the global supply chain. Chip supply has modestly improved in each successive quarter in 2022, which we expect to continue through the fourth quarter assuming no new unforeseen impacts to the global supply chain.
32
In
addition to impacts on our supply chain, we have also experienced, and continue to experience other impacts from the macroeconomic conditions, including increased inflation of materials and labor, energy, overhead, freight and logistics costs, and are engaging in various mitigation strategies and activities, including productivity and price realization efforts. Specifically, our productivity efforts include selective chip allocation, product redesigns, alternate sourcing options, and global procurement efforts to mitigate inflationary impacts. We have also initiated restructuring plans to further optimize our cost structure.
Risks related to the pandemic, supply chain and macroeconomic issues, including inflation, are described in further detail under "Item 1A. Risk Factors" in the Company's 2021 Annual Report.
Executive
Summary
Xylem reported revenue for the third quarter of 2022 of $1,380 million, an increase of 9.1% compared to $1,265 million reported in the third quarter of 2021. On a constant currency basis, revenue increased by $195 million, or 15.4%, driven by organic revenue growth in all end markets. These results were driven by organic growth across all segments and in all end markets.
We generated operating income of $168 million (margin of 12.2%) during the third quarter of 2022, as compared to $152 million (margin of 12.0%) in 2021. Operating income in the third quarter of 2022 included an increase in special charges of $13 million and an unfavorable impact from increased restructuring and realignment costs of $6 million as compared to the third quarter of 2021. Excluding the impact of special charges and restructuring and realignment costs, adjusted operating income was $187 million (adjusted
margin of 13.6%) during the third quarter of 2022 as compared to $155 million (adjusted margin of 12.3%) in 2021. The increase in adjusted operating margin was primarily related to price realization, productivity savings and favorable volume, partially offset by inflation, increased spending on strategic investments and unfavorable mix.
Additional financial highlights for the quarter ended September 30, 2022 include the following:
•Orders of $1,419 million, down 6.5% from $1,518 million in the prior year period, and down 0.7% on an organic basis.
•Earnings per share of $0.07, down 88.9% compared to prior year ($0.79, up 25.4% versus prior year, on an adjusted basis).
•Net income
as a percent of revenue of .87%, down 813 basis points compared to 9.0% in the prior year. EBITDA margin of 5.9%, down 1,110 basis points when compared to 17.0% in the prior year (18.3% on an adjusted basis, up 40 basis points)
•Net cash flow generated in operating activities of $234 million for the nine months ended September 30, 2022, a decrease of $84 million during the same period of the prior year. Free cash flow of $86 million, down $105 million from the prior year.
33
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
Nine Months Ended
September 30,
September 30,
(in millions, except for per share data)
2022
2021
2022
2021
Net income & Earnings per share
$
12
$
0.07
$
114
$
0.63
$
206
$
1.14
$
314
$
1.73
Restructuring
and realignment
6
0.03
2
0.01
18
0.10
16
0.09
Special
charges
154
(b)
0.84
2
0.01
159
0.88
8
0.04
(Gain)
loss from sale of business
—
—
—
—
(1)
(0.01)
(2)
(0.01)
Tax
effects of adjustments (a)
(28)
(c)
(0.15)
(1)
(0.01)
(34)
(0.19)
1
(0.02)
Adjusted net income &
Adjusted earnings per share
$
144
$
0.79
$
116
$
0.63
$
348
$
1.92
$
337
$
1.86
(a)
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.
(b) The special charges in the quarter primarily relates to the U.K. pension settlement expense of $140 million and asset impairment charges of $12 million recorded in the period.
(c) The $28 million in tax effects of adjustments in the quarter primarily consists of $23 million related to to the U.K. pension settlement expense.
34
•"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.
Nine Months Ended
September 30,
(in millions)
2022
2021
Net
cash provided by operating activities
$
234
$
318
Capital expenditures
(148)
(127)
Free cash flow
$
86
$
191
Net
cash used in investing activities
$
(123)
$
(113)
Net cash used in financing activities
$
(210)
$
(806)
35
2022 Outlook
We
are further updating our total revenue growth to be in the range of approximately 4% in 2022, with organic revenue growth anticipated to be in the range of 9% to 10%. The following is a summary of our organic revenue outlook by end markets:
•Utilities revenue increased by approximately 5% through the third quarter on an organic basis driven by strength in the U.S. and western Europe partially offset by weakness in the emerging markets. For the remainder of 2022, we expect organic revenue growth in the mid-single-digit range, as utilities continue to remain focused on mission-critical applications in wastewater. Long-term capex outlook supported by aging infrastructure and the emerging markets’ continued advancement. On the clean water side, the timing of large project deployments has been impacted by the global shortage of electronic components. Although chip supply remains
constrained, we do expect a continued, modest easing of chip supply, sequentially. Additionally, we can expect continued momentum for water quality products and increased demand for pipeline assessment services due to aging infrastructure.
•Industrial revenue increased by approximately 13% through the third quarter on an organic basis driven by strength across all major geographic regions. For 2022, we now expect organic revenue growth in the low-double-digit range. We expect to see continued robust growth in our dewatering business, especially in the emerging markets from mining demand. We expect sustained demand in light industrial activity globally.
•In the commercial markets, organic revenue increased by approximately 8% through the third quarter on an organic basis driven by strength across all major geographic regions. For the
remainder of 2022, we now expect organic revenue growth in the high-single to low-double digit range. We expect increased demand for green buildings and energy efficiency related projects, particularly in Europe, and strong commercial development in the Middle East.
•In the residential markets, organic revenue increased by approximately 16% through the third quarter on an organic basis predominately driven by strength in the U.S. This market is primarily driven by solid replacement revenue serviced through our distribution network. For 2022, we expect organic revenue growth in the high-teens. We anticipate dealer activity to remain healthy and order demand to normalize as supply chains and lead times improve.
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 2022, we expect to incur approximately $25 million and $30 million in restructuring and realignment costs.
36
Results of Operations
Three
Months Ended
Nine Months Ended
September 30,
September 30,
(in millions)
2022
2021
Change
2022
2021
Change
Revenue
$
1,380
$
1,265
9.1
%
$
4,016
$
3,872
3.7
%
Gross
profit
524
472
11.0
%
1,511
1,482
2.0
%
Gross margin
38.0
%
37.3
%
70
bp
37.6
%
38.3
%
(70)
bp
Total
operating expenses
356
320
11.3
%
1,086
1,037
4.7
%
Expense to revenue ratio
25.8
%
25.3
%
50
bp
27.0
%
26.8
%
20
bp
Restructuring
and realignment costs
6
2
200.0
%
18
16
12.5
%
Special
charges
13
1
NM
15
3
400.0
%
Adjusted operating expenses
337
317
6.3
%
1,053
1,018
3.4
%
Adjusted
operating expenses to revenue ratio
24.4
%
25.1
%
(70)
bp
26.2
%
26.3
%
(10)
bp
Operating
income
168
152
10.5
%
425
445
(4.5)
%
Operating margin
12.2
%
12.0
%
20
bp
10.6
%
11.5
%
(90)
bp
U.K.
pension settlement expense
140
—
100.0
%
140
—
100.0
%
Interest and other non-operating expense, net
11
19
(42.1)
%
35
62
(43.5)
%
Gain
from sale of business
—
—
—
1
2
(50.0)
%
Income tax expense
5
19
(73.7)
%
45
71
(36.6)
%
Tax
rate
27.8
%
13.9
%
1,390
bp
17.8
%
18.3
%
(50)
bp
Net income
$
12
$
114
(89.5)
%
$
206
$
314
(34.4)
%
NM
- Not meaningful change
Revenue
Revenue generated during the three and nine months ended September 30, 2022 was $1,380 million and $4,016 million, reflecting increases of $115 million, or 9.1%, and $144 million, or 3.7%, respectively, compared to the same prior year periods. On a constant currency basis, revenue grew 15.4% and 8.2% for the three and nine months ended September 30, 2022. The increases on a constant currency basis were driven by organic revenue growth of $199 million and $326 million respectively, reflecting strong organic growth across all major geographic regions for the quarter and on a year-to-date basis, driven by strong backlog execution and price realization.
The following table illustrates the impact from organic
growth, recent divestitures, and foreign currency translation in relation to revenue during the three and nine months ended September 30, 2022:
Water
Infrastructure
Applied Water
Measurement & Control Solutions
Total Xylem
(in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
2021
Revenue
$
547
$
400
$
318
$
1,265
Organic Growth
73
13.3
%
79
19.8
%
47
14.8
%
199
15.7
%
Divestitures
—
—
%
—
—
%
(4)
(1.3)
%
(4)
(0.3)
%
Constant
Currency
73
13.3
%
79
19.8
%
43
13.5
%
195
15.4
%
Foreign
currency translation (a)
(46)
(8.4)
%
(21)
(5.3)
%
(13)
(4.1)
%
(80)
(6.3)
%
Total
change in revenue
27
4.9
%
58
14.5
%
30
9.4
%
115
9.1
%
2022
Revenue
$
574
$
458
$
348
$
1,380
(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 Swedish Krona.
37
Water
Infrastructure
Applied Water
Measurement & Control Solutions
Total Xylem
(in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
2021
Revenue
$
1,625
$
1,207
$
1,040
$
3,872
Organic Growth
170
10.5
%
149
12.3
%
7
0.7
%
326
8.4
%
Divestitures
—
—
%
—
—
%
(9)
(0.9)
%
(9)
(0.2)
%
Constant
Currency
170
10.5
%
149
12.3
%
(2)
(0.2)
%
317
8.2
%
Foreign currency translation (a)
(99)
(6.1)
%
(44)
(3.6)
%
(30)
(2.9)
%
(173)
(4.5)
%
Total
change in revenue
71
4.4
%
105
8.7
%
(32)
(3.1)
%
144
3.7
%
2022 Revenue
$
1,696
$
1,312
$
1,008
$
4,016
(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 Swedish Krona and the Australian Dollar.
Water Infrastructure
Water Infrastructure revenue increased $27 million, or 4.9%, for the third quarter of 2022 (13.3% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $46 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $73 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 $49 million across all major geographic regions, with particular strength in the U.S. driven by good price realization and strength in the construction sector, and in western Europe
where we saw strong demand in utilities' capital spending coupled with good price realization. The industrial end market also had organic growth of $24 million spanning all major geographic regions, with particular strength in emerging markets led by strong dewatering demand in Latin America and Africa, as well as strength in western Europe where we benefited from strong backlog execution.
From an application perspective, organic revenue growth for the third quarter was driven by our transport applications with $67 million of organic growth, with dewatering accounting for almost half of that. All three of our major geographic regions contributed to the organic revenue growth in transport, led by the U.S. where we continued to experience strong price realization and healthy market conditions, followed by western Europe which had strong demand from utility capital projects and solid project execution. We also experienced strong growth
in the emerging markets driven by strong price realization a well as robust mining demand in our dewatering business, particularity in Latin America and Africa. Organic revenue for the treatment application was up $6 million for the quarter, driven by backlog execution in western Europe.
For the nine months ended September 30, 2022, revenue increased $71 million, or 4.4% (10.5% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $99 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $170 million. Organic growth for the period was driven by strength in both the utility and industrial end markets. The utilities end market experienced organic growth of $90 million led by strength in the U.S. and western Europe, bolstered by strong price realization, solid backlog
execution and timing of projects as compared to prior year; which was partially offset by weakness in the emerging markets, primarily due to the negative impact of continued COVID impacts in China. The industrial end market had $80 million of organic growth across all major geographies, particularly in western Europe due to strong backlog execution, and the emerging markets, driven by mining projects and price realization in both Latin America and Africa.
From an application perspective, organic revenue growth during the nine-month period was driven by our transport applications. Transport experienced $160 million of revenue growth, almost half of which came from the dewatering application. The increase in organic revenue was led by the U.S. and western Europe, where we experienced solid price realization and executed on strong backlog in both regions. The emerging markets also had strong growth in dewatering from mining demand
in Latin America and Africa, which was partially offset by declines in China due to COVID impacts. Organic revenue for the treatment application also contributed $10 million for the period, as revenue growth from strong backlog execution in western Europe and the U.S., partially offset by declines in emerging markets led by the continued negative COVID impacts on China.
38
Applied Water
Applied Water revenue increased $58 million, or 14.5%, for the third quarter of 2022 (19.8% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $21 million of foreign currency translation, with the change at constant currency coming entirely from organic
growth of $79 million, led by strength in the industrial end market, followed by strength in the commercial and residential end markets. Organic revenue growth in the third quarter was $40 million for the industrial water application, driven by the emerging markets, due to strong backlog execution driven by market recovery in China and in western Europe where we benefited from strength in the marine and food & beverage sectors and continued investments that drove strong growth in manufacturing output. The U.S. also experienced continued strength in the industrial water application, driven by strong price realization. The commercial and residential building services applications grew organically $26 million and $13 million, respectively. Growth in these applications was driven by price realization and strong backlog execution in the U.S. due to supply chain improvements.
For the nine months ended September
30, 2022, revenue increased $105 million, or 8.7% (12.3% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $44 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $149 million. Organic growth during the period was driven by strength in all three end markets and across all major geographic regions, with particular strength in the U.S. and western Europe. Organic revenue growth during the nine month period was led by strength in the industrial water application of $78 million, where in the U.S. where we benefited from price realization and strong backlog execution, in the emerging markets where we saw market recovery in China, and in Western Europe where we had healthy order intake across the sector. Commercial building services grew $38 million organically during the period, particularly in the U.S. and western Europe,
where we benefited from price realization and strong backlog execution. The residential building services application had $33 million of organic revenue growth during the period, primarily in the U.S. driven by price realization and strong backlog execution.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $30 million, or 9.4%, for the third quarter of 2022 (13.5% 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 from an organic growth of $47 million (14.8% growth) and reduced revenue related to divestiture impacts of $4 million. Organic growth in the quarter was driven by $42 million in the utility end markets across all major geographies. The industrial end market experienced modest growth of $5
million.
From an application perspective, organic revenue growth during the quarter was driven by the water application of $38 million, primarily in the U.S., as a result of easing of electronic component shortages and strong price realization. The energy applications grew $9 million driven by gas metering backlog execution in the U.S.
For the nine months ended September 30, 2022, revenue decreased $32 million, or 3.1% (0.2% decrease on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $30 million of foreign currency translation, with the change at constant currency coming from an organic increase of $7 million (0.7% increase) and reduced revenue related to divestiture impacts of $9 million. Organic revenue growth in the period consisted of growth in the industrial end market of $8 million,
driven by strength in our test business in the emerging markets, slightly offset by $1 million of declines in the utility end market.
From an application perspective, organic revenue growth during the nine-month period consisted of growth in the water application of $27 million, partially offset by declines in the energy applications of $20 million. Organic revenue growth in the water application was driven by strength in the U.S. due to strong price realization, and backlog execution in the emerging markets. Declines in the energy applications were driven by impacts from electronic component shortages in the U.S. during the first half of the year.
39
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 third quarter of 2022 were $1,419 million, a decrease of $99 million, or 6.5%, over the prior year (1.1% decrease on a constant currency basis). Orders received during the nine months ended September 30, 2022 were $4,818 million, an increase of $102 million, or 2.2%, over the prior year (6.2% increase on a constant currency basis). Order intake was negatively impacted by $82 million and $189 million of foreign currency translation for the three and nine months ended September 30, 2022, respectively.
The decrease on a constant currency basis for the quarter was primarily driven by organic order declines of $10 million. The increase on a constant currency basis for the nine month period was primarily driven by organic order growth of $309 million.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three and nine months ended September 30, 2022:
Water
Infrastructure
Applied Water
Measurement & Control Solutions
Total Xylem
(in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
2021
Orders
$
623
$
446
$
449
$
1,518
Organic Growth
18
2.9
%
(17)
(3.8)
%
(11)
(2.4)
%
(10)
(0.7)
%
Divestitures
—
—
%
—
—
%
(7)
(1.6)
%
(7)
(0.4)
%
Constant
Currency
18
2.9
%
(17)
(3.8)
%
(18)
(4.0)
%
(17)
(1.1)
%
Foreign currency translation (a)
(47)
(7.5)
%
(20)
(4.5)
%
(15)
(3.3)
%
(82)
(5.4)
%
Total
change in orders
(29)
(4.7)
%
(37)
(8.3)
%
(33)
(7.3)
%
(99)
(6.5)
%
2022 Orders
$
594
$
409
$
416
$
1,419
(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 Swedish Krona.
Water
Infrastructure
Applied Water
Measurement & Control Solutions
Total Xylem
(in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
2021
Orders
$
1,873
$
1,409
$
1,434
$
4,716
Organic Growth
225
12.0
%
30
2.1
%
54
3.8
%
309
6.6
%
Divestitures
—
—
%
—
—
%
(18)
(1.3)
%
(18)
(0.4)
%
Constant
Currency
225
12.0
%
30
2.1
%
36
2.5
%
291
6.2
%
Foreign currency translation (a)
(113)
(6.0)
%
(45)
(3.2)
%
(31)
(2.2)
%
(189)
(4.0)
%
Total
change in orders
112
6.0
%
(15)
(1.1)
%
5
0.3
%
102
2.2
%
2022 Orders
$
1,985
$
1,394
$
1,439
$
4,818
(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 Swedish Krona and the Australian Dollar.
Water Infrastructure
Water Infrastructure segment orders decreased $29 million, or 4.7%, to $594 million (2.9% increase on a constant currency basis) for the third quarter of 2022 as compared to the prior year. Order intake for the quarter was negatively impacted by $47 million of foreign currency translation. The order increase on a constant currency basis in the quarter was driven by organic order growth in our transport applications in the U.S. and western Europe, where we benefited from healthy market conditions, large infrastructure projects and price realization. Transport order growth in the U.S. and western Europe was slightly
offset by declines in emerging markets, where dewatering strength in Latin America and Africa was more than offset by order softness in India, China and
40
Russia. For the treatment application, organic orders declined modestly in the quarter, primarily due to modest weakness in the emerging markets and western Europe more than offsetting growth in the U.S.
For the nine months ended September 30, 2022, orders increased $112 million, or 6.0%, to $1,985 million (12.0% on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by $113 million of foreign currency translation. Organic orders increased during the period as strength
in the transport applications came primarily from the U.S. where we benefited from strong market demand and timing of large infrastructure projects in utilities. There was also order growth from water utility customers in western Europe mainly from increased demand in utility capital projects and healthy market conditions in the first half of the year. The treatment application saw a decrease in orders driven by the emerging markets due to declines in China related to COVID impacts, which more than offset modest growth in the U.S.
Applied Water
Applied Water segment orders decreased $37 million, or 8.3%, to $409 million (3.8% decrease on a constant currency basis) for the third quarter of 2022 as compared to the prior year. Order weakness for the quarter was negatively impacted by $20 million of foreign currency translation. The order decrease on a constant currency basis was driven
by weakness in the U.S. following strong demand recovery in the prior year. The declines in the U.S. were primarily in the specialty flow control business in the industrial end market, as well as in residential building services. This decline was partially offset by higher order intake in the emerging markets.
For the nine months ended September 30, 2022, orders decreased $15 million, or 1.1%, to $1,394 million (2.1% increase on a constant currency basis) as compared to the prior year. Order weakness for the period was negatively impacted by $45 million of foreign currency translation. The order increase on a constant currency basis was driven by strength in the emerging markets and western Europe as a result of strong market conditions and stocking by channel partners, partially offset by weakness in the U.S. following very strong demand recovery in the prior year reflecting
order growth of 28% in the prior year period.
Measurement & Control Solutions
Measurement & Control Solutions segment orders decreased $33 million, or 7.3%, to $416 million (4.0% decrease on a constant currency basis) for the third quarter of 2022 as compared to the prior year. Order weakness for the quarter was negatively impacted by $15 million of foreign currency translation and reduced orders related to divestiture impacts of $7 million. The order decrease on a constant currency basis consisted primarily of organic order declines of $11 million, or (2.4)%. The order declines in the current quarter are lapping very strong organic order growth of 42% in the same prior year period. Organic orders for the quarter decreased in the energy applications, primarily driven by moderation of the increased demand and advanced ordering to address electronic component shortages that
we benefited from in the prior year. This decline was partially offset by strength in the water application driven by large project orders in the U.S. and the emerging markets.
For the nine months ended September 30, 2022, orders increased $5 million or 0.3%, to $1,439 million (2.5% increase on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by $31 million of foreign currency translation and reduced orders related to divestiture impacts of $18 million. The order increase on a constant currency basis consisted primarily of organic order growth of $54 million, or 3.8%. The modest order growth in the period is lapping very strong order growth of 42% in the same period during the prior year. Organic orders for the period increased in the energy applications, primarily driven by demand and advanced ordering in the first
half of the year to address electronic component shortages. This increase was partially offset by weakness in the water application driven by the moderation of early orders to mitigate electronic component shortages and longer lead times that drove order growth in the prior year, as well as modest order growth in our test and assessment service offerings.
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 $3,667 million at September 30, 2022, an increase of $703 million or 23.7%, as compared to September 30, 2021 backlog of $2,964 million, and an increase of $427 million or 13.2%, as compared to December 31, 2021 backlog of $3,240
41
million, driven by
the significant increase in orders in the year. We anticipate that approximately 30% of the backlog at September 30, 2022 will be recognized as revenue in the remainder of 2022. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue increased 70 and decreased 70 basis points to 38.0% and 37.6% for the three and nine months ended September 30, 2022, as compared to 37.3% and 38.3% for the comparative 2021 period. The gross margin increase for the quarter included favorable impacts of 840 basis points, driven by 570 basis points of price realization and 250 basis points of productivity savings. Favorable impacts in the quarter were partially offset by 770 basis points of negative impacts, driven by 570 basis points of inflation,
80 basis points of unfavorable mix and 50 basis points of spending on strategic investments. The gross margin decrease for the nine month period included 770 basis points of negative impacts, driven by 610 basis points of cost inflation, as well as increased spending on strategic investments of 60 basis points and unfavorable mix of 60 basis points. These impacts were partially offset favorable impacts of 700 basis points, driven by 440 basis points of price realization and 230 basis points of productivity savings.
Operating Expenses
The following table presents operating expenses for the three and nine months ended September 30, 2022 and 2021:
Three
Months Ended
Nine Months Ended
September 30,
September 30,
(in millions)
2022
2021
Change
2022
2021
Change
Selling,
general and administrative expenses ("SG&A")
$
294
$
273
7.7
%
$
912
$
878
3.9
%
SG&A
as a % of revenue
21.3
%
21.6
%
(30)
bp
22.7
%
22.7
%
—
bp
Research and development
expenses ("R&D")
47
49
(4.1)
%
152
152
—
%
R&D as a % of revenue
3.4
%
3.9
%
(50)
bp
3.8
%
3.9
%
(10)
bp
Restructuring
and asset impairment charges
15
(2)
(850.0)
%
22
7
214.3
%
Operating
expenses
$
356
$
320
11.3
%
$
1,086
$
1,037
4.7
%
Expense
to revenue ratio
25.8
%
25.3
%
50
bp
27.0
%
26.8
%
20
bp
Selling, General and Administrative
("SG&A") Expenses
SG&A expenses increased by $21 million to $294 million, or 21.3% of revenue, in the third quarter of 2022, as compared to $273 million, or 21.6% of revenue, in the comparable 2021 period. Revenue growth was higher than SG&A increases resulting in a lower SG&A as a percentage of sales for the third quarter. Cost increases were driven by increased investments in strategic growth initiatives of $18 million and inflation of $9 million, partially offset by $5 million productivity savings.
SG&A expenses increased by $34 million to $912 million, or 22.7% of revenue, in the nine months ended September 30, 2022, as compared to $878 million, or 22.7% of revenue, in the comparable 2021 period. Cost increases were driven by increased investments in strategic growth initiatives of $41 million
and inflation of $28 million, partially offset by $29 million of favorable currency impacts and $15 million productivity savings.
Research and Development ("R&D") Expenses
R&D expense was $47 million, or 3.4% of revenue, in the third quarter of 2022, as compared to $49 million, or 3.9% of revenue in the third quarter of 2021; and was $152 million, or 3.8% of revenue, in the nine months ended September 30, 2022, as compared to $152 million, or 3.9% of revenue, in the comparable 2021 period. The R&D spend was fairly consistent year over year in both periods.
42
Restructuring and
Asset Impairment Charges
Restructuring
During the three and nine months ended September 30, 2022, we incurred restructuring costs of $3 million and $9 million, respectively. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across all segments.
During the three and nine months ended September 30, 2021, we recognized restructuring recoveries of $(2) million and charges of $6 million, respectively, of which $(2) million and $4 million, respectively, relate to actions previously announced in 2020. These charges included reduction of
headcount across all segments and asset impairments within our Measurement & Control Solutions segment.
The following is a roll-forward for the nine months ended September 30, 2022 and 2021 of employee position eliminations associated with restructuring activities:
2022
2021
Planned
reductions - January 1
60
319
Additional planned reductions
92
73
Actual reductions and reversals
(66)
(234)
Planned reductions -
September 30
86
158
The following table presents expected restructuring spend in 2022 and thereafter:
(in
millions)
Water Infrastructure
Applied Water
Measurement & Control Solutions
Corporate
Total
Actions
Commenced in 2022:
Total expected costs
$
4
$
1
$
3
$
—
$
8
Costs
incurred during Q1 2022
—
—
—
—
—
Costs incurred during Q2 2022
2
1
2
—
5
Costs
incurred during Q3 2022
2
—
1
—
3
Total expected costs remaining
$
—
$
—
$
—
$
—
$
—
Actions
Commenced in 2021:
Total expected costs
$
3
$
—
$
1
$
—
$
4
Costs
incurred during 2021
3
—
—
—
3
Costs incurred during Q1 2022
—
—
—
—
—
Costs
incurred during Q2 2022
—
—
—
—
—
Costs incurred during Q3 2022
—
—
—
—
—
Total
expected costs remaining
$
—
$
—
$
1
$
—
$
1
During
the second quarter of 2022, we also incurred charges of $1 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2021.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2022 consist primarily of severance charges. The actions commenced in 2022 are complete.
The Water Infrastructure and Measurement & Control Solutions actions commenced in 2021 consist primarily of severance charges. The Water Infrastructure actions are complete and the Measurement & Control Solutions actions are expected to continue through the first quarter of 2023.
43
We currently expect to incur between $10 million
and $15 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 third quarter of 2022, we determined that certain assets including software and customer relationships within our Measurement & Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $12 million. Refer to Note 8, "Goodwill and Other Intangible Assets," for additional information.
Operating Income and Adjusted EBITDA
Operating income was $168 million (operating margin of 12.2%) during the third quarter of 2022, an increase
of $16 million, or 10.5%, when compared to operating income of $152 million (operating margin of 12.0%) during the prior year, or a total increase of 20 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 included 1200 basis points of expansion from favorable operating impacts, which consisted of an 800 basis point increase related to price realization, 300 basis points related to productivity savings and 100 basis points of favorable volume. Margin expansion was offset by negative operating impacts of 1070 basis points driven by 650 basis points of inflation, 190 basis points of increased spending on strategic investments and 80 basis points of unfavorable mix. Excluding special charges and restructuring and realignment costs, adjusted operating income was $187 million (adjusted operating margin
of 13.6%) for the third quarter of 2022 as compared to adjusted operating income of $155 million (adjusted operating margin of 12.3%) or the third quarter of 2021.
Operating income was $425 million (operating margin of 10.6%) for the nine months ended September 30, 2022, a decrease of $20 million, or 4.5%, when compared to operating income of $445 million (operating margin of 11.5%) during the prior year, or a total decrease of 90 basis points. Operating margin declines included unfavorable impacts of 30 basis points from increases in special charges and restructuring and realignment costs as compared to the prior year, as well as 990 basis points of unfavorable operating impacts, driven by 700 basis points of inflation and 180 basis points of increased spending on strategic investments. Operating margin declines were offset by 930 basis points from favorable operating impacts,
which were driven by a 630 basis point increase from price realization and 280 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was $458 million (adjusted operating margin of 11.4%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $464 million (adjusted operating margin of 12.0%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $252 million (adjusted EBITDA margin of 18.3%) during the third quarter of 2022, an increase of $25 million, or 11.0%, when compared to adjusted EBITDA of $227 million (adjusted EBITDA margin of 17.9%) 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 expansion excludes the benefit from a year over year reduction in depreciation and amortization expense.
Adjusted EBITDA for the nine months ended September 30, 2022 was $659 million (adjusted EBITDA margin of 16.4%), a decrease of $17 million, or 2.5%, when compared to adjusted EBITDA of $676 million (adjusted EBITDA margin of 17.5%) during the comparable period in prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting adjusted operating margin noted above; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.
44
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
Nine Months Ended
September 30,
September 30,
(in millions)
2022
2021
Change
2022
2021
Change
Water
Infrastructure
Operating income
$
104
$
101
3.0
%
$
286
$
265
7.9
%
Operating
margin
18.1
%
18.5
%
(40)
bp
16.9
%
16.3
%
60
bp
Restructuring and realignment costs
3
1
200.0
%
7
10
(30.0)
%
Special
charges
—
—
NM
—
—
NM
Adjusted operating income
$
107
$
102
4.9
%
$
293
$
275
6.5
%
Adjusted
operating margin
18.6
%
18.6
%
—
bp
17.3
%
16.9
%
40
bp
Applied Water
Operating
income
$
77
$
60
28.3
%
$
197
$
190
3.7
%
Operating
margin
16.8
%
15.0
%
180
bp
15.0
%
15.7
%
(70)
bp
Restructuring and realignment costs
1
2
(50.0)
%
4
5
(20.0)
%
Special
charges
—
—
NM
—
1
NM
Adjusted operating income
$
78
$
62
25.8
%
$
201
$
196
2.6
%
Adjusted
operating margin
17.0
%
15.5
%
150
bp
15.3
%
16.2
%
(90)
bp
Measurement & Control
Solutions
Operating income (loss)
$
(2)
$
7
(128.6)
%
$
(17)
$
29
158.6
%
Operating
margin
(0.6)
%
2.2
%
(280)
bp
(1.7)
%
2.8
%
(450)
bp
Restructuring
and realignment costs
2
(1)
NM
7
1
600.0
%
Special charges
12
—
100.0
%
13
—
100.0
%
Adjusted
operating income
$
12
$
6
100.0
%
$
3
$
30
90.0
%
Adjusted
operating margin
3.4
%
1.9
%
150
bp
0.3
%
2.9
%
(260)
bp
Corporate and other
Operating
loss
$
(11)
$
(16)
31.3
%
$
(41)
$
(39)
5.1
%
Special
charges
1
1
NM
2
2
—
%
Adjusted operating loss
$
(10)
$
(15)
(33.3)
%
$
(39)
$
(37)
5.4
%
Total
Xylem
Operating income
$
168
$
152
10.5
%
$
425
$
445
(4.5)
%
Operating
margin
12.2
%
12.0
%
20
bp
10.6
%
11.5
%
(90)
bp
Restructuring and realignment costs
6
2
200.0
%
18
16
12.5
%
Special
charges
13
1
1,200.0
%
15
3
400.0
%
Adjusted operating income
$
187
$
155
20.6
%
$
458
$
464
(1.3)
%
Adjusted
operating margin
13.6
%
12.3
%
130
bp
11.4
%
12.0
%
(60)
bp
NM - Not meaningful
percentage change
45
The table below provides a reconciliation of net income to consolidated EBITDA and adjusted EBITDA:
Operating income for our Water Infrastructure segment was $104 million (operating margin of 18.1%) during the third quarter of 2022, an increase of $3 million, or 2.9%, when compared to operating income of $101 million (operating margin of 18.5%) during the prior year, or a total decrease of 40 basis points. Operating margin declines included unfavorable impacts of 40 basis points from increases in restructuring and realignment costs as compared to the prior year, as well as negative operating impacts of 1,080 basis points driven by 560 basis points of inflation, 250 basis points of increased spending on strategic investments and 190 basis points of unfavorable mix. Margin declines were offset by 1,080 basis points from favorable operating impacts consisting a 680 basis points of price realization, 300 basis points of productivity savings and 100 basis points of favorable volume. Excluding special charges and
restructuring and realignment costs, adjusted operating income was $107 million (adjusted operating margin of 18.6%) for the third quarter of 2022 as compared to adjusted operating income of $102 million (adjusted operating margin of 18.6%) or the third quarter of 2021.
48
Operating income was $286 million for our Water Infrastructure segment (operating margin of 16.9%) for the nine months ended September 30, 2022, an increase of $21 million, or 7.9%, when compared to operating income of $265 million (operating margin of 16.3%) during the prior year, or a total increase of 60 basis points. Operating margin expansion included favorable impacts of 20 basis points from a decrease in restructuring and realignment costs as compared
to the prior year, as well as 940 basis points from favorable operating impacts, driven by 510 basis points of price realization, 280 basis points from productivity savings and 90 basis points of favorable volume. Margin expansion was offset by 900 basis points of unfavorable impacts driven by 570 basis points of inflation, 220 basis points due to increased spending on strategic investments and 80 basis points of unfavorable mix. Excluding special charges and restructuring and realignment costs, adjusted operating income was $293 million (adjusted operating margin of 17.3%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $275 million (adjusted operating margin of 16.9%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $119 million (adjusted EBITDA margin of 20.7%) for
the third quarter of 2022, an increase of $3 million, or 2.6%, when compared to adjusted EBITDA of $116 million (adjusted EBITDA margin of 21.2%) during the prior year. The adjusted EBITDA margin was impacted by the same offsetting factors impacting the adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in share based compensation expense and other non-operating expense.
Adjusted EBITDA was $330 million (adjusted EBITDA margin of 19.5%) for the nine months ended September 30, 2022, an increase of $18 million, or 5.8%, when compared to adjusted EBITDA of $312 million (adjusted EBITDA margin of 19.2%) during 2021. The increase in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin.
Applied Water
Operating
income for our Applied Water segment was $77 million (operating margin of 16.8%) during the third quarter of 2022, an increase of $17 million, or 28.3%, when compared to operating income of $60 million (operating margin of 15.0%) during the prior year, or a total increase of 180 basis points. Operating margin expansion included favorable impacts of 30 basis points from a decrease in restructuring and realignment costs as compared to the prior year, as well as 1,510 basis points from favorable operating impacts, driven by 1,150 basis points from price realization and 320 basis points from productivity savings. Margin expansion was offset by negative operating impacts of 1,360 basis points driven by 860 basis points of inflation, 130 basis points of increased spending on strategic investments, 130 basis points of inventory management costs and 60 basis points of unfavorable mix. Excluding special charges and restructuring and realignment costs, adjusted operating income
was $78 million (adjusted operating margin of 17.0%) for the third quarter of 2022 as compared to adjusted operating income of $62 million (adjusted operating margin of 15.5%) for the third quarter of 2021.
Operating income was $197 million for our Applied Water segment (operating margin of 15.0%) for the nine months ended September 30, 2022, an increase of $7 million, or 3.7%, when compared to operating income of $190 million (operating margin of 15.7%) during the prior year, or a total decrease of 70 basis points. Operating margin declines included favorable impacts of 20 basis points from a decrease in restructuring and realignment costs and special charges as compared to the prior year, as well as 1,300 basis points of unfavorable operating impacts, driven by 950 basis points of inflation, 100 basis points of increased spending on strategic investments, and 70 basis points
of increased inventory management costs. Margin declines were offset by 1,210 basis points from favorable operating impacts, which were driven by 880 basis points of price realization and 320 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was $201 million (adjusted operating margin of 15.3%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $196 million (adjusted operating margin of 16.2%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $83 million (adjusted EBITDA margin of 18.1%) for the third quarter of 2022, an increase of $15 million, or 22.1%, when compared to adjusted EBITDA of $68 million (adjusted EBITDA margin of 17.0%) during the prior year. The increase in adjusted EBITDA margin
was primarily due to the same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.
Adjusted EBITDA was $217 million (adjusted EBITDA margin of 16.5%) for the nine months ended September 30, 2022, an increase of $2 million, or 0.9%, when compared to adjusted EBITDA of $215 million (adjusted EBITDA margin of 17.8%) during the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.
49
Measurement
& Control Solutions
Operating loss for our Measurement & Control Solutions segment was $2 million (operating margin of (0.6%)) during the third quarter of 2022, a decrease of $9 million, or (128.6)%, when compared to operating income of $7 million (operating margin of 2.2%) during the prior year, or a total decrease of 280 basis points. Operating margin declines included unfavorable impacts of 430 basis points from increases in special charges (asset impairment) and restructuring and realignment costs as compared to the prior year. Operating margin declines also included negative operating impacts of 530 basis points driven by 490 basis points of inflation. Margin declines were offset by 680 basis points from favorable operating impacts consisting of 440 basis points of price realization and 240 basis points of favorable volume. Excluding special charges and restructuring and realignment costs, adjusted operating
income was $12 million (adjusted operating margin of 3.4%) for the third quarter of 2022 as compared to adjusted operating income of $6 million (adjusted operating margin of 1.9%) for the third quarter of 2021.
Operating loss was $17 million for our Measurement & Control Solutions (operating margin of (1.7%)) for the nine months ended September 30, 2022, a decrease of $46 million, or (158.9)%, when compared to operating income of $29 million (operating margin of 2.8%) during the prior year, or a total decrease of 450 basis points. Operating margin declines included unfavorable impacts of 190 basis points an increase in special charges (asset impairment) and restructuring and realignment costs as compared to the prior year. Operating margin declines also had negative operating impacts of 890 basis points of unfavorable impacts driven by 530 basis points of inflation, 160
basis points of unfavorable volume and 90 basis points of unfavorable mix. Margin declines were offset by 630 basis points from favorable operating impacts consisting of 410 basis points of price realization and 220 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was $3 million (adjusted operating margin of 0.3%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $30 million (adjusted operating margin of 2.9%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $48 million (adjusted EBITDA margin of 13.8%) for the third quarter of 2022, an increase of $3 million, or 6.7%, when compared to adjusted EBITDA of $45 million (adjusted EBITDA margin of 14.2%) during the prior year. The decrease 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 a year over year reduction in depreciation and amortization expense.
Adjusted EBITDA was $109 million (adjusted EBITDA margin of 10.8%) for the nine months ended September 30, 2022, a decrease of $34 million, or 23.8%, when compared to adjusted EBITDA of $143 million (adjusted EBITDA margin of 13.8%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the decrease in adjusted operating margin; however, adjusted EBITDA margin decline was greater as it did not benefit from a year over year reduction in depreciation and amortization expense.
Corporate and Other
Operating
loss for corporate and other decreased $5 million, or 31.2%, during the third quarter of 2022 compared to the prior year period. For the nine months ended September 30, 2022, operating loss for corporate and other increased $2 million, or 5.1%, compared to the same prior year period. The decrease in operating loss for the three months ended September 30, 2022 was due to the timing of employee-related expenses as compared to prior year. The increase in operating loss for the year was primarily due to higher performance related incentive costs.
Interest Expense
Interest expense was $12 million and $37 million for the three and nine months ended September 30, 2022 and $21 million and $63 million for the three and nine months ended September 30,
2021, respectively. The decrease in interest expense is primarily driven by interest expense incurred during 2021 related to our senior note that was paid off in October 2021 and interest income related to additional net investment hedges executed in during 2022. 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.
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Income Tax Expense
The income tax provision for the three months ended September 30, 2022 was $5 million resulting in an effective tax rate of 27.8%, compared
to a $19 million expense resulting in an effective tax rate of 13.9% for the same period in 2021. The income tax provision for the nine months ended September 30, 2022 was $45 million resulting in an effective tax rate of 17.8%, compared to a $71 million expense resulting in an effective tax rate of 18.3% for the same period in 2021. The effective tax rate for the three months ended September 30, 2022 differs from the same period in 2021 due to the impact of earnings mix in the current period. The effective tax rate for the nine month period ended September 30, 2022 differs from the same period in 2021 due to the impact of tax settlement benefits in the current period which was partially offset by permanent differences.
Liquidity
and Capital Resources
The following table summarizes our sources and (uses) of cash:
Nine Months Ended
September 30,
(in millions)
2022
2021
Change
Operating
activities
$
234
$
318
$
(84)
Investing activities
(123)
(113)
(10)
Financing activities
(210)
(806)
596
Foreign
exchange (a)
(64)
(19)
(45)
Total
$
(163)
$
(620)
$
457
(a)The impact is primarily due to weakening of the Euro and Chinese Yuan partially offset by strengthening of the Russian
Ruble.
Sources and Uses of Liquidity
Operating Activities
Cash generated by operating activities was $234 million for the nine months ended September 30, 2022 as compared to $318 million in the comparable prior year period. The reduction in cash generated was primarily driven by higher working capital levels, reflecting increased safety stock and higher accounts receivable driven by increased sales. Lower interest and income tax payments partially offset these items.
Investing Activities
Cash used in investing activities was $123 million for the nine months ended September 30, 2022 as compared to $113 million in the comparable prior year period. The increase in spending
was driven by higher capital expenditures driven primarily by investments in equipment and rental fleet. Cash received from cross-currency swaps partially offset the outflow.
Financing Activities
Cash used by financing activities was $210 million for the nine months ended September 30, 2022 as compared to cash used of $806 million in the comparable prior year period. The reduction in cash used was primarily driven by the repayment of Senior Notes due 2021 in the prior year.
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. As a result of uncertainties caused both directly and indirectly by the COVID-19 pandemic and macroeconomic
conditions, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends.
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Historically, we have generated operating cash flow sufficient to fund our primary cash needs. If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will
be available to us on acceptable terms or that such financing will be available at all. Our securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note 11, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.
We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis.
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. In addition, we believe our existing committed credit facilities and access to the public debt markets would provide further
liquidity if required. Currently, we have available liquidity of approximately $2.0 billion, consisting of $1.2 billion of cash and $800 million of available credit facilities as disclosed in Note 11, "Credit Facilities and Debt", of our condensed consolidated financial statements. On October 1, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of $600 million. We intend to repay the Senior Notes due 2023 in December 2022 at par using cash on hand.
Risks related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our 2021 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 53% and 54% of our revenue from non-U.S. operations for the three and nine months ended September 30, 2022, respectively, and 56% for both the three and nine months ended September 30, 2021. 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 September 30, 2022, we have provided a deferred tax liability of $1 million for net foreign withholding taxes and state income taxes on $475 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, particularly at this time and moving forward given the uncertainty around the magnitude and duration of the COVID-19 pandemic and related macro economic conditions. Management’s Discussion and Analysis of Financial Condition
and Results of Operations in the 2021 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 2021 Annual Report.
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Post-retirement Benefit Plans. As described in our 2021 Annual Report, the Company initiated the process for a full buy-out of its largest defined benefit plan in the U.K. in 2019. During the first quarter of 2020, the
Company purchased a bulk annuity policy as a plan asset to facilitate the termination and buy-out of the plan. The buyout was completed in September 2022, at which point the remaining benefit obligations were transferred to the insurer and we were relieved of any further obligation. As a result, we recorded a pension settlement charge of £123 million (approximately $140 million), primarily consisting of unrecognized actuarial losses. The settlement also resulted in the recognition of $23 million in net tax benefits. The settlement of the plan did not impact our cash position.
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 2021 Annual Report.
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.
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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 2021 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 September 30, 2022:
(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)
7/1/22 - 7/31/22
—
—
—
$182
8/1/22 - 8/31/22
—
—
—
$182
9/1/22
- 9/30/22
—
—
—
$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 September 30, 2022. There are up to $182 million in shares that may still be purchased under this plan as of September 30, 2022.
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.
101.0
The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2022, 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 September 30, 2022 formatted in Inline XBRL and contained in Exhibit 101.0.
55
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.
