UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
| | | | |
x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20192020
or
|
| | | | |
¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-35229
Xylem Inc.
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
Indiana | | 45-2080495 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1 International Drive, Rye Brook, NY 10573
(Address of principal executive offices) (Zip code)
(914) 323-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange of which registered |
Common Stock, par value $0.01 per share | | XYL | | New York Stock Exchange |
2.250% Senior Notes due 2023 | | XYL23 | | New 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. Yes þ☑ 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 and post such files). Yes þ☑ 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.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☑ | | Accelerated filer | | ☐ |
| | | | | | |
Large accelerated filer | | þ | | Accelerated filer | | ¨ |
| | | | | |
Non-accelerated filer | | ¨☐
| | Smaller reporting company | | ¨☐ |
| | | | | | |
| | | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new 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 ¨☐ No þ☑
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange of which registered |
Common Stock, par value $0.01 per share | | XYL | | New York Stock Exchange |
2.250% Senior Notes due 2023 | | XYL23 | | New York Stock Exchange |
As of April 26, 2019,May 1, 2020, there were 179,933,009179,915,293 outstanding shares of the registrant’s common stock, par value $0.01 per share.
Xylem Inc.
Table of Contents
|
| | | | | | | | | | |
ITEM | | | PAGE |
PART I – Financial Information | | | |
Item 1 | - | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Item 2 | - | | |
Item 3 | - | | |
Item 4 | - | | |
PART II – Other Information | | | |
Item 1 | - | | |
Item 1A | - | | |
Item 2 | - | | |
Item 3 | - | | |
Item 4 | - | | |
Item 5 | - | | |
Item 6 | - | | |
| | | |
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(in millions, except per share data)
| | | For the three months ended March 31, | 2019 | | 2018 | For the three months ended March 31, | 2020 | | 2019 | |
Revenue | $ | 1,237 |
| | $ | 1,217 |
| Revenue | $ | 1,123 | | | $ | 1,237 | | |
Cost of revenue | 763 |
| | 757 |
| Cost of revenue | 714 | | | 763 | | |
Gross profit | 474 |
| | 460 |
| Gross profit | 409 | | | 474 | | |
Selling, general and administrative expenses | 303 |
| | 296 |
| Selling, general and administrative expenses | 297 | | | 303 | | |
Research and development expenses | 51 |
| | 41 |
| Research and development expenses | 49 | | | 51 | | |
Restructuring and asset impairment charges | 11 |
| | 10 |
| Restructuring and asset impairment charges | 2 | | | 11 | | |
| Operating income | 109 |
| | 113 |
| Operating income | 61 | | | 109 | | |
Interest expense | 18 |
| | 21 |
| Interest expense | 16 | | | 18 | | |
Other non-operating income, net | 2 |
| | 3 |
| |
Other non-operating (expense) income, net | | Other non-operating (expense) income, net | (3) | | | 2 | | |
Gain from sale of business | 1 |
| | — |
| Gain from sale of business | — | | | 1 | | |
Income before taxes | 94 |
| | 95 |
| Income before taxes | 42 | | | 94 | | |
Income tax expense | 15 |
| | 16 |
| Income tax expense | 4 | | | 15 | | |
Net income | $ | 79 |
| | $ | 79 |
| Net income | $ | 38 | | | $ | 79 | | |
| Earnings per share: | | | | Earnings per share: | | | | |
Basic | $ | 0.44 |
| | $ | 0.44 |
| Basic | $ | 0.21 | | | $ | 0.44 | | |
Diluted | $ | 0.43 |
| | $ | 0.43 |
| Diluted | $ | 0.21 | | | $ | 0.43 | | |
Weighted average number of shares: | | | | Weighted average number of shares: | | |
Basic | 179.7 |
| | 179.9 |
| Basic | 180.2 | | | 179.7 | | |
Diluted | 181.1 |
| | 181.4 |
| Diluted | 181.3 | | | 181.1 | | |
|
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(in millions)
| | For the three months ended March 31, | 2019 | | 2018 | For the three months ended March 31, | 2020 | | 2019 | |
Net income | $ | 79 |
| | $ | 79 |
| Net income | $ | 38 | | | $ | 79 | | |
Other comprehensive income, before tax: | | | | |
Other comprehensive (loss) income, before tax: | | Other comprehensive (loss) income, before tax: | | |
Foreign currency translation adjustment | 29 |
| | 8 |
| Foreign currency translation adjustment | (78) | | | 29 | | |
| Net change in derivative hedge agreements: | | | | Net change in derivative hedge agreements: | | |
Unrealized loss | (9 | ) | | — |
| Unrealized loss | (2) | | | (9) | | |
Amount of loss (gain) reclassified into net income | 2 |
| | (1 | ) | |
Amount of loss reclassified into net income | | Amount of loss reclassified into net income | 3 | | | 2 | | |
Net change in postretirement benefit plans: | | | | Net change in postretirement benefit plans: | | |
| Amortization of prior service credit | (1 | ) | | (1 | ) | Amortization of prior service credit | (1) | | | (1) | | |
Amortization of net actuarial loss into net income | 3 |
| | 3 |
| Amortization of net actuarial loss into net income | 5 | | | 3 | | |
Settlement/Curtailment | — |
| | 1 |
| |
Other comprehensive income, before tax | 24 |
| | 10 |
| |
Income tax expense (benefit) related to items of other comprehensive income | 4 |
| | (10 | ) | |
Other comprehensive income, net of tax | 20 |
| | 20 |
| |
Comprehensive income | $ | 99 |
| | $ | 99 |
| |
| Other comprehensive (loss) income, before tax | | Other comprehensive (loss) income, before tax | (73) | | | 24 | | |
Income tax expense related to items of other comprehensive (loss) income | | Income tax expense related to items of other comprehensive (loss) income | 14 | | | 4 | | |
Other comprehensive (loss) income, net of tax | | Other comprehensive (loss) income, net of tax | (87) | | | 20 | | |
Comprehensive (loss) income | | Comprehensive (loss) income | $ | (49) | | | $ | 99 | | |
Less: comprehensive loss attributable to noncontrolling interests | | Less: comprehensive loss attributable to noncontrolling interests | (1) | | | — | | |
Comprehensive (loss) income attributable to Xylem | | Comprehensive (loss) income attributable to Xylem | $ | (48) | | | $ | 99 | | |
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 739 | | | $ | 724 | |
Receivables, less allowances for discounts, returns and doubtful accounts of $29 and $35 in 2020 and 2019, respectively | 975 | | | 1,036 | |
Inventories | 573 | | | 539 | |
Prepaid and other current assets | 175 | | | 151 | |
| | | |
Total current assets | 2,462 | | | 2,450 | |
Property, plant and equipment, net | 628 | | | 658 | |
Goodwill | 2,790 | | | 2,839 | |
Other intangible assets, net | 1,141 | | | 1,174 | |
Other non-current assets | 570 | | | 589 | |
Total assets | $ | 7,591 | | | $ | 7,710 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 506 | | | $ | 597 | |
Accrued and other current liabilities | 619 | | | 628 | |
Short-term borrowings and current maturities of long-term debt | 459 | | | 276 | |
Total current liabilities | 1,584 | | | 1,501 | |
Long-term debt | 2,031 | | | 2,040 | |
Accrued postretirement benefits | 433 | | | 445 | |
Deferred income tax liabilities | 315 | | | 310 | |
Other non-current accrued liabilities | 407 | | | 447 | |
Total liabilities | 4,770 | | | 4,743 | |
Commitments and contingencies (Note 18) | | | | | |
Stockholders’ equity: | | | |
Common Stock – par value $0.01 per share: | | | |
Authorized 750.0 shares, issued 194.4 shares and 193.9 shares in 2020 and 2019, respectively | 2 | | | 2 | |
Capital in excess of par value | 2,004 | | | 1,991 | |
Retained earnings | 1,854 | | | 1,866 | |
Treasury stock – at cost 14.5 shares and 13.7 shares in 2020 and 2019, respectively | (587) | | | (527) | |
Accumulated other comprehensive loss | (461) | | | (375) | |
Total stockholders’ equity | 2,812 | | | 2,957 | |
Non-controlling interests | 9 | | | 10 | |
Total equity | 2,821 | | | 2,967 | |
Total liabilities and stockholders’ equity | $ | 7,591 | | | $ | 7,710 | |
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 275 |
| | $ | 296 |
|
Receivables, less allowances for discounts and doubtful accounts of $28 and $35 in 2019 and 2018, respectively | 1,020 |
| | 1,031 |
|
Inventories | 617 |
| | 595 |
|
Prepaid and other current assets | 169 |
| | 172 |
|
Total current assets | 2,081 |
| | 2,094 |
|
Property, plant and equipment, net | 653 |
| | 656 |
|
Goodwill | 2,988 |
| | 2,976 |
|
Other intangible assets, net | 1,219 |
| | 1,232 |
|
Other non-current assets | 527 |
| | 264 |
|
Total assets | $ | 7,468 |
| | $ | 7,222 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 548 |
| | $ | 586 |
|
Accrued and other current liabilities | 589 |
| | 546 |
|
Short-term borrowings and current maturities of long-term debt | 304 |
| | 257 |
|
Total current liabilities | 1,441 |
| | 1,389 |
|
Long-term debt | 2,044 |
| | 2,051 |
|
Accrued postretirement benefits | 394 |
| | 400 |
|
Deferred income tax liabilities | 312 |
| | 303 |
|
Other non-current accrued liabilities | 469 |
| | 297 |
|
Total liabilities | 4,660 |
| | 4,440 |
|
Commitments and contingencies (Note 19) |
| |
|
Stockholders’ equity: | | | |
Common Stock – par value $0.01 per share: | | | |
Authorized 750.0 shares, issued 193.6 shares and 192.9 shares in 2019 and 2018, respectively | 2 |
| | 2 |
|
Capital in excess of par value | 1,962 |
| | 1,950 |
|
Retained earnings | 1,674 |
| | 1,639 |
|
Treasury stock – at cost 13.7 shares and 13.2 shares in 2019 and 2018, respectively | (526 | ) | | (487 | ) |
Accumulated other comprehensive loss | (316 | ) | | (336 | ) |
Total stockholders’ equity | 2,796 |
| | 2,768 |
|
Non-controlling interests | 12 |
| | 14 |
|
Total equity | 2,808 |
| | 2,782 |
|
Total liabilities and stockholders’ equity | $ | 7,468 |
| | $ | 7,222 |
|
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | For the three months ended March 31, | 2019 | | 2018 | For the three months ended March 31, | 2020 | | 2019 |
Operating Activities | | | | Operating Activities | | | |
Net income | $ | 79 |
| | $ | 79 |
| Net income | $ | 38 | | | $ | 79 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation | 29 |
| | 29 |
| Depreciation | 29 | | | 29 | |
Amortization | 35 |
| | 38 |
| Amortization | 35 | | | 35 | |
Share-based compensation | 9 |
| | 9 |
| Share-based compensation | 8 | | | 9 | |
Restructuring and asset impairment charges | 11 |
| | 10 |
| Restructuring and asset impairment charges | 2 | | | 11 | |
| Gain from sale of business | (1 | ) | | — |
| Gain from sale of business | — | | | (1) | |
Other, net | 1 |
| | (4 | ) | Other, net | 4 | | | 1 | |
Payments for restructuring | (4 | ) | | (5 | ) | Payments for restructuring | (8) | | | (4) | |
Changes in assets and liabilities (net of acquisitions): | | | | Changes in assets and liabilities (net of acquisitions): | |
Changes in receivables | 7 |
| | (9 | ) | Changes in receivables | 23 | | | 7 | |
Changes in inventories | (25 | ) | | (40 | ) | Changes in inventories | (54) | | | (25) | |
Changes in accounts payable | (17 | ) | | 6 |
| Changes in accounts payable | (68) | | | (17) | |
| Other, net | (41 | ) | | (50 | ) | Other, net | (11) | | | (41) | |
Net Cash – Operating activities | 83 |
| | 63 |
| Net Cash – Operating activities | (2) | | | 83 | |
Investing Activities | | | | Investing Activities | | | |
Capital expenditures | (69 | ) | | (61 | ) | Capital expenditures | (51) | | | (69) | |
Acquisitions of businesses, net of cash acquired | (5 | ) | | (430 | ) | Acquisitions of businesses, net of cash acquired | — | | | (5) | |
| Other, net | (3 | ) | | — |
| Other, net | 3 | | | (3) | |
Net Cash – Investing activities | (77 | ) | | (491 | ) | Net Cash – Investing activities | (48) | | | (77) | |
Financing Activities | | | | Financing Activities | | | |
Short-term debt issued, net | 50 |
| | 371 |
| Short-term debt issued, net | 193 | | | 50 | |
Short-term debt repaid | | Short-term debt repaid | (3) | | | — | |
| Repurchase of common stock | (39 | ) | | (33 | ) | Repurchase of common stock | (60) | | | (39) | |
Proceeds from exercise of employee stock options | 4 |
| | 3 |
| Proceeds from exercise of employee stock options | 5 | | | 4 | |
Dividends paid | (44 | ) | | (38 | ) | Dividends paid | (48) | | | (44) | |
Other, net | — |
| | (1 | ) | |
| Net Cash – Financing activities | (29 | ) | | 302 |
| Net Cash – Financing activities | 87 | | | (29) | |
Effect of exchange rate changes on cash | 2 |
| | 9 |
| Effect of exchange rate changes on cash | (22) | | | 2 | |
Net change in cash and cash equivalents | (21 | ) | | (117 | ) | Net change in cash and cash equivalents | 15 | | | (21) | |
Cash and cash equivalents at beginning of year | 296 |
| | 414 |
| Cash and cash equivalents at beginning of year | 724 | | | 296 | |
Cash and cash equivalents at end of period | $ | 275 |
| | $ | 297 |
| Cash and cash equivalents at end of period | $ | 739 | | | $ | 275 | |
Supplemental disclosure of cash flow information: | | | | Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | | Cash paid during the period for: | |
Interest | $ | 13 |
| | $ | 14 |
| Interest | $ | 12 | | | $ | 13 | |
Income taxes (net of refunds received) | $ | 18 |
| | $ | 17 |
| Income taxes (net of refunds received) | $ | 8 | | | $ | 18 | |
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Background 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 three3 segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note 20,19, "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.
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 presentationstatement 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, 20182019 ("20182019 Annual Report") in preparing these unaudited condensed consolidated financial statements, with the exception of accounting standard updates described in Note 2. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 20182019 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, postretirement obligations and assets, revenue recognition, income tax contingency accruals and valuation allowances, goodwill and indefinite lived intangible impairment testing, contingent liabilities and contingent liabilities.lease accounting. 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.
Note 2.2. Recently Issued Accounting Pronouncements
Recently Adopted Pronouncements Not Yet Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the accounting for implementation costs of a hosting arrangement that is a service contract. The guidance establishes the requirement to capitalize certain implementation costs incurred in a hosting arrangement that is a service contract, effectively aligning with the requirement to capitalize certain implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The requirements of the amended guidance may be applied using either a retrospective or prospective approach. We are evaluating the impact of the guidance on our financial condition and results of operations.
In June 2016, the FASB issued guidanceASU 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," amending the accounting for the impairment of financial instruments, including trade receivables. Under currentprevious guidance, credit losses arewere recognized when the applicable losses arehad a probable likelihood of occurring and this assessment iswas based on past events and current conditions. The amended current guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach
except for debt securities, which require a prospective transition approach. We are evaluating theadopted this guidance as of January 1, 2020. The adoption of this guidance did not have a material impact of the guidance on our financial condition and results of operations.
Recently Adopted Pronouncements
In February 2016, the FASB issued guidance amending the accounting for leases. Specifically, the amended guidance requires all lessees to record a lease liability at lease inception, with a corresponding right of use ("ROU") asset, except for short-term leases. Lessor accounting is not fundamentally changed. This amended guidance is effective for interim and annual periods beginning after December 15, 2018 using a modified retrospective approach. Early adoption was permitted. We adopted this guidance as of January 1, 2019 using the modified retrospective approach whereby prior comparative periods were not retrospectively restated in the condensed consolidated financial statements. The adoption of the standard resulted in the recognition of ROU assets and lease liabilities of $267 million and $265 million, respectively, as well as deferred tax assets and deferred tax liabilities of $68 million, as of January 1, 2019, the date of initial application. The guidance did not have a material impact on our Condensed Consolidated Income Statements and Statements of Cash Flow. See Note 9, "Leases" for further details.
Note 3. Acquisitions and Divestitures
2019 Acquisitions
During the three months ended March 31, 2020 and 2019 we spent approximately $0 million and $5 million, net of cash received on acquisition activity.activity, respectively.
2018 Acquisitions and Divestitures
Pure Technologies Ltd.
On January 31, 2018, we acquired all the issued and outstanding shares of Pure Technologies Ltd. (“Pure”), a leader in intelligent leak detection and condition assessment solutions for water distribution networks for approximately $420 million, net of cash received. Acquisition costs of $4 million were reflected as a component of selling, general and administrative expenses in our Condensed Consolidated Income Statement.
Pure’s results of operations were consolidated with the Company effective February 1, 2018 and are reflected in the Measurement & Control Solutions segment.
The Pure purchase price allocation as of January 31, 2018 is shown in the following table:
|
| | | |
(in millions) | Amount |
Cash | $ | 14 |
|
Receivables | 23 |
|
Inventories | 4 |
|
Prepaid and other current assets | 2 |
|
Property, plant and equipment | 22 |
|
Intangible assets | 149 |
|
Other long-term assets | 1 |
|
Accounts payable | (3 | ) |
Accrued and other current liabilities | (12 | ) |
Deferred income tax liabilities | (25 | ) |
Other non-current accrued liabilities | (2 | ) |
Total identifiable net assets | 173 |
|
| |
Goodwill | 261 |
|
Total consideration | $ | 434 |
|
The fair values of Pure's assets and liabilities were determined based on estimates and assumptions which management believes are reasonable.
Goodwill arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of Pure and Xylem. All of the goodwill was assigned to the Measurement & Control Solutions segment and is not deductible for tax purposes.
The estimate of the fair value of Pure identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes key information underlying identifiable intangible assets related to the Pure acquisition:
|
| | | | | | |
Category | | Life | | Amount (in millions) |
Customer Relationships | | 17 - 18 years | | $ | 84 |
|
Technology | | 3 - 10 years | | 38 |
|
Tradenames | | 20 years | | 21 |
|
Internally Developed Software | | 3 years | | 6 |
|
Total | | | | $ | 149 |
|
The following table summarizes, on an unaudited pro forma basis, the condensed combined results of operations of the Company for the three month period ended March 31, 2018 assuming the acquisition of Pure was made on January 1, 2017:
|
| | | | |
| (in millions) | Three Months Ended March 31, 2018 |
|
| Revenue | $ | 1,222 |
|
| Net income | $ | 76 |
|
The foregoing unaudited pro forma results are for informational purposes only and are not necessarily indicative of the actual results of operations that might have occurred had the acquisition occurred on January 1, 2017, nor are they necessarily indicative of future results. The pro forma financial information includes the impact of purchase accounting and other nonrecurring items directly attributable to the acquisition, which include:
•Amortization expense of acquired intangibles
Adjustments to the depreciation of property, plant and equipment reflecting the impact of the calculated fair value of those assets in accordance with purchase accounting
Adjustments to interest expense to remove historical Pure interest costs and reflect Xylem's current debt profile
•The related tax impact of the above referenced adjustments
The pro forma results do not include any cost savings or operational synergies that may be generated or realized due to the acquisition of Pure.
For the two month period ended March 31, 2018 Pure had revenue and operating loss of $16 million and $3 million, respectively.
Other Acquisition Activity
During the three months ended March 31, 2018 we also spent approximately $10 million net of cash received on other acquisition activity.
Note 4. Revenue
Disaggregation of Revenue
The following table illustrates the sources of revenue:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in millions) | 2020 | | 2019 | | | | |
Revenue from contracts with customers | $ | 1,074 | | | $ | 1,178 | | | | | |
Lease Revenue | 49 | | | 59 | | | | | |
Total | $ | 1,123 | | | $ | 1,237 | | | | | |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2019 | | 2018 |
Revenue from contracts with customers | $ | 1,178 |
| | $ | 1,162 |
|
Lease Revenue | 59 |
| | 55 |
|
Total | $ | 1,237 |
|
| $ | 1,217 |
|
The following table reflects revenue from contracts with customers by application:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in millions) | 2020 | | 2019 | | | | |
Water Infrastructure | | | | | | | |
Transport | $ | 318 | | | $ | 346 | | | | | |
Treatment | 71 | | | 77 | | | | | |
| | | | | | | |
Applied Water | | | | | | | |
Building Services | 187 | | | 213 | | | | | |
Industrial Water | 151 | | | 166 | | | | | |
| | | | | | | |
Measurement & Control Solutions | | | | | | | |
Water | 183 | | | 199 | | | | | |
Energy | 72 | | | 73 | | | | | |
Software as a Service | 21 | | | 24 | | | | | |
Test | 71 | | | 80 | | | | | |
| | | | | | | |
Total | $ | 1,074 | | | $ | 1,178 | | | | | |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2019 | | 2018 |
Water Infrastructure | | | |
Transport | $ | 346 |
| | $ | 347 |
|
Treatment | 77 |
| | 78 |
|
| | | |
Applied Water | | | |
Commercial Building Services | 154 |
| | 137 |
|
Residential Building Services | 59 |
| | 57 |
|
Industrial Water | 166 |
| | 172 |
|
| | | |
Measurement and Control Solutions | | | |
Water | 199 |
| | 172 |
|
Energy | 73 |
| | 80 |
|
Software as a Service/Other | 24 |
| | 34 |
|
Test | 80 |
| | 85 |
|
| | | |
Total | $ | 1,178 |
|
| $ | 1,162 |
|
The following table reflects revenue from contracts with customers by geographical region:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2019 | | 2018 |
Water Infrastructure | | | |
United States | $ | 133 |
| | $ | 113 |
|
Europe | 160 |
| | 177 |
|
Emerging Markets & Other | 130 |
| | 135 |
|
| | | |
Applied Water | | | |
United States | 201 |
| | 188 |
|
Europe | 94 |
| | 98 |
|
Emerging Markets & Other | 84 |
| | 80 |
|
| | | |
Measurement and Control Solutions | | | |
United States | 236 |
| | 206 |
|
Europe | 72 |
| | 84 |
|
Emerging Markets & Other | 68 |
| | 81 |
|
| | | |
Total | $ | 1,178 |
|
| $ | 1,162 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in millions) | 2020 | | 2019 | | | | |
Water Infrastructure | | | | | | | |
United States | $ | 121 | | | $ | 133 | | | | | |
Europe | 157 | | | 160 | | | | | |
Asia Pacific | 59 | | | 74 | | | | | |
Other | 52 | | | 56 | | | | | |
| | | | | | | |
Applied Water | | | | | | | |
United States | 191 | | | 201 | | | | | |
Europe | 82 | | | 94 | | | | | |
Asia Pacific | 24 | | | 39 | | | | | |
Other | 41 | | | 45 | | | | | |
| | | | | | | |
Measurement & Control Solutions | | | | | | | |
United States | 221 | | | 236 | | | | | |
Europe | 74 | | | 72 | | | | | |
Asia Pacific | 22 | | | 31 | | | | | |
Other | 30 | | | 37 | | | | | |
| | | | | | | |
Total | $ | 1,074 | | | $ | 1,178 | | | | | |
Contract Balances
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. ChangeChanges in contract assets and liabilities are due to our performance under the contract.
The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:
| | | | | | | | | | | | |
(in millions) | Contract Assets (a) | Contract Liabilities | | | | |
Balance at January 1, 2019 | $ | 96 | | $ | 113 | | | | | |
Additions, net | 39 | | 46 | | | | | |
Revenue recognized from opening balance | — | | (45) | | | | | |
Billings | (32) | | — | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other | 11 | | 2 | | | | | |
Balance at March 31, 2019 | $ | 114 | | $ | 116 | | | | | |
| | | | | | |
Balance at January 1, 2020 | $ | 106 | | $ | 135 | | | | | |
Additions, net | 42 | | 54 | | | | | |
Revenue recognized from opening balance | — | | (47) | | | | | |
Billings | (38) | | — | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other | (4) | | (4) | | | | | |
Balance at March 31, 2020 | $ | 106 | | $ | 138 | | | | | |
(a)Excludes receivable balances which are disclosed on the balance sheet
|
| | | | | | |
(in millions) | Contract Assets (a) | Contract Liabilities |
Balance at January 1, 2018 | $ | 89 |
| $ | 107 |
|
Additions, net | 38 |
| 56 |
|
Revenue recognized from opening balance | — |
| (54 | ) |
Billings | (34 | ) | — |
|
Other | 1 |
| 1 |
|
Balance at March 31, 2018 | $ | 94 |
| $ | 110 |
|
| | |
Balance at January 1, 2019 | $ | 96 |
| $ | 113 |
|
Additions, net | 39 |
| 46 |
|
Revenue recognized from opening balance | — |
| (45 | ) |
Billings | (32 | ) | — |
|
Other | 11 |
| 2 |
|
Balance at March 31, 2019 | $ | 114 |
| $ | 116 |
|
| |
(a) | Excludes receivable balances which are disclosed on the balance sheet |
Performance obligations
Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of March 31, 2019,2020, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $314$380 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.
Note 5. Restructuring and Asset Impairment Charges
Restructuring
From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position ourselves based onourselves. During the economic environmentthree months ended March 31, 2020, we recognized restructuring charges of $2 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and customer demand. North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount within our Water Infrastructure segment.
During the three months ended March 31, 2019, we recognized restructuring charges of $8 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Measurement & Control Solutions and Water Infrastructure segments.
During the three months ended March 31, 2018, we recognized restructuring charges of $10 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Measurement & Control Solutions and Water Infrastructure segments, as well as headcount reductions within our Applied Water segment.
The following table presents the components of restructuring expense and asset impairment charges:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in millions) | 2020 | | 2019 | | | | |
By component: | | | | | | | |
Severance and other charges | $ | 2 | | | $ | 7 | | | | | |
Lease related charges | — | | | 1 | | | | | |
| | | | | | | |
| | | | | | | |
Total restructuring charges | $ | 2 | | | $ | 8 | | | | | |
Asset impairment | — | | | 3 | | | | | |
Total restructuring and asset impairment charges | $ | 2 | | | $ | 11 | | | | | |
| | | | | | | |
By segment: | | | | | | | |
Water Infrastructure | $ | 2 | | | $ | 4 | | | | | |
Applied Water | — | | | — | | | | | |
Measurement & Control Solutions | — | | | 7 | | | | | |
| | | | | | | |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2019 | | 2018 |
By component: | | | |
Severance and other charges | $ | 7 |
| | $ | 9 |
|
Lease related charges | 1 |
| | 1 |
|
Total restructuring charges | $ | 8 |
| | $ | 10 |
|
Asset impairment | 3 |
| | — |
|
Total restructuring and asset impairment charges | $ | 11 |
| | $ | 10 |
|
| | | |
By segment: | | | |
Water Infrastructure | $ | 4 |
| | $ | 3 |
|
Applied Water | — |
| | 1 |
|
Measurement & Control Solutions | 7 |
| | 6 |
|
The following table displays a rollforwardroll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within accrued"accrued and other current liabilities,liabilities" and "other non-current accrued liabilities", for the three months ended March 31, 20192020 and 2018:2019:
| | | | | | | | | | | | | | |
(in millions) | | 2020 | | 2019 |
Restructuring accruals - January 1 | | $ | 27 | | | $ | 5 | |
Restructuring charges | | 2 | | | 8 | |
Cash payments | | (8) | | | (4) | |
Foreign currency and other | | (1) | | | — | |
Restructuring accruals - March 31 | | $ | 20 | | | $ | 9 | |
| | | | |
By segment: | | | | |
Water Infrastructure | | $ | 1 | | | $ | 2 | |
Applied Water | | 1 | | | — | |
Measurement & Control Solutions | | 17 | | | 4 | |
Regional selling locations (a) | | 1 | | | 3 | |
| | | | |
|
| | | | | | | | |
(in millions) | | 2019 | | 2018 |
Restructuring accruals - January 1 | | $ | 5 |
| | $ | 7 |
|
Restructuring charges | | 8 |
| | 10 |
|
Cash payments | | (4 | ) | | (5 | ) |
Restructuring accruals - March 31 | | $ | 9 |
| | $ | 12 |
|
| | | | |
By segment: | | | | |
Water Infrastructure | | $ | 2 |
| | $ | 1 |
|
Applied Water | | — |
| | 1 |
|
Measurement & Control Solutions | | 4 |
| | 6 |
|
Regional selling locations (a) | | 3 |
| | 3 |
|
Corporate and other | | — |
| | 1 |
|
(a) | |
(a) | Regional selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments. |
The following is a rollforward for the three months ended March 31, 2019 and 2018 of employee position eliminations associated with restructuring activities:expense were not allocated to the segments.
|
| | | | | | |
| | 2019 | | 2018 |
Planned reductions - January 1 | | 69 |
| | 47 |
|
Additional planned reductions | | 158 |
| | 102 |
|
Actual reductions and reversals | | (134 | ) | | (45 | ) |
Planned reductions - March 31 | | 93 |
| | 104 |
|
The following table presents expected restructuring spend for actions commenced as of March 31, 2019:2020:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Corporate | | Total |
Actions Commenced in 2019: | | | | | | | | | | |
Total expected costs | | $ | 5 |
|
| $ | — |
|
| $ | 6 |
|
| $ | — |
| | $ | 11 |
|
Costs incurred during Q1 2019 | | 3 |
|
| — |
|
| 3 |
|
| — |
| | 6 |
|
Total expected costs remaining | | $ | 2 |
|
| $ | — |
|
| $ | 3 |
|
| $ | — |
|
| $ | 5 |
|
| | | | | | | | | | |
Actions Commenced in 2018: | | | | | | | | | | |
Total expected costs | | $ | 9 |
|
| $ | 1 |
|
| $ | 7 |
|
| $ | — |
| | $ | 17 |
|
Costs incurred during 2018 | | 7 |
|
| 1 |
|
| 7 |
|
| — |
| | 15 |
|
Costs incurred during Q1 2019 | | 1 |
|
| — |
|
| — |
|
| — |
| | 1 |
|
Total expected costs remaining | | $ | 1 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 1 |
|
| | | | | | | | | | |
Actions Commenced in 2017: | | | | | | | | | | |
Total expected costs | | $ | 16 |
| | $ | 8 |
| | $ | 4 |
| | $ | — |
| | $ | 28 |
|
Costs incurred during 2017 | | 5 |
| | 4 |
| | 2 |
| | — |
| | 11 |
|
Costs incurred during 2018 | | 2 |
| | 1 |
| | 1 |
| | — |
| | 4 |
|
Costs incurred during Q1 2019 | | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total expected costs remaining | | $ | 9 |
|
| $ | 3 |
|
| $ | — |
|
| $ | — |
|
| $ | 12 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | | | Total |
Actions Commenced in 2020: | | | | | | | | | | |
Total expected costs | | $ | 1 | | | $ | — | | | $ | — | | | | | $ | 1 | |
Costs incurred during Q1 2020 | | 1 | | | — | | | — | | | | | 1 | |
Total expected costs remaining | | $ | — | | | | $ | — | | | | $ | — | | | | | | $ | — | |
| | | | | | | | | | |
Actions Commenced in 2019: | | | | | | | | | | |
Total expected costs | | $ | 20 | | | $ | 5 | | | $ | 27 | | | | | $ | 52 | |
Costs incurred during 2019 | | 18 | | | 5 | | | 27 | | | | | 50 | |
Costs incurred during Q1 2020 | | 1 | | | — | | | — | | | | | 1 | |
| | | | | | | | | | |
Total expected costs remaining | | $ | 1 | | | $ | — | | | $ | — | | | | | $ | 1 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Actions Commenced in 2017: | | | | | | | | | | |
Total expected costs | | $ | 12 | | | $ | 7 | | | $ | 4 | | | | | $ | 23 | |
Costs incurred during 2017 | | 5 | | | 4 | | | 2 | | | | | 11 | |
Costs incurred during 2018 | | 2 | | | 1 | | | 1 | | | | | 4 | |
Costs incurred during 2019 | | 1 | | | — | | | 1 | | | | | 2 | |
| | | | | | | | | | |
Costs incurred during Q1 2020 | | — | | | — | | | — | | | | | — | |
Total expected costs remaining | | $ | 4 | | | | $ | 2 | | | | $ | — | | | | | | $ | 6 | |
The Water Infrastructure actions commenced in 2020 consist primarily of severance charges and are substantially complete. The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2019 consist primarily of severance charges and are expected to continue through the end of 2019.charges. The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2018 consist primarily of severance chargesare complete and the Water Infrastructure actions are expected to continue through the thirdfourth quarter of 2019.2020. The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2017 consist primarily of severance chargescharges. The Measurement & Control Solutions actions are complete and the Water Infrastructure and Applied Water actions are expected to continue through the fourth quarter of 2020.2021.
Asset Impairment
During the first quarter of 2019 we determined that certain assets within our Measurement and& Control Solutions segment, including a customer relationship, were impaired. Accordingly we recognized an impairment charge of $3 million. Refer to Note 10,9, "Goodwill and Other Intangible Assets," for additional information.
Note 6. Income 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 foreign income tax rate differentials and discrete items.
The income tax provision for the three months ended March 31, 20192020 was $15$4 million resulting in an effective tax rate of 16.6%10.0%, compared to $16a $15 million charge resulting in an effective tax rate of 17.1%16.6% for the same period in 2018. 2019. The effective tax rate was lower thanfor the U.S.three month period ended March 31, 2020 differs from the United States federal statutory rate primarily due to the mix of earnings in jurisdictions, partially offset by the Global Intangible Low-Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the three month period ended March 31, 2020 is lower than the same period in 2019 due to the relative impact of the benefit from favorable equity compensation deductions on the effective tax rate.
Unrecognized Tax Benefits
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities or litigation, based on the technical merits of the position. The
tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits at March 31, 20192020 was $132$128 million, as compared to $136$129 million at December 31, 2018,2019, which if ultimately recognized will reduce our effective tax rate. We believe that it is
reasonably possible that the unrecognized tax benefits will be reduced by approximately $8$4 million within the next 12 months as a result of the expiration of certain statutes of limitations. We classify interest expense relating to unrecognized tax benefits as a component of other non-operating expense, net, and tax penalties as a component of income tax expense in our Condensed Consolidated Income Statements. As of March 31, 2019,2020, we had $8$9 million of interest accrued for 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. The assessment asserts an aggregate amount of approximately $80 million for tax, penalties and interest. Xylem filed an appeal with the Administrative Court of Stockholm. Management, in consultation with external legal advisors, believes it is more likely than not that Xylem will prevail on the proposed assessment and is vigorously defending our position through litigation. As of March 31, 2020, we have not recorded any unrecognized tax benefits related to this uncertain tax position.
Note 7.7. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Net income (in millions) | $ | 38 | | | $ | 79 | | | | | |
Shares (in thousands): | | | | | | | |
Weighted average common shares outstanding | 180,154 | | | 179,720 | | | | | |
Add: Participating securities (a) | 25 | | | 26 | | | | | |
Weighted average common shares outstanding — Basic | 180,179 | | | 179,746 | | | | | |
Plus incremental shares from assumed conversions: (b) | | | | | | | |
Dilutive effect of stock options | 725 | | | 835 | | | | | |
Dilutive effect of restricted stock units and performance share units | 390 | | | 532 | | | | | |
| | | | | | | |
Weighted average common shares outstanding — Diluted | 181,294 | | | 181,113 | | | | | |
Basic earnings per share | $ | 0.21 | | | $ | 0.44 | | | | | |
Diluted earnings per share | $ | 0.21 | | | $ | 0.43 | | | | | |
(a)Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders 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 15, "Share-Based Compensation Plans", to the condensed consolidated financial statements for further detail on the performance share units.
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2019 | | 2018 |
Net income (in millions) | $ | 79 |
| | $ | 79 |
|
Shares (in thousands): | | | |
Weighted average common shares outstanding | 179,720 |
| | 179,858 |
|
Add: Participating securities (a) | 26 |
| | 23 |
|
Weighted average common shares outstanding — Basic | 179,746 |
| | 179,881 |
|
Plus incremental shares from assumed conversions: (b) | | | |
Dilutive effect of stock options | 835 |
| | 928 |
|
Dilutive effect of restricted stock units and performance share units | 532 |
| | 556 |
|
Weighted average common shares outstanding — Diluted | 181,113 |
| | 181,365 |
|
Basic earnings per share | $ | 0.44 |
| | $ | 0.44 |
|
Diluted earnings per share | $ | 0.43 |
| | $ | 0.43 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in thousands) | 2020 | | 2019 | | | | |
Stock options | 1,367 | | | 1,394 | | | | | |
Restricted stock units | 314 | | | 348 | | | | | |
Performance share units | 285 | | | 472 | | | | | |
| |
(a) | Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders 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 16, "Share-Based Compensation Plans" to the condensed consolidated financial statements for further detail on the performance share units.
|
|
| | | | | |
| Three Months Ended |
| March 31, |
(in thousands) | 2019 | | 2018 |
Stock options | 1,394 |
| | 1,218 |
|
Restricted stock units | 348 |
| | 294 |
|
Performance share units | 472 |
| | 538 |
|
Note 8. Inventories
The components of total inventories are summarized as follows:
| | | | | | | | | | | |
(in millions) | March 31, 2020 | | December 31, 2019 |
Finished goods | $ | 228 | | | $ | 212 | |
Work in process | 51 | | | 47 | |
Raw materials | 294 | | | 280 | |
Total inventories | $ | 573 | | | $ | 539 | |
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
Finished goods | $ | 256 |
| | $ | 248 |
|
Work in process | 52 |
| | 45 |
|
Raw materials | 309 |
| | 302 |
|
Total inventories | $ | 617 |
| | $ | 595 |
|
Note 9. Leases
As discussed in Note 2, “Recently Issued Accounting Pronouncements,” Xylem adopted the new guidance on accounting for leases.
Leasing Arrangements
We lease certain offices, manufacturing buildings, transportation equipment, machinery, computers and other equipment. Our most significant lease liabilities relate to real estate leases. These leases include renewal, termination or purchase options, and we have assessed these to determine whether it is reasonably certain for us to exercise any of the previously mentioned options. All periods relating to options that are reasonably certain to be exercised have been included in the lease term of the respective leases.
We have recorded ROU assets for lease arrangements that are reasonably certain to extend beyond 12 months. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The implicit rate within our leases is generally not determinable, and we use our incremental borrowing rate at the lease commencement date to determine the net present value of lease payments. The determination of the appropriate incremental borrowing rate requires judgment. We determine the appropriate incremental borrowing rate for each lease using our current borrowing rate, adjusted for various factors including geographic region, level of collateralization and term, to align with the term of the underlying lease.
Many of our leases are subject to payment adjustments to reflect annual changes in price indexes, such as the Consumer Price Index. While associated lease liabilities are not re-measured as a result of changes in the applicable price indexes, changes to required lease payments are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.
Leases with a lease term of 12 months or less, including renewal options that are reasonably certain to be exercised, that also do not include an option to purchase the underlying asset that is reasonably certain of exercise, are not recorded on the balance sheet. Instead, lease payments for these leases are recognized as a lease cost on a straight-line basis over the lease term.
We elected the package of practical expedients, which among other things, does not require reassessment of lease classification. Additionally, we have made an accounting policy election whereby we chose not to separate non-lease components from lease components in agreements in all leases which we are the lessee.
We did not identify any events or conditions during the quarter ended March 31, 2019 to indicate that a reassessment or re-measurement of our existing leases was required. There were also no impairment indicators identified during the quarter ended March 31, 2019 that required an impairment test for the Company’s ROU assets or other long-lived assets in accordance with ASC 360-10.
Our current lease liabilities of $62 million are included in Accrued and other current liabilities and our non-current lease liabilities of $193 million are included in Other non-current accrued liabilities as of March 31, 2019. Our ROU asset balances are included in Other non-current assets. The net balance of our ROU assets as of March 31, 2019 was $256 million. These balances include an immaterial amount related to finance leases.
The components of our lease cost were as follows:
|
| | | |
(in millions) | Three Months Ended March 31, 2019 |
Lease cost | |
Operating lease cost | $ | 18 |
|
Short-term lease cost | 1 |
|
Variable lease cost | 8 |
|
Total lease cost | $ | 27 |
|
The supplemental cash flow information related to leases are as follows:
|
| | | |
(in millions) | Three Months Ended March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 18 |
|
| |
Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | $ | 7 |
|
Information relating to the lease term and discount rate are as follows:
|
| |
| Three Months Ended March 31, 2019 |
Weighted-average remaining lease term (years) | |
Operating leases | 6 Years |
| |
Weighted-average discount rate | |
Operating leases | 2.79% |
As of March 31, 2019, the maturities of operating lease liabilities were as follows:
|
| | | |
(in millions) | |
2019 | $ | 52 |
|
2020 | 57 |
|
2021 | 41 |
|
2022 | 30 |
|
2023 | 23 |
|
2024 | 18 |
|
Thereafter | 56 |
|
Total lease payments | 277 |
|
Less: Imputed interest | (23 | ) |
Total | $ | 254 |
|
Disclosures related to periods prior to adoption of the New Lease Standard as reported in our December 31, 2018 Form 10-K.
As of December 31, 2018, we were obligated to make minimum future rental payments under operating leases which are as follows:
|
| | | |
(in millions) | |
2019 | $ | 76 |
|
2020 | 61 |
|
2021 | 43 |
|
2022 | 33 |
|
2023 | 22 |
|
Thereafter | 64 |
|
Total lease payments | 299 |
|
Lessor arrangements
In addition to manufacturing and selling equipment, we also lease out equipment to customers in exchange for consideration. These arrangements are generally short term in nature and predominantly involve the rental of pumps and accessories within the Water Infrastructure segment. Rental arrangements generally do not provide the customer the right to purchase the equipment as Xylem’s strategy is to rent these items over their useful lives. Customers may be billed based on daily, weekly or monthly rates depending on the expected rental period. We assessed that these arrangements constitute a lease under ASC 842, and have recognized them as operating leases. In situations where arrangements contain both the sale of products and a leasing component, contract consideration is allocated based on relative standalone selling price.
Total revenue from lease arrangements was $59 million for the three months ended March 31, 2019. Our gross assets available for rent and related accumulated amortization were $255 million and $163 million, respectively, as of March 31, 2019. Depreciation expense for these assets was $7 million for the three months ended March 31, 2019.
Note 10.9. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying value of goodwill by reportable segment for the three months ended March 31, 20192020 are as follows:
|
| | | | | | | | | | | | | | | |
(in millions) | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total |
Balance as of January 1, 2019 | $ | 653 |
| | $ | 516 |
| | $ | 1,807 |
| | $ | 2,976 |
|
Activity in 2019 | | | | | | | |
Divested/Acquired | — |
| | — |
| | 8 |
| | 8 |
|
Foreign currency and other | 1 |
| | (1 | ) | | 4 |
| | 4 |
|
Balance as of March 31, 2019 | $ | 654 |
| | $ | 515 |
| | $ | 1,819 |
| | $ | 2,988 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | | | Total |
Balance as of January 1, 2020 | $ | 651 | | | $ | 513 | | | $ | 1,675 | | | | | $ | 2,839 | |
Activity in 2020 | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency and other | (13) | | | (5) | | | (31) | | | | | (49) | |
Balance as of March 31, 2020 | $ | 638 | | | $ | 508 | | | $ | 1,644 | | | | | $ | 2,790 | |
Other Intangible Assets
Information regarding our other intangible assets is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
(in millions) | Carrying Amount | | Accumulated Amortization | | Net Intangibles | | Carrying Amount | | Accumulated Amortization | | Net Intangibles |
Customer and distributor relationships | $ | 947 |
| | $ | (301 | ) | | $ | 646 |
| | $ | 951 |
| | $ | (286 | ) | | $ | 665 |
|
Proprietary technology and patents | 200 |
| | (97 | ) | | 103 |
| | 198 |
| | (93 | ) | | 105 |
|
Trademarks | 148 |
| | (43 | ) | | 105 |
| | 148 |
| | (41 | ) | | 107 |
|
Software | 371 |
| | (173 | ) | | 198 |
| | 355 |
| | (164 | ) | | 191 |
|
Other | 20 |
| | (19 | ) | | 1 |
| | 24 |
| | (19 | ) | | 5 |
|
Indefinite-lived intangibles | 166 |
| | — |
| | 166 |
| | 159 |
| | — |
| | 159 |
|
Other Intangibles | $ | 1,852 |
| | $ | (633 | ) | | $ | 1,219 |
| | $ | 1,835 |
| | $ | (603 | ) | | $ | 1,232 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | |
(in millions) | Carrying Amount | | Accumulated Amortization | | Net Intangibles | | Carrying Amount | | Accumulated Amortization | | Net Intangibles |
Customer and distributor relationships | $ | 931 | | | $ | (361) | | | $ | 570 | | | $ | 945 | | | $ | (352) | | | $ | 593 | |
Proprietary technology and patents | 200 | | | (113) | | | 87 | | | 204 | | | (111) | | | 93 | |
Trademarks | 145 | | | (54) | | | 91 | | | 148 | | | (52) | | | 96 | |
Software | 442 | | | (215) | | | 227 | | | 428 | | | (206) | | | 222 | |
Other | 17 | | | (16) | | | 1 | | | 20 | | | (16) | | | 4 | |
Indefinite-lived intangibles | 165 | | | — | | | 165 | | | 166 | | | — | | | 166 | |
Other Intangibles | $ | 1,900 | | | $ | (759) | | | $ | 1,141 | | | $ | 1,911 | | | $ | (737) | | | $ | 1,174 | |
Amortization expense related to finite-lived intangible assets was $35 million and $38$35 million for the three monthsmonth periods ended March 31, 20192020 and 2018,2019, respectively.
During the first quarter of 2019, we determined that the intended use of a finite livedfinite-lived customer relationship within the test application of our Measurement and& Control Solutions segment had changed. Accordingly we recorded a $3
million impairment charge. The charge was calculated using the 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.
Note 11.10. Derivative 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 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 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 $370$376 million and $506$0 million as of March 31, 20192020 and December 31, 2018,2019, respectively. As of March 31, 2019,2020, 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 Polish Zloty and sell Euro, purchase USU.S. Dollar and sell Canadian Dollar, and to sell Canadian Dollar and Purchasepurchase Euro. The purchased notional amounts associated with these currency derivatives are $142$151 million, $120$117 million, $38 million, $27$24 million, $22$23 million and $16 million, respectively. As of December 31, 2018, the purchased notional amounts associated with these currency derivatives were $191 million, $168 million, $52 million, $37 million, $29 million and $22$18 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 2019 we entered into additional cross currency swaps. The total notional amount of derivative instruments designated as net investment hedges was $421$702 million and $426$714 million as of March 31, 20192020 and December 31, 2018,2019, respectively.
Foreign Currency Denominated Debt
On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023. We designated the entirety of the outstanding balance, or $559$544 million and $566$554 million as of March 31, 20192020 and December 31, 2018,2019, respectively, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.
The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in millions) | 2020 | | 2019 | | | | |
Cash Flow Hedges | | | | | | | |
Foreign Exchange Contracts | | | | | | | |
Amount of (loss) recognized in OCI | $ | (2) | | | $ | (9) | | | | | |
Amount of loss reclassified from OCI into revenue | 2 | | | 1 | | | | | |
Amount of loss reclassified from OCI into cost of revenue | 1 | | | 1 | | | | | |
| | | | | | | |
Net Investment Hedges | | | | | | | |
Cross Currency Swaps | | | | | | | |
Amount of gain recognized in OCI | $ | 45 | | | $ | 7 | | | | | |
Amount of income recognized in Interest Expense | 4 | | | 3 | | | | | |
Foreign Currency Denominated Debt | | | | | | | |
Amount of gain recognized in OCI | $ | 10 | | | $ | 7 | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2019 | | 2018 |
Cash Flow Hedges | | | |
Foreign Exchange Contracts | | | |
Amount of (loss) recognized in OCI (a) | $ | (9 | ) | | $ | — |
|
Amount of (gain) loss reclassified from OCI into revenue (a) | 1 |
| | (1 | ) |
Amount of loss reclassified from OCI into cost of revenue (a) | 1 |
| | — |
|
| | | |
Net Investment Hedges | | | |
Cross Currency Swaps | | | |
Amount of gain (loss) recognized in OCI (a) | $ | 7 |
| | $ | (23 | ) |
Amount of income recognized in Interest Expense | 3 |
| | — |
|
Foreign Currency Denominated Debt | | | |
Amount of gain (loss) recognized in OCI (a) | $ | 7 |
| | $ | (23 | ) |
As of March 31, 2019, $82020, $2 million of net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months. The ineffective portion of a cash flow hedge is recognized immediately in selling, general and administrative expenses in the Condensed Consolidated Income Statements and was not material for the three months ended March 31, 2019 and 2018.
As of March 31, 2019,2020, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration. The net investment hedges did not experience any ineffectiveness for the three months ended March 31, 2019.
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.
The fair values of our foreign exchange contracts currently included in our hedging program designated as hedging instruments were as follows:
|
| | | | | | | |
(in millions) | March 31, 2019 | | December 31, 2018 |
Derivatives designated as hedging instruments | | | |
Assets | | | |
Cash Flow Hedges | | | |
Other current assets | $ | 1 |
| | $ | 3 |
|
Liabilities | | | |
Cash Flow Hedges | | | |
Other current liabilities | $ | (8 | ) | | $ | (1 | ) |
Net Investment Hedges | | | |
Other non-current accrued liabilities | $ | (38 | ) | | $ | (46 | ) |
| | | | | | | | | | | |
(in millions) | March 31, 2020 | | December 31, 2019 |
Derivatives designated as hedging instruments | | | |
Assets | | | |
Cash Flow Hedges | | | |
Other current assets | $ | 6 | | | $ | — | |
Net Investment Hedges | | | |
Other non-current assets | $ | 29 | | | $ | 4 | |
Liabilities | | | |
Cash Flow Hedges | | | |
Other current liabilities | $ | (9) | | | $ | — | |
Net Investment Hedges | | | |
Other non-current accrued liabilities | $ | (2) | | | $ | (24) | |
The fair value of our long-term debt, due in 2023, designated as a net investment hedge was $602$565 million and $599$591 million as of March 31, 20192020 and December 31, 2018,2019, respectively.
Note 12.11. Accrued and Other Current Liabilities
The components of total accrued and other current liabilities are as follows:
| | (in millions) | March 31, 2019 | | December 31, 2018 | (in millions) | March 31, 2020 | | December 31, 2019 |
Compensation and other employee benefits | $ | 170 |
| | $ | 194 |
| Compensation and other employee benefits | $ | 177 | | | $ | 199 | |
Customer-related liabilities | 130 |
| | 129 |
| Customer-related liabilities | 155 | | | 153 | |
Accrued taxes | 79 |
| | 85 |
| Accrued taxes | 73 | | | 79 | |
Lease liabilities | 62 |
| | — |
| Lease liabilities | 56 | | | 61 | |
Accrued warranty costs | 40 |
| | 44 |
| Accrued warranty costs | 50 | | | 36 | |
Other accrued liabilities | 108 |
| | 94 |
| Other accrued liabilities | 108 | | | 100 | |
Total accrued and other current liabilities | $ | 589 |
| | $ | 546 |
| Total accrued and other current liabilities | $ | 619 | | | $ | 628 | |
Note 13.12. Credit Facilities and Debt
Total debt outstanding is summarized as follows: | | (in millions) | March 31, 2019 | | December 31, 2018 | (in millions) | March 31, 2020 | | December 31, 2019 |
| 4.875% Senior Notes due 2021 (a) | $ | 600 |
| | $ | 600 |
| 4.875% Senior Notes due 2021 (a) | $ | 600 | | | $ | 600 | |
2.250% Senior Notes due 2023 (a) | 563 |
| | 570 |
| 2.250% Senior Notes due 2023 (a) | 547 | | | 557 | |
3.250% Senior Notes due 2026 (a) | 500 |
| | 500 |
| 3.250% Senior Notes due 2026 (a) | 500 | | | 500 | |
4.375% Senior Notes due 2046 (a) | 400 |
| | 400 |
| 4.375% Senior Notes due 2046 (a) | 400 | | | 400 | |
Commercial paper | 85 |
| | — |
| Commercial paper | 268 | | | 276 | |
Term loan | 141 |
| | 257 |
| |
| Other | 78 |
| | — |
| Other | 191 | | | — | |
Debt issuance costs and unamortized discount (b) | (19 | ) | | (19 | ) | Debt issuance costs and unamortized discount (b) | (16) | | | (17) | |
| Total debt | 2,348 |
| | 2,308 |
| Total debt | 2,490 | | | 2,316 | |
Less: short-term borrowings and current maturities of long-term debt | 304 |
| | 257 |
| Less: short-term borrowings and current maturities of long-term debt | 459 | | | 276 | |
Total long-term debt | $ | 2,044 |
| | $ | 2,051 |
| Total long-term debt | $ | 2,031 | | | $ | 2,040 | |
| |
(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 2021 was $628 million and $620 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of our Senior Notes due 2023 was $602 million and $599 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of our Senior Notes due 2026 was $491 million and $476 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of our Senior Notes due 2046 was $411 million and $397 million as of March 31, 2019 and December 31, 2018, 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. |
(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 2021 was $640 million and $629 million as of March 31, 2020 and December 31, 2019, respectively. The fair value of our Senior Notes due 2023 was $565 million and $591 million as of March 31, 2020 and December 31, 2019, respectively. The fair value of our Senior Notes due 2026 was $533 million and $518 million as of March 31, 2020 and December 31, 2019, respectively. The fair value of our Senior Notes due 2046 was $400 million and $431 million as of March 31, 2020 and December 31, 2019, 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 September 20, 2011, we issued 4.875% Senior Notes of $600 million aggregate principal amount due October 2021 (the "Senior Notes due 2021"). On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023 (the "Senior Notes due 2023"). On October 11, 2016, we issued 3.250% Senior Notes of $500 million aggregate principal amount due October 2026 (the “Senior Notes due 2026”) and 4.375% Senior Notes of $400 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, subject to exceptions, to incur debt secured by liens and engage in sale and leaseback transactions, as well as provide for customary events of default (subject, in certain cases, to receipt of notice of default and/or customary grace and cure periods). We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal 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.
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 101% of their principal amount plus accrued and unpaid interest to the date of repurchase.
Interest on the Senior Notes due 2021 is payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable 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 beginning on May 1, 2017. As of March 31, 2019,2020, we are in compliance with all covenants for the Senior Notes.
Credit Facilities
2015 Five-Year Revolving Credit Facility
Effective March 27, 2015, Xylem entered into a Five-Year Revolving Credit Facility (the "2015 Credit Facility") with Citibank, N.A., as Administrative Agent, and a syndicate of lenders. The 2015 Credit Facility provides for an
aggregate principal amount of up to $600 million of: (i) revolving extensions of credit (the "revolving loans") outstanding at any time and (ii) the issuance of letters of credit in a face amount not in excess of $100 million outstanding at any time. The 2015 Credit Facility provides for increases of up to $200 million for a maximum aggregate principle amount of $800 million in aggregate principal amount at our request and with the consent of the institutions providing such increased commitments. On March 5, 2019 Xylem terminated the 2015 Credit Facility among the Company, certain lenders and Citibank, N.A. as Administrative Agent.
2019 Five-Year Revolving Credit Facility
On March 5, 2019, Xylem entered into a Five-YearFive-Year Revolving Credit Facility (the “2019 Credit Facility”) with Citibank, N.A., as administrative agent,Administrative Agent, and a syndicate of lenders. The 2019 Credit Facility provides for an aggregate principal amount of up to $800 million (available in U.S. dollarsDollars and in Euros), with an accordion option for increases of up to $200 million for a maximum aggregate principal amount of $1 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 score. 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(as adjusted infor the Environmental, Social and Governance score.score).
The 2019 Credit facilityFacility requires that Xylem maintain a consolidated total debt to consolidated EBITDA ratio, which will be based on the last four fiscal quarters, and in addition 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 AgreementFacility 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 Agreement.Facility. As of March 31, 2019,2020, the 2019 Credit Facility was undrawn and we are in compliance with all covenants.
Term Loan FacilityCommercial 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 $600 million maximum issuing balance and a combined limit of $800 million inclusive of the 2019 Credit Facility. As of March 31, 2020 and December 31, 2019, none of the Company's $600 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 January 26, 2018,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 €500 million (approximately $547 million) which may be denominated in a variety of currencies. The maximum issuing balance may be increased in accordance with the Dealer Agreement. As of March 31, 2020 and December 31, 2019, $268 million and $276 million of the Company's Euro commercial paper program was outstanding, respectively, at a weighted average interest rate of (0.21)%. We have the ability to continue borrowing under this program going forward in future periods.
Other Borrowings
Effective October 20, 2016, Xylem entered into an uncommitted short term facility with SEB Bank. The line of credit provides for an aggregate principal amount of up to €110 million (approximately $120 million). The full amount of €100M has been drawn on March 19, 2020 at an interest rate of 0.70% for a duration of three months with a maturity date on June 19, 2020. As of March 31, 2020 and December 31, 2019, $120 million and $0 million were outstanding under the uncommitted short term facility, respectively.
Effective November 29, 2019, Xylem entered into an uncommitted short term facility with BGL BNP Paribas Bank. The line of credit provides for an aggregate principal amount of up to €65 million (approximately $71 million). The full amount of €65M has been drawn on March 19, 2020 at an interest rate of 1.25% for a duration of three months with a maturity date in June 19, 2020. No amounts were outstanding previously under the BGL BNP Paribas Bank short term facility.
Subsequent Events
On April 25, 2020, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month €225€100 million (approximately $253$109 million) term loan facility (the “Term Facility”) at an interest ratethe terms of 0.45% in which the terms are set forth in a Term Loan Agreement,term loan agreement, among the borrower, the Company, as parent guarantor and ING Bank. The Company has entered into a parentalparent guarantee in favor of ING Bank also dated January 26, 2018April 25, 2020 to secure all present and future obligations of the borrower under the Term Loan Agreement. The Term Facility wasBorrowings accrue interest at a rate equal to the EURIBOR or a replacement base rate, plus an applicable margin based on Xylem's credit rating. Xylem will also pay quarterly fees whether such commitment is used to partially fund the acquisition of Pure Technologies Ltd. On January 25, 2019, the Company extended the Term Facility for another month and then on February 25, 2019 extended the Term Facility through February 2020. During the first quarter of 2019, the Company partially paid down the Term facility.
Commercial Paper
Our commercial paper program generally serves as a means of short-term funding with $600 million maximum issuing balance and a combined limit of $800 million inclusiveor unused. To date none of the 2019 ING Bank term facility has been drawn down upon.
Five-Year Revolving Credit Facility. As of March 31, 2019 and December 31, 2018, $85 million and $0 million ofOn April 30, 2020, the Company’s $600 million commercial paper program was outstanding at a weighted average interest rate of 2.75% and 0%, respectively. We have the ability to continue borrowing under this program going forward in in future periods.
Other Borrowings
Effective October 20, 2016, XylemCompany entered into a revolving line12-month $50 million term loan facility the terms of credit with SEB Bank. which are set forth in a term loan agreement among the Company and Australia and New Zealand Banking Group Limited. Borrowings accrue interest at a rate equal to an adjusted LIBOR rate plus 1.50%.The line of credit provides for an aggregate principalfull amount of up €120$50 million (approximately $135 million) at an interest rate of 0.50% and a maturity date that has been extended to March 31,drawn down upon on April 30, 2020. During the first quarter of 2019, this line of credit was used to partially pay down the Term Facility. As of March 31, 2019 and December 31, 2018, $78 million and $0 million were outstanding under the revolving line of credit, respectively.
Note 14.13. Postretirement Benefit Plans
The components of net periodic benefit cost for our defined benefit pension plans are as follows:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2019 | | 2018 |
Domestic defined benefit pension plans: | | | |
Service cost | $ | 1 |
| | $ | 1 |
|
Interest cost | 1 |
| | 1 |
|
Expected return on plan assets | (2 | ) | | (2 | ) |
Amortization of net actuarial loss | — |
| | 1 |
|
Net periodic benefit cost | $ | — |
| | $ | 1 |
|
International defined benefit pension plans: | | | |
Service cost | $ | 3 |
| | $ | 2 |
|
Interest cost | 5 |
| | 5 |
|
Expected return on plan assets | (9 | ) | | (9 | ) |
Amortization of net actuarial loss | 2 |
| | 2 |
|
Settlement/Curtailment | — |
| | 1 |
|
Net periodic benefit cost | $ | 1 |
| | $ | 1 |
|
Total net periodic benefit cost | $ | 1 |
| | $ | 2 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in millions) | 2020 | | 2019 | | | | |
Domestic defined benefit pension plans: | | | | | | | |
Service cost | $ | 1 | | | $ | 1 | | | | | |
Interest cost | 1 | | | 1 | | | | | |
Expected return on plan assets | (2) | | | (2) | | | | | |
| | | | | | | |
Amortization of net actuarial loss | 1 | | | — | | | | | |
Net periodic benefit cost | $ | 1 | | | $ | — | | | | | |
International defined benefit pension plans: | | | | | | | |
Service cost | $ | 3 | | | $ | 3 | | | | | |
Interest cost | 4 | | | 5 | | | | | |
Expected return on plan assets | (4) | | | (9) | | | | | |
| | | | | | | |
Amortization of net actuarial loss | 3 | | | 2 | | | | | |
| | | | | | | |
Net periodic benefit cost | $ | 6 | | | $ | 1 | | | | | |
Total net periodic benefit cost | $ | 7 | | | $ | 1 | | | | | |
The components of net periodic benefit cost other than the service cost component are included in the line item "other"Other non-operating income, (expense), net" in the Condensed Consolidated Income Statements.
The total net periodic benefit cost for other postretirement employee benefit plans was less than $1 million including amountsnet credits recognized ininto other comprehensive income ("OCI") of less than $1 million for the three months ended March 31, 2019. The total net periodic benefit cost for other postretirement employee benefit plans was less than $1 million including amounts recognized in OCI of $1 million, for the three months ended2020 and March 31, 2018.2019, respectively.
We contributed $5$12 million and $6$5 million to our defined benefit plans during the three months ended March 31, 20192020 and 2018,2019, respectively. Additional contributions ranging between approximately $10 million and $20 million are expected during the remainder of 2019.2020.
During Q1 2020, the Company purchased a bulk annuity policy with an insurance company for its largest defined benefit plan in the UK, as a plan asset, to facilitate the termination and buy-out of the plan. The bulk annuity fully insures the benefits payable to the participants of the plan until a full buy-out of the plan can be executed, which is expected to occur in 2021. Included in the Company's Q1 contributions is $5 million paid to meet the shortfall between the cost of the bulk annuity policy and the plan assets. As a result of the change in assets from a mix of equities and bonds to the bulk annuity, the plan's expected rate of return on assets was reduced to 1.00% at December 31, 2019. The rate at December 31, 2018 was 7.25%. On January 27, 2020, the plan's assets of $336 million were transferred to the insurance company for the purchase of the bulk annuity.
Note 15.14. Equity
The following table shows the changes in stockholders' equity for the three months ended March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Non-Controlling Interest | | Total |
Balance at January 1, 2020 | $ | 2 | | | $ | 1,991 | | | $ | 1,866 | | | $ | (375) | | | $ | (527) | | | $ | 10 | | | $ | 2,967 | |
| | | | | | | | | | | | | |
Cumulative effect of change in accounting principle | | | | | (2) | | | | | | | | | (2) | |
Net income | — | | | — | | | 38 | | | — | | | — | | | — | | | 38 | |
Other comprehensive loss, net | — | | | | — | | | | — | | | | (86) | | | | — | | | (1) | | | (87) | |
Dividends declared ($0.26 per share) | — | | | — | | | (48) | | | — | | | — | | | — | | | (48) | |
Stock incentive plan activity | — | | | | 13 | | | | — | | | | — | | | | (10) | | | — | | | 3 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | (50) | | | — | | | (50) | |
Balance at March 31, 2020 | $ | 2 | | | $ | 2,004 | | | $ | 1,854 | | | $ | (461) | | | $ | (587) | | | $ | 9 | | | $ | 2,821 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The following table shows the changes in stockholders' equity for the three months ended March 31, 2019:
| | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Non-Controlling Interest | | Total | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Non-Controlling Interest | | Total |
Balance at January 1, 2019 | $ | 2 |
| | $ | 1,950 |
| | $ | 1,639 |
| | $ | (336 | ) | | $ | (487 | ) | | $ | 14 |
| | $ | 2,782 |
| Balance at January 1, 2019 | $ | 2 | | | $ | 1,950 | | | $ | 1,639 | | | $ | (336) | | | $ | (487) | | | $ | 14 | | | $ | 2,782 | |
Sale of business | | | | | | | | | | | (2 | ) | | (2 | ) | Sale of business | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
Net income | | | | | 79 |
| | | | | | | | 79 |
| Net income | — | | | — | | | 79 | | | — | | | — | | | — | | | 79 | |
Other comprehensive income, net | | | | | | | 20 |
| | | | | | 20 |
| Other comprehensive income, net | — | | | — | | | — | | | 20 | | | — | | | — | | | 20 | |
Dividends declared ($0.24 per share) | | | | | (44 | ) | | | | | | | | (44 | ) | Dividends declared ($0.24 per share) | — | | | — | | | (44) | | | — | | | — | | | — | | | (44) | |
Stock incentive plan activity | | | 12 |
| | | | | | (14 | ) | | | | (2 | ) | Stock incentive plan activity | — | | | 12 | | | — | | | — | | | (14) | | | — | | | (2) | |
Repurchase of common stock | | | | | | | | | (25 | ) | | | | (25 | ) | Repurchase of common stock | — | | | — | | | — | | | — | | | (25) | | | — | | | (25) | |
Balance at March 31, 2019 | $ | 2 |
| | $ | 1,962 |
| | $ | 1,674 |
| | $ | (316 | ) | | $ | (526 | ) | | $ | 12 |
| | $ | 2,808 |
| Balance at March 31, 2019 | $ | 2 | | | | $ | 1,962 | | | | $ | 1,674 | | | | $ | (316) | | | | $ | (526) | | | | $ | 12 | | | | $ | 2,808 | |
|
The following table shows the changes in stockholders' equity for the three months ended March 31, 2018: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Non-Controlling Interest | | Total |
Balance at January 1, 2018 | $ | 2 |
| | $ | 1,912 |
| | $ | 1,227 |
| | $ | (210 | ) | | $ | (428 | ) | | $ | 16 |
| | $ | 2,519 |
|
Cumulative effect of change in accounting principle | | | | | 14 |
| | (17 | ) | | | | | | (3 | ) |
Net income | | | | | 79 |
| | | | | | | | 79 |
|
Other comprehensive income, net | | | | | | | 20 |
| | | | | | 20 |
|
Dividends declared ($0.21 per share) | | | | | (38 | ) | | | | | | | | (38 | ) |
Stock incentive plan activity | | | 13 |
| | | | | | (8 | ) | | | | 5 |
|
Repurchase of common stock | | | | | | | | | (25 | ) | | | | (25 | ) |
Balance at March 31, 2018 | $ | 2 |
|
| $ | 1,925 |
|
| $ | 1,282 |
|
| $ | (207 | ) |
| $ | (461 | ) |
| $ | 16 |
|
| $ | 2,557 |
|
Note 16.15. Share-Based Compensation Plans
Share-based compensation expense was $9$8 million and $9 million during the three months ended March 31,2019 2020 and 2018,2019, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $10$9 million, $32$29 million and $25$15 million, respectively, at March 31, 20192020 and is expected to be recognized over a weighted average period of 2.3, 2.32.2 and 2.22.4 years, respectively. The amount of cash received from the exercise of stock options was $4$5 million and $3$4 million for the three months ended March 31, 2020 and 2019, and 2018, respectively.
Stock Option Grants
The following is a summary of the changes in outstanding stock options for the three months ended March 31, 20192020:
|
| | | | | | | | | | | | |
| Share units (in thousands) | | Weighted Average Exercise Price / Share | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) |
Outstanding at January 1, 2019 | 2,125 |
| | $ | 43.08 |
| | 6.5 | | |
Granted | 330 |
| | 74.07 |
| | | | |
Exercised | (106 | ) | | 35.37 |
| | | | |
Forfeited and expired | (3 | ) | | 65.72 |
| | | | |
Outstanding at March 31, 2019 | 2,346 |
| | $ | 47.76 |
| | 6.9 | | $ | 74 |
|
Options exercisable at March 31, 2019 | 1,673 |
| | $ | 39.19 |
| | 5.9 | | $ | 67 |
|
Vested and expected to vest as of March 31, 2019 | 2,258 |
| | $ | 46.79 |
| | 6.8 | | $ | 73 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Share units (in thousands) | | Weighted Average Exercise Price / Share | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) |
Outstanding at January 1, 2020 | 2,040 | | | $ | 48.56 | | | 6.3 | | |
Granted | 334 | | | 80.66 | | | | | |
Exercised | (130) | | | 41.18 | | | | | |
Forfeited and expired | (5) | | | 74.37 | | | | | |
Outstanding at March 31, 2020 | 2,239 | | | $ | 53.72 | | | 6.7 | | $ | 37 | |
Options exercisable at March 31, 2020 | 1,615 | | | $ | 44.45 | | | 5.7 | | $ | 36 | |
Vested and expected to vest as of March 31, 2020 | 2,146 | | | $ | 52.67 | | | 6.5 | | $ | 36 | |
The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the three months ended March 31, 20192020 was $4.1$5.6 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 assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for 20192020 grants:
|
| | | | |
Volatility | 24.10 |
| % |
Risk-free interest rate | 2.56 |
| % |
Dividend yield | 1.30 |
| % |
Expected term (in years) | 5.4 |
| |
Weighted-average fair value / share | $ | 17.06 |
| |
| | | | | | | | |
Volatility | 22.90 | | % | |
Risk-free interest rate | 1.15 | | % | |
Dividend yield | 1.29 | | % | |
Expected term (in years) | 5.8 | |
Weighted-average fair value / share | $ | 16.03 | | |
Expected volatility is calculated based on a weightedan analysis of historic and implied volatility measures for a set of peer companies and Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and 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.United States Treasury yield curve in effect at the time of option grant.
Restricted Stock Unit Grants
The following is a summary of restricted stock unit activity for the three months ended March 31, 20192020. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant.grant:
| | | | | | | | | | | |
| Share units (in thousands) | | Weighted Average Grant Date Fair Value /Share |
Outstanding at January 1, 2020 | 512 | | | $ | 68.95 | |
Granted | 219 | | | 80.66 | |
Vested | (200) | | | 64.84 | |
Forfeited | (9) | | | 71.20 | |
Outstanding at March 31, 2020 | 522 | | | $ | 75.34 | |
|
| | | | | | |
| Share units (in thousands) | | Weighted Average Grant Date Fair Value /Share |
Outstanding at January 1, 2019 | 537 |
| | $ | 59.41 |
|
Granted | 230 |
| | 74.07 |
|
Vested | (207 | ) | | 54.02 |
|
Forfeited | (8 | ) | | 65.83 |
|
Outstanding at March 31, 2019 | 552 |
| | $ | 67.38 |
|
ROIC Performance Share Unit Grants
The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the three months ended March 31, 2019.2020. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant. grant:
| | | | | | | | | | | | | | | |
| Share units (in thousands) | | | | | | Weighted Average Grant Date Fair Value /Share |
Outstanding at January 1, 2020 | 225 | | | | | | | $ | 64.51 | |
Granted | 67 | | | | | | | 80.66 | |
| | | | | | | |
Vested | (89) | | | | | | | 49.15 | |
Forfeited | (1) | | | | | | | 74.17 | |
Outstanding at March 31, 2020 | 202 | | | | | | | $ | 76.60 | |
|
| | | | | | |
| Share units (in thousands) | | Weighted Average Grant Date Fair Value /Share |
Outstanding at January 1, 2019 | 274 |
| | $ | 52.11 |
|
Granted | 76 |
| | 74.07 |
|
Adjustment for Performance Condition Achieved (a) | 74 |
| | 37.86 |
|
Vested | (173 | ) | | 37.86 |
|
Forfeited | (1 | ) | | 61.43 |
|
Outstanding at March 31, 2019 | 250 |
| | $ | 64.44 |
|
(a) Represents an increase in the number of original ROIC performance share units awarded based on the final performance criteria achievement at the end of the performance period of such awards.
TSR Performance Share Unit Grants
The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the three months ended March 31, 2019:2020:
|
| | | | | | |
| Share units (in thousands) | | Weighted Average Grant Date Fair Value /Share |
Outstanding at January 1, 2019 | 274 |
| | $ | 61.04 |
|
Granted | 76 |
| | 89.62 |
|
Adjustment for Market Condition Achieved (a) | 74 |
| | 37.86 |
|
Vested | (173 | ) | | 37.86 |
|
Forfeited | (1 | ) | | 61.43 |
|
Outstanding at March 31, 2019 | 250 |
| | $ | 75.65 |
|
| | | | | | | | | | | | | | | |
| Share units (in thousands) | | | | | | Weighted Average Grant Date Fair Value /Share |
Outstanding at January 1, 2020 | 225 | | | | | | | $ | 75.80 | |
Granted | 67 | | | | | | | 105.66 | |
Adjustment for Market Condition Achieved (a) | 35 | | | | | | | 49.15 | |
Vested | (124) | | | | | | | 49.15 | |
Forfeited | (1) | | | | | | | 74.17 | |
Outstanding at March 31, 2020 | 202 | | | | | | | $ | 97.97 | |
(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.
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 20192020 grants:
| | | | | | | | |
| | |
Volatility | 20.9 | % |
Volatility | 22.6 | | % | |
Risk-free interest rate | 2.521.08 | | % | |
| | |
| | |
Note 17.16. Capital Stock
For the three months ended March 31, 2020 and March 31, 2019 the Company repurchased approximately 0.8 million shares of common stock for $60 million and approximately 0.5 million shares of common stock for $39 million, of common stock.respectively. Repurchases include both 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 $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. There were approximately 0.7 million shares repurchased for $50 million under this program for the three months ended March 31, 2020. For the three months ended March 31, 2019, we repurchased approximately 0.3 million shares for $25 million. For the three months ended March 31, 2018 we repurchased approximately 0.3 million shares for $25 million. There are up to $338$288 million in shares that may still be purchased under this plan as of March 31, 2019.2020.
Aside from the aforementioned repurchase program, we repurchased approximately 0.1 million shares and approximately 0.2 million shares for approximately $10 million and approximately $14 million for the three months ended March 31, 2020 and 2019, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. We repurchased approximately 0.1 million shares for $8 million for the three months ended March 31, 2018.
Note 18.17. Accumulated Other Comprehensive Loss
The following table provides the components of accumulated other comprehensive loss for the three months ended March 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Foreign Currency Translation | | Postretirement Benefit Plans | | Derivative Instruments | | Total |
Balance at January 1, 2020 | $ | (103) | | | $ | (269) | | | $ | (3) | | | $ | (375) | |
Foreign currency translation adjustment | (77) | | | — | | | — | | | (77) | |
Tax on foreign currency translation adjustment | (13) | | | — | | | — | | | (13) | |
| | | | | | | |
| | | | | | | |
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net | — | | | 4 | | | — | | | 4 | |
Income tax impact on amortization of postretirement benefit plan items | — | | | (1) | | | — | | | (1) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Unrealized loss on derivative hedge agreements | — | | | — | | | (2) | | | (2) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Reclassification of unrealized loss on foreign exchange agreements into revenue | — | | | — | | | 2 | | | 2 | |
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | — | | | — | | | 1 | | | 1 | |
| | | | | | | |
| | | | | | | |
Balance at March 31, 2020 | $ | (193) | | | $ | (266) | | | $ | (2) | | | $ | (461) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
(in millions) | Foreign Currency Translation | | Postretirement Benefit Plans | | Derivative Instruments | | Total |
Balance at January 1, 2019 | $ | (121 | ) | | $ | (214 | ) | | $ | (1 | ) | | $ | (336 | ) |
Foreign currency translation adjustment | 29 |
| | — |
| | — |
| | 29 |
|
Tax on foreign currency translation adjustment | (4 | ) | | — |
| | — |
| | (4 | ) |
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net | — |
| | 2 |
| | — |
| | 2 |
|
Income tax impact on amortization of postretirement benefit plan items | — |
| | (1 | ) | | — |
| | (1 | ) |
Unrealized loss on derivative hedge agreements | — |
| | — |
| | (9 | ) | | (9 | ) |
Income tax benefit on unrealized loss on derivative hedge agreements | — |
| | — |
| | 1 |
| | 1 |
|
Reclassification of unrealized loss on foreign exchange agreements into revenue | — |
| | — |
| | 1 |
| | 1 |
|
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | — |
| | — |
| | 1 |
| | 1 |
|
Balance at March 31, 2019 | $ | (96 | ) | | $ | (213 | ) | | $ | (7 | ) | | $ | (316 | ) |
The following table provides the components of accumulated other comprehensive loss for the three months ended March 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Foreign Currency Translation | | Postretirement Benefit Plans | | Derivative Instruments | | Total |
Balance at January 1, 2019 | $ | (121) | | | $ | (214) | | | $ | (1) | | | $ | (336) | |
| | | | | | | |
Foreign currency translation adjustment | 29 | | | — | | | — | | | 29 | |
Tax on foreign currency translation adjustment | (4) | | | — | | | — | | | (4) | |
| | | | | | | |
| | | | | | | |
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net | — | | | 2 | | | — | | | 2 | |
| | | | | | | |
| | | | | | | |
Income tax impact on amortization of postretirement benefit plan items | — | | | (1) | | | — | | | (1) | |
Unrealized loss on derivative hedge agreements | — | | | — | | | (9) | | | (9) | |
Income tax benefit on unrealized loss on derivative hedge agreements | — | | | — | | | 1 | | | 1 | |
| | | | | | | |
Reclassification of unrealized loss on derivative hedge agreements into revenue | — | | | — | | | 1 | | | 1 | |
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | — | | | — | | | 1 | | | 1 | |
| | | | | | | |
| | | | | | | |
Balance at March 31, 2019 | $ | (96) | | | $ | (213) | | | $ | (7) | | | $ | (316) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
(in millions) | Foreign Currency Translation | | Postretirement Benefit Plans | | Derivative Instruments | | Total |
Balance at January 1, 2018 | $ | (15 | ) | | $ | (198 | ) | | $ | 3 |
| | $ | (210 | ) |
Cumulative effect of change in accounting principle | (11 | ) | | (6 | ) | | — |
| | (17 | ) |
Foreign currency translation adjustment | 8 |
| | — |
| | — |
| | 8 |
|
Tax on foreign currency translation adjustment | 11 |
| | — |
| | — |
| | 11 |
|
Changes in postretirement benefit plans | — |
| | 1 |
| | — |
| | 1 |
|
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net | — |
| | 2 |
| | — |
| | 2 |
|
Income tax impact on amortization of postretirement benefit plan items | — |
| | (1 | ) | | — |
| | (1 | ) |
Reclassification of unrealized gain on derivative hedge agreements into revenue | — |
| | — |
| | (1 | ) | | (1 | ) |
Balance at March 31, 2018 | $ | (7 | ) | | $ | (202 | ) | | $ | 2 |
| | $ | (207 | ) |
Note 19.18. Commitments and Contingencies
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 ownedpreviously-owned entities). These proceedings may seek remedies relating to environmental matters, tax, intellectual property matters, acquisitions or divestitures, product liability and personal injury claims, privacy, employment, labor and pension matters, government contract issues and commercial or contractual disputes.
From time to time, claims may be asserted against Xylem alleging injury caused by any of our products resulting from asbestos exposure. We believe there are numerous legal defenses available for such claims and would defend ourselves vigorously. Pursuant to the Distribution Agreement among ITT Corporation (now ITT LLC), Exelis and Xylem, ITT Corporation (now ITT LLC) has an obligation to indemnify, defend and hold Xylem harmless for asbestos product liability matters, including settlements, judgments, and legal defense costs associated with all pending and future claims that may arise from past sales of ITT’s legacy products. We believe ITT Corporation (now ITT LLC) remains a substantial entity with sufficient financial resources to honor its obligations to us.
See Note 6, "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 $6$3 million and $7$5 million as of March 31, 20192020 and December 31, 2018,2019, respectively, for these general litigationlegal matters.
Indemnifications
As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC), Exelis Inc. and Xylem will indemnify, defend and hold harmless each of the other parties with respect to such parties’ assumed or retained liabilities under the Distribution Agreement and breaches of the Distribution Agreement or related spin agreements. The former parent’s indemnification obligations include asserted and unasserted asbestos and silica liability claims that relate to the presence or alleged presence of asbestos or silica in products manufactured, repaired or sold prior to October 31, 2011, the Distribution Date, subject to limited exceptions with respect to certain employee claims, or in the structure or material of any building or facility, subject to exceptions with respect to employee claims relating to Xylem buildings or facilities. The indemnification associated with pending and future asbestos claims does not expire. Xylem has not recorded a liability for material matters for which we expect to be indemnified by the former parent or Exelis Inc. through the Distribution Agreement and we are not aware of any claims or other circumstances that would give rise to material payments from us under such indemnifications. On May 29, 2015, Harris Inc. acquired Exelis. As the parent of Exelis, Harris Inc. is responsible for Exelis’sExelis’ indemnification obligations under the Distribution Agreement.
Guarantees
We obtain certain stand-by letters of credit, bank guarantees, and surety bonds and insurance letters of credit from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance related requirements. As of March 31, 20192020 and December 31, 2018,2019, the amount of surety bonds, bank guarantees, stand-by letters of credit bank guarantees and surety bondsinsurance letters of credit was $258$330 million and $275$340 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.United States 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 under the Distribution Agreement, 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 theour 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 $3 million and $4$3 million as of March 31, 20192020 and December 31, 2018,2019, respectively, 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
We warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and specific non-performance. The table below provides the changes in our product warranty accrual:
| | (in millions) | 2019 | | 2018 | (in millions) | 2020 | | 2019 |
Warranty accrual – January 1 | $ | 60 |
| | $ | 82 |
| Warranty accrual – January 1 | $ | 41 | | | $ | 60 | |
Net charges for product warranties in the period | 5 |
| | 7 |
| Net charges for product warranties in the period | 22 | | | 5 | |
Settlement of warranty claims | (13 | ) | | (9 | ) | Settlement of warranty claims | (7) | | | (13) | |
Foreign currency and other | — |
| | 1 |
| Foreign currency and other | (1) | | | — | |
Warranty accrual - March 31 | $ | 52 |
| | $ | 81 |
| Warranty accrual - March 31 | $ | 55 | | | $ | 52 | |
Note 20.19. Segment Information
Our business has three3 reportable segments: Water Infrastructure, Applied Water and Measurement & Control Solutions. When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics. The Water Infrastructure segment focuses on the transportation and treatment of water, offering a range of products including water, wastewater and wastewaterstorm 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.
Additionally, 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.
The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1 in the 20182019 Annual Report). The following tables contain financial information for each reportable segment: | | | Three Months Ended | | Three Months Ended | |
| March 31, | | March 31, | |
(in millions) | 2019 | | 2018 | (in millions) | 2020 | | 2019 | |
Revenue: | | | | Revenue: | | | | |
Water Infrastructure | $ | 482 |
| | $ | 480 |
| Water Infrastructure | $ | 438 | | | $ | 482 | | |
Applied Water | 379 |
| | 366 |
| Applied Water | 338 | | | 379 | | |
Measurement & Control Solutions | 376 |
| | 371 |
| Measurement & Control Solutions | 347 | | | 376 | | |
Total | $ | 1,237 |
| | $ | 1,217 |
| Total | $ | 1,123 | | | $ | 1,237 | | |
Operating Income: | | | | Operating Income: | | | | |
Water Infrastructure | $ | 51 |
| | $ | 49 |
| Water Infrastructure | $ | 39 | | | $ | 51 | | |
Applied Water | 56 |
| | 50 |
| Applied Water | 47 | | | 56 | | |
Measurement & Control Solutions | 16 |
| | 33 |
| Measurement & Control Solutions | (12) | | | 16 | | |
Corporate and other | (14 | ) | | (19 | ) | Corporate and other | (13) | | | (14) | | |
Total operating income | $ | 109 |
| | $ | 113 |
| Total operating income | $ | 61 | | | $ | 109 | | |
Interest expense | $ | 18 |
| | 21 |
| Interest expense | $ | 16 | | | 18 | | |
Other non-operating income, net | 2 |
| | 3 |
| |
Other non-operating (expense) income, net | | Other non-operating (expense) income, net | (3) | | | 2 | | |
Gain from sale of business | 1 |
| | — |
| Gain from sale of business | — | | | 1 | | |
Income before taxes | $ | 94 |
| | $ | 95 |
| Income before taxes | $ | 42 | | | $ | 94 | | |
Depreciation and Amortization: | | | | Depreciation and Amortization: | | | | |
Water Infrastructure | $ | 15 |
| | $ | 17 |
| Water Infrastructure | $ | 15 | | | $ | 15 | | |
Applied Water | 6 |
| | 5 |
| Applied Water | 6 | | | 6 | | |
Measurement & Control Solutions | 36 |
| | 37 |
| Measurement & Control Solutions | 36 | | | 36 | | |
Regional selling locations (a) | 4 |
| | 5 |
| Regional selling locations (a) | 4 | | | 4 | | |
Corporate and other | 3 |
| | 3 |
| Corporate and other | 3 | | | 3 | | |
Total | $ | 64 |
| | $ | 67 |
| Total | $ | 64 | | | $ | 64 | | |
Capital Expenditures: | | | | Capital Expenditures: | | | | |
Water Infrastructure | $ | 30 |
| | $ | 23 |
| Water Infrastructure | $ | 10 | | | $ | 30 | | |
Applied Water | 6 |
| | 9 |
| Applied Water | 9 | | | 6 | | |
Measurement & Control Solutions | 24 |
| | 24 |
| Measurement & Control Solutions | 27 | | | 24 | | |
Regional selling locations (b) | 4 |
| | 5 |
| Regional selling locations (b) | 4 | | | 4 | | |
Corporate and other | 5 |
| | — |
| Corporate and other | 1 | | | 5 | | |
Total | $ | 69 |
| | $ | 61 |
| Total | $ | 51 | | | $ | 69 | | |
(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.
| | | | | | | | | | | |
(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. |
|
| | | | |
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"). Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries.
This Report contains information that may constitute “forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” “believe,” “target,” “will,” “could,” “would,” “should” and similar expressions identify forward-looking statements. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements include any statements that are not historical in nature, including any statements about the capitalization of the Company, the Company’s restructuring and realignment plans, future strategic plans and other statements that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals. All statements that address operating or financial performance, events or developments that we expect or anticipate will occur in the future - including statements relating to orders, revenues, operating margins and earnings per share growth, and statements expressing general views about future operating results - are forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements. Many of these risks and uncertainties are currently amplified by and may continue to be amplified by, or in the future may be amplified by, the novel coronavirus (COVID-19) pandemic.
Factors that could cause results to differ materially from those anticipated include: overall economic and business conditions; uncertainty of the magnitude, duration, geographic reach and impact on the global economy of the COVID-19 pandemic; the current, and uncertain future, impact of the COVID-19 pandemic on our business, growth, projections, financial condition, operations, cash flows, and liquidity, including the impact of adverse economic conditions politicalcaused by the COVID-19 pandemic on our performance or customer markets; actual or potential other epidemics, pandemics or global health crises; geopolitical and other risks associated with our international operations, including military actions, protectionism, economic sanctions or trade barriers including tariffs and embargoes that could affect customer markets and our business, and non-compliance with laws, including foreign corrupt practice laws, data privacy, export and import laws and competition laws; potential for unexpected cancellations or delays of customer orders in our reported backlog; our exposure to fluctuations in foreign currency exchange rates; disruption, competition and pricing pressures in the markets we serve; industrial, governmental and private sector spending; the strength of housing and related markets; weather conditions; ability to retain and attract talent and key members of management; our relationship with and the performance of our supply chain including channel partners; our ability to successfully identify, complete and integrate acquisitions; our ability to borrow or to refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; changes in the value of goodwill or intangible assets; risks relating to product defects, product security, product liability and recalls; claims or investigations by governmental or regulatory bodies; securitycybersecurity attacks, breaches or other disruptions of our information technology systems;systems on which we rely; our sustainability initiatives; litigation and 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, 20182019 ("20182019 Annual Report") and with subsequent filings we make with the Securities and Exchange Commission ("SEC").
All forward-looking statements made herein are based on information currently available to the Company as of the date of this Report. The Company undertakes 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.
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 reporting periods included herein are described as ending on the last day of the calendar quarter.
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 treatmentanalysis 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 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
|
•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. We also offer smart lighting solutions that improve efficiency and public safety efforts across communities. 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 The global outbreak of the COVID-19 disease was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has created significant global volatility, uncertainty and economic disruption. The global spread of the COVID-19 pandemic has curtailed the movement of people, goods and services worldwide, including in many of the regions where we sell our products and services and conduct operations. This section summarizes the most significant impacts related to the COVID-19 pandemic that we have experienced to date, and we have included additional details as applicable throughout other sections of this report. Many of these impacts did not begin to be felt broadly across our businesses until the latter part of the first quarter of 2020. In response to the COVID-19 pandemic, Xylem deployed a COVID-19 Response Team, responsible for Xylem's Pandemic Plan, which is designed to aid in prevention, preparedness, response and recovery at our sites. Depending on the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences, we anticipate that it will become more difficult to distinguish specific aspects of our operational and financial performance that are most directly related to COVID-19 from those that are more broadly influenced by ongoing
macroeconomic, market and industry dynamics that may also be, to varying degrees, related to the COVID-19 pandemic and its consequences. Public health officials have recommended, or governments have mandated, precautions to mitigate the spread of COVID-19, including stay at home or similar measures in many of the areas in which we operate. Operationally, our production facilities located in Latin America, Europe and Asia Pacific have experienced, or continue to experience reduced production levels due to such measures. Those production facilities that experienced temporarily closures have been or will be reopened in the near term. The COVID-19 pandemic is also adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and businesses. Closures and reduced facility production levels have had short term impacts to our internal supply chain. We expect to continue to experience unpredictable interruptions at our internal and external suppliers. To date, the most significant impacts were experienced in volume reductions ranging across all segments and concentrated in Asia Pacific, particularly in China and India, and to a lesser extent, the United States and Europe. Future demand for our products and services is uncertain as the COVID-19 pandemic has also had an adverse impact on many of the customers we serve. As such, we may experience decreased or delayed demand for our products and services, as well as changes in the payment patterns of our customers. At the end of the first quarter, total backlog increased 4.8% as compared to December 31, 2019 and cancellations were materially consistent with the prior year, with no material cancellations to date. In many cases, Xylem’s products and services are considered "essential services" under various governmental mandates, and as a result we did not experience significant issues in our ability to distribute products or services, aside from customer-driven project delays. However, because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s ongoing and future impacts on our business, financial condition, results of operations, and stock price remains uncertain and difficult to predict, but we expect our results to continue to be adversely impacted beyond the quarter ending March 31, 2020. Xylem has taken measures to protect the health and safety of our employees and work with our customers to minimize potential disruptions. We have implemented a support pay program for employees impacted by COVID-19, and an essential services premium pay program for the benefit of employees whose roles are classified as an “essential service” and, as such, are required to work either onsite at a Xylem facility or in the field supporting customers during periods of mandated stay at home or similar measures. Xylem Watermark, our corporate social responsibility program, is also supporting our communities in addressing the challenges posed by this global pandemic through its partnership with Americares and UNICEF, as well as the expansion of the Partner Community Grants program and other philanthropic commitments. Many of our offices globally have transitioned to a fully remote work from home status, with no material disruption to operations, financial reporting systems, internal control over financial reporting or disclosure controls and procedures. We will continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19. We continue to assess possible implications to our business, supply chain and customers, and to take necessary actions in an effort to mitigate adverse consequences. Risk related to these items are described in further detail under Item 1A, "Risk Factors". |
| |
• | Measurement & Control Solutions primarilyserves 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 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. We also offer smart lighting solutions that improve efficiency and public safety efforts across communities. 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.
|
Executive Summary
Xylem reported revenue for the first quarter of 20192020 of $1,237$1,123 million, an increasea decrease of 1.6%9.2% compared to $1,217$1,237 million reported in the first quarter of 2018.2019. On a constant currency basis, revenue increaseddecreased by $71$95 million, or 5.8%, consisting of organic revenue growth of $76 million, or 6.2%7.7%, driven entirely by growthorganic declines across all segments and all end markets. AcquisitionWhile organic revenue decline in the first quarter was anticipated, the decline was much greater than expected as our business was impacted by the global acceleration of $5 million also contributed to the increase in revenue during the period, which was offset by a reduction in revenue related to divestitures of $10 million.COVID-19 pandemic across all segments.
We generated operating income of $109$61 million (margin of 8.8%5.4%) during the first quarter of 2019, a $4 million decrease2020, as compared to $113$109 million (margin of 9.3%8.8%) in 2018. The decrease2019. Operating income in operating income and margin included an unfavorable impactthe first quarter of 2020 benefited from increaseddecreases in restructuring and realignment costs of $4$11 million partially offset by a decrease inand special charges of $2$4 million duringas compared to the period.first quarter of 2019. Excluding the impact of these items, adjusted operating income was $70 million (adjusted margin of 6.2%) during the first quarter of 2020 as compared to $133 million (adjusted margin of 10.8%) during the first quarter of 2019 as compared to $135 million (adjusted margin of 11.1%) in 2018.2019. The decrease in adjusted operating margin was primarily due to unfavorable volume, impacted significantly by COVID-19, cost inflation, increased cost of quality, unfavorable mix and increased spending on strategic investments, lower overhead cost absorption and unfavorable mix.
investments. These negative impacts were substantiallypartially offset by cost reductions from our global procurement and productivity initiatives, favorable volume impactsincluding restructuring savings, and price realization.
Additional financial highlights for the quarter ended March 31, 20192020 include the following:
•Orders of $1,315$1,261 million, down 0.4%4.1% from $1,320$1,315 million in the prior year, up 4.0%and down 2.4% on an organic basis across all segments, heavily impacted by the COVID-19 pandemic.
•Earnings per share of $0.43, remained flat$0.21, down 51.2% when compared to the prior year ($0.52, up 2.0%0.23, down 55.8% on an adjusted basis).
Cash•Net cash flow fromused by operating activities of $83$2 million for the three months ended March 31, 2019, up 31.7%2020, down $85 million from the prior year. FreeNegative free cash flow excluding Sensus acquisition related costs, of $14$53 million, increased $11down $67 million overfrom the prior year, as higher operating cash flows were partially offset by increased spending on capital investments.year.
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management 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 items to represent non-GAAP measures 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, to be key performance indicators:
•"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 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 as applicable, restructuring and realignment costs, special charges, gains and lossesgain or loss from the sale of a businessbusinesses and tax-related special items.items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | | | | | | | | | | | |
(In millions, except for per share data) | 2020 | | | | 2019 | | | | | | | | | | |
Net income & Earnings per share | $ | 38 | | | $ | 0.21 | | | $ | 79 | | | $ | 0.43 | | | | | | | | | |
Restructuring and realignment, net of tax of $2 and $4 | 7 | | | 0.04 | | | 16 | | | 0.09 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Special charges, net of tax of $0 and $0 | 1 | | | — | | | 4 | | | 0.02 | | | | | | | | | |
Tax-related special items | (4) | | | (0.02) | | | (4) | | | (0.02) | | | | | | | | | |
Gain from sale of business, net of tax of $0 | — | | | — | | | (1) | | | — | | | | | | | | | |
Adjusted net income & Adjusted earnings per share | $ | 42 | | | $ | 0.23 | | | $ | 94 | | | $ | 0.52 | | | | | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(In millions, except for per share data) | 2019 | | 2018 |
Net income attributable to Xylem | $ | 79 |
| | $ | 79 |
|
Earnings per share - diluted | $ | 0.43 |
| | $ | 0.43 |
|
Restructuring and realignment, net of tax of $4 and $4 | 16 |
| | 12 |
|
Special charges, net of tax of $0 and $1 | 4 |
| | 5 |
|
Tax-related special items | (4 | ) | | (3 | ) |
Gain from sale of business, net of tax of $0 | (1 | ) | | — |
|
Adjusted net income | $ | 94 |
| | $ | 93 |
|
Adjusted earnings per share | $ | 0.52 |
| | $ | 0.51 |
|
•"adjusted operating expenses" defined as operating expenses 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.
•“realignment costs” defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs.
"Sensus acquisition related costs" defined as costs incurred by the Company associated with the acquisition of Sensus that are being reported within operating income. These costs include integration costs, acquisition costs, costs related to the recognition of the backlog intangible asset amortization recorded in purchase accounting.
•“special charges" defined as costs incurred by the Company, such as acquisition and integration related costs, not included in "Sensus Acquisition Related Costs", non-cash impairment charges and other special non-operating items.items, such as pension adjustments.
•"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, significant reserves for cash repatriation, excess tax benefits/losses and other discrete tax adjustments.
•"free cash flow" defined as net cash from operating activities, as reported in the Statement of Cash Flow,Flows, less capital expenditures as well as adjustments for other significant items that impact current results which management believes are not related to our ongoing operations and performance.expenditures. Our definition of free"free cash flowflow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
(In millions) | 2020 | | 2019 |
Net cash (used) provided by operating activities | $ | (2) | | | $ | 83 | |
Capital expenditures | (51) | | | (69) | |
Free cash flow | $ | (53) | | | $ | 14 | |
Net cash used by investing activities | $ | (48) | | | $ | (77) | |
Net cash provided (used) by financing activities | $ | 87 | | | $ | (29) | |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(In millions) | 2019 | | 2018 |
Net cash provided by operating activities | $ | 83 |
| | $ | 63 |
|
Capital expenditures | (69 | ) | | (61 | ) |
Free cash flow | $ | 14 |
| | $ | 2 |
|
Cash paid for Sensus acquisition related costs | $ | — |
| | $ | (1 | ) |
Free cash flow, excluding Sensus acquisition related costs | $ | 14 |
| | $ | 3 |
|
•“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude share-based compensation, restructuring and realignment costs, special charges and gain or loss from sale of businesses.
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
(in millions) | 2020 | | 2019 | | | | |
Net Income | $ | 38 | | | $ | 79 | | | | | |
Income tax expense | 4 | | | 15 | | | | | |
Interest expense (income), net | 14 | | | 17 | | | | | |
Depreciation | 29 | | | 29 | | | | | |
Amortization | 35 | | | 35 | | | | | |
EBITDA | $ | 120 | | | $ | 175 | | | | | |
Share-based compensation | $ | 8 | | | $ | 9 | | | | | |
Restructuring and realignment | 9 | | | 20 | | | | | |
| | | | | | | |
Special charges | 1 | | | 4 | | | | | |
Gain from sale of business | — | | | (1) | | | | | |
Adjusted EBITDA | $ | 138 | | | $ | 207 | | | | | |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2019 | | 2018 |
Net Income | $ | 79 |
| | $ | 79 |
|
Income tax expense | 15 |
| | 16 |
|
Interest expense (income), net | 17 |
| | 20 |
|
Depreciation | 29 |
| | 29 |
|
Amortization | 35 |
| | 38 |
|
EBITDA | $ | 175 |
| | $ | 182 |
|
Share-based compensation | $ | 9 |
| | $ | 9 |
|
Restructuring and realignment | 20 |
| | 16 |
|
Special charges | 4 |
| | 6 |
|
Gain from sale of business | (1 | ) | | — |
|
Adjusted EBITDA | $ | 207 |
| | $ | 213 |
|
20192020 Outlook
We anticipatewithdrew 2020 guidance on March 31, 2020 due to uncertainties caused by COVID-19. We are not prepared to reinstate full-year guidance, but are providing total revenue growth in the range of 2% to 4% in 2019, with organic revenue growth anticipatedoutlook for the second quarter to be indown 20% to 30% driven by the rangeimpact of 4% to 6%. COVID-19.
The following is a summary of our organicoutlook on each of our end markets:
•Utilities revenue outlookdecreased by end market.
Utilities increased approximately 6%5% organically in the first quarter driven by strengthweakness in the United States, and Asia Pacific and the Middle East, partially offset by weaknessstrength in western Europe and Canada. For 2019,Europe. During 2020 we expect organic growthoperational spending to continue to be resilient and are seeing some areas of opportunity driven by operational pressures facing utilities. Nevertheless, utilities will be facing workforce challenges from impacts of COVID-19 on the way in which they need to operate . We also expect delays in capital projects being awarded and a potential push back in execution of current projects, but anticipate capex spending to hold up in the mid-single-digit range drivenmid-to-longer term given the multi-year capex funding mechanisms utilities use and the governmental commitments to continued investment we're seeing in a number of our markets.
•Industrial revenue decreased by healthy water and wastewater spending in the U.S. and smart meter and infrastructure analytics growth opportunities. We also anticipate stability in Europe and that a healthy infrastructure investment focus in the emerging markets will continue in China and India.
Industrial increased by roughly 4%approximately 10% organically in the first quarter driven by strengthweakness in the United States LatinNorth America, Asia Pacific and western Europe. For 2019,As 2020 progresses we expect organic growth inindustrial facilities to limit access to sales teams and channel partners, causing slower orders and activity while non-essential work is deferred. Exposure to the low to mid-single-digits driven by continued solid industrial conditions in the U.S. as thedown-stream impacts of a soft oil and gas markets beginmarket will have an effect on both our dewatering and applied water businesses potentially leading to stabilize after a strong 2018. We alsosignificant demand declines. Additionally, we anticipate mixed emerging market conditions with strength in India and Latin America, offset by softness in the Middle Eastmarine and slowing growth in China.beverage dispensing verticals driven by social distancing and mandatory lockdown constraints.
•In the commercial markets, organic growthrevenue decline was approximately 12%11% in the first quarter driven by strengthweakness in the emerging markets and the United States. For 2019,During the short-term we expect organic growthconstruction site shut-downs to lead to project delays while backlog remains robust and underlying quote activity remains healthy. Although we have not seen a slowdown in the mid-single-digit range as the overall market will begin to moderate after two years of strong performance. Organic growthproject pipelines at this point in time, this is an area that we will be driven by continued strength inmonitoring closely given likely recessionary effects.
•In the U.S., especially during the first half of the year, and the emerging markets led by initiatives in the China and India building markets.
In residential markets, organic growthrevenue decline was approximately 4%14% in the first quarter driven by strengthweakness in western Europe, the United States and Asia Pacific, partially offset by weakness in the Middle East and Africa. For 2019, we expect low-single-digit growthPacific. This market is primarily driven by continued competitionreplacement revenue serviced through distribution network. As such, we anticipate only emergency replacement activity as a result of social distancing requirements and expect industry softness to continue while lockdowns are in place.
As result of uncertainties caused by the U.S. replacement market asCOVID-19 pandemic and its potential impacts on future demand, we are reevaluating aspects of our spending, including capital expenditures, strategic investments and dividends. We have identified approximately $100 million in net reductions of planned spending on a combination of operational and capital expenditures for the housing market begins to stabilize. We also anticipate stability in Europe and modest growth opportunities in China and other Asia Pacific countries for secondary clean water sources.
remainder of 2020. We will also continue to strategically execute restructuring and realignment actions primarily to reposition our European and North American businessesbusiness in an effort to optimize our cost structure and improve our operational efficiency and effectiveness. During 2019, we expect to incur between $60 million and $70 million inWe are still assessing the amount of any additional restructuring and realignment costs. We expect to realize approximately $7 million of incremental net savings in 2019 from actions initiated in 2018, and an additional $16 million of net savings from our 2019 actions.
We plan to continue to take actions and focus spending in 2019 on actions that allow us to make progress on our top strategic priorities. The priority of accelerating profitable growth encompasses our initiatives to drive commercial excellence, grow in emerging markets and strengthen innovation and technology through creation of new centers of excellence, a streamlined approach to product development and strategic acquisitions. The priority of driving continuous improvement is an area where we will continue to work to create new opportunities to unlock savings by eliminating waste and increasing efficiencies, which is supported by efforts to expand and further deepen our talent pool. We plan to continue to deploy capital in smart, disciplined ways to develop and acquire solutions to address our customers’ challenges. Finally, we continue to work to improve cash performance and generate capital to return to our shareholders.
may incurred during the year.
| | | Three Months Ended | | Three Months Ended | |
| March 31, | | March 31, | |
(In millions) | 2019 | | 2018 | | Change | (In millions) | 2020 | | 2019 | | Change | |
Revenue | $ | 1,237 |
| | $ | 1,217 |
| | 1.6 |
| % | Revenue | $ | 1,123 | | | $ | 1,237 | | | (9.2) | | % | |
Gross profit | 474 |
| | 460 |
| | 3.0 |
| % | Gross profit | 409 | | | 474 | | | (13.7) | | % | |
Gross margin | 38.3 | % | | 37.8 | % | | 50 |
| bp | Gross margin | 36.4 | % | | 38.3 | % | | (190) | | bp | |
| Total operating expenses | 365 |
| | 347 |
| | 5.2 |
| % | Total operating expenses | 348 | | | 365 | | | (4.7) | | % | |
Expense to revenue ratio | 29.5 | % | | 28.5 | % | | 100 |
| bp | Expense to revenue ratio | 31.0 | % | | 29.5 | % | | 150 | | bp | |
Restructuring and realignment costs | 20 |
| | 16 |
| | 25.0 |
| % | Restructuring and realignment costs | 9 | | | 20 | | | (55.0) | | % | |
| Special charges | 4 |
| | 6 |
| | (33.3 | ) | % | Special charges | — | | | 4 | | | NM | | | |
Adjusted operating expenses | 341 |
| | 325 |
| | 4.9 |
| % | Adjusted operating expenses | 339 | | | 341 | | | (0.6) | | % | |
Adjusted operating expenses to revenue ratio | 27.6 | % | | 26.7 | % | | 90 |
| bp | Adjusted operating expenses to revenue ratio | 30.2 | % | | 27.6 | % | | 260 | | bp | |
Operating income | 109 |
| | 113 |
| | (3.5 | ) | % | Operating income | 61 | | | 109 | | | (44.0) | | % | |
Operating margin | 8.8 | % | | 9.3 | % | | (50 | ) | bp | Operating margin | 5.4 | % | | 8.8 | % | | (340) | | bp | |
Interest and other non-operating expense, net | 16 |
| | 18 |
| | (11.1 | ) | % | Interest and other non-operating expense, net | 19 | | | 16 | | | 18.8 | | % | |
Gain from sale of business | 1 |
| | — |
| | NM |
| % | Gain from sale of business | — | | | 1 | | | NM | | | |
Income tax expense | 15 |
| | 16 |
| | (6.3 | ) | % | Income tax expense | 4 | | | 15 | | | (73.3) | | % | |
Tax rate | 16.6 | % | | 17.1 | % | | (50 | ) | bp | Tax rate | 10.0 | % | | 16.6 | % | | (660) | | bp | |
Net income | $ | 79 |
| | $ | 79 |
| | — |
| % | Net income | $ | 38 | | | $ | 79 | | | (51.9) | | % | |
NM - Not meaningful percentage change
Revenue
Revenue generated during the three months ended March 31, 20192020 was $1,237$1,123 million, reflecting an increasea decrease of $20$114 million, or 1.6%9.2%, compared to the same prior year period. On a constant currency basis, revenue grew 5.8%declined 7.7% for the three months ended March 31, 2019.2020. The increasedecrease at constant currency consisted primarilyentirely of an increasea decline in organic revenue of $76$95 million reflecting strong organic growth in the United Statessignificantly lower demand across all major geographic regions and the emerging markets, particularly in China, India and Latin America. This growth was partially offset by declines in Canada and western Europe. Acquisition revenue of $5 million also contributedsegments largely due to the increase in revenue, offset by revenueCOVID-19 related to divestitures of $10 million in the period.impacts.
The following tables illustratetable illustrates the impact from organic growth,declines, recent acquisitions and divestitures, and foreign currency translation in relation to revenue during the three months ended March 31, 2019:2020: | | | | Water Infrastructure | | | Applied Water | | | Measurement & Control Solutions | | | Total Xylem | |
(In millions) | | (In millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | |
2019 Revenue | | 2019 Revenue | $ | 482 | | | | $ | 379 | | | | $ | 376 | | | | $ | 1,237 | | | |
Organic Impact | | Organic Impact | (32) | | (6.6) | % | | (38) | | (10.0) | % | | (25) | | (6.6) | % | | (95) | | (7.7) | % | |
Acquisitions/(Divestitures) | | Acquisitions/(Divestitures) | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | |
Constant Currency | | Constant Currency | (32) | | (6.6) | % | | (38) | | (10.0) | % | | (25) | | (6.6) | % | | (95) | | (7.7) | % | |
Foreign currency translation (a) | | Foreign currency translation (a) | (12) | | (2.5) | % | | (3) | | (0.8) | % | | (4) | | (1.1) | % | | (19) | | (1.5) | % | |
Total change in revenue | | Total change in revenue | (44) | | (9.1) | % | | (41) | | (10.8) | % | | (29) | | (7.7) | % | | (114) | | (9.2) | % | |
2020 Revenue | | 2020 Revenue | $ | 438 | | | $ | 338 | | | $ | 347 | | | $ | 1,123 | | | |
| | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem | |
(In millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | |
2018 Revenue | $ | 480 |
| | | $ | 366 |
| | | $ | 371 |
| | | $ | 1,217 |
| | |
Organic growth | 32 |
| 6.7 | % | | 25 |
| 6.8 | % | | 19 |
| 5.1 | % | | 76 |
| 6.2 | % | |
Acquisitions/Divestitures | — |
| — | % | | — |
| — | % | | (5 | ) | (1.3 | )% | | (5 | ) | (0.4 | )% | |
Constant currency | 32 |
| 6.7 | % | | 25 |
| 6.8 | % | | 14 |
| 3.8 | % | | 71 |
| 5.8 | % | |
Foreign currency translation (a) | (30 | ) | (6.3 | )% | | (12 | ) | (3.3 | )% | | (9 | ) | (2.4 | )% | | (51 | ) | (4.2 | )% | |
Total change in revenue | 2 |
| 0.4 | % | | 13 |
| 3.6 | % | | 5 |
| 1.3 | % | | 20 |
| 1.6 | % | |
2019 Revenue | $ | 482 |
| | | $ | 379 |
| | | $ | 376 |
| | | $ | 1,237 |
| | |
|
(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 Argentine Peso,Australian Dollar, the British Pound,Norwegian Krone, the Swedish Krona and the Chinese Yuan and the Australian Dollar.Yuan.
Water Infrastructure
Water Infrastructure revenue increased $2decreased $44 million, or 0.4%9.1%, for the first quarter of 2019 (6.7% increase at constant currency) compared to 2018. Revenue was negatively impacted by $30 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $32 million. Organic growth for the quarter was driven by strength in the utility end market, particularly in the United States where we benefited from healthy order intake and strong market conditions across all applications. Organic growth for the quarter was also driven by strength in the industrial end market, particularly in the emerging markets, where rental business grew in Latin America and Asia Pacific during the year. Price realization also contributed to the organic growth during the quarter.
From an application perspective, organic revenue growth for the first quarter was driven primarily by our transport application. The transport application had strong revenue growth in North America, Latin America and Asia Pacific driven by strong project deliveries and price realization during the quarter as well as continued growth in the global dewatering rental business, coming from strength in mining and construction. Organic revenue from our treatment application also contributed to the segment's growth with filtration project deliveries in the United States where we benefited from healthy order intake coming into the year. This organic growth was partially offset by declines in western Europe and Canada, primarily due to large utility treatment project deliveries in the prior year.
Applied Water
Applied Water revenue increased $13 million, or 3.6%, for the first quarter of 2019 (6.8% increase2020 (6.6% decrease at constant currency) as compared to the prior year. Revenue was negatively impacted by $12 million of foreign currency translation, forwith the quarter. Revenue growthchange at constant currency consistedcoming entirely from an organic decline of $32 million. Organic weakness for the quarter was primarily driven by the industrial end market, particularly in North America, due to continued soft market conditions in oil and gas, and in Asia Pacific, where organic growth of $25 million, or 6.8%, which was heavily impacted by the COVID-19 pandemic. Organic revenue decline for the quarter was also driven by strengthweakness in the commercialutility end market, particularly in the United States, due to softness in construction and the lapping of projects in the prior year, as well as modest growthin India due to the timing of project deployments in the industrialprior year. We estimate that almost half of the organic revenue declines in the segment were impacted by the COVID-19 pandemic, particularly in China and residential end markets. India.
From an application perspective, the organic revenue growth indecline during the first quarter of 2019 was ledprimarily driven by growthour transport application where market conditions continued to soften in North America in the commercial building servicesdewatering applications, with oil and gas, construction and mining all down in the quarter. Asia Pacific also contributed to the organic revenue decline within the transport application, primarily driven by strong price realizationthe timing of large utility project deployments in India and the negative impact of the COVID-19 pandemic throughout the region. The treatment application contributed a more modest organic revenue decline during the quarter and healthy industry demand leading todriven by the timing of filtration project deliveries in the United States and continued benefits of product localization in China. The industrial water applicationStates.
Applied Water
Applied Water revenue also grew organically, primarily driven by market growth in western Europe coupled with customers stocking orders due to political concerns and strength in the United States. Organic growth in residential building services came primarily from strong wastewater business and price realization in the United States.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $5decreased $41 million, or 1.3%10.8%, for the first quarter of 2019 (3.8%2020 (10.0% decrease at constant currency) as compared to the prior year. Revenue was negatively impacted by $9$3 million of foreign currency translation for quarter. Revenue growththe quarter, with the change at constant currency was made upcoming entirely from an organic decline of organic revenue growth of $19 million, or 5.1%, and reduced by $5 million from the net acquisition and divestiture activity.$38 million. Organic revenue
growthweakness for the quarter was driven by strengthdeclines across all end markets and in all major geographic regions. We estimate that approximately two thirds of the organic revenue declines in the segment were driven by impacts from the COVID-19 pandemic, particularly in China and the United States where lockdown activities caused a slow down in the markets served.
From an application perspective, the organic revenue decline in the first quarter was led by weakness in the building services application in the commercial markets which was driven by the impact of the COVID-19 pandemic within the emerging markets, particularly China, and in the United States where the timing of shipments was impacted by the economic slowdown. The industrial water application also experienced a decline in organic revenue during the quarter driven by industry softening, which has been further impacted by the COVID-19 pandemic, in the emerging markets, western Europe and the United States. Weakness in the building services application in the residential market also contributed to the organic revenue decline during the quarter, primarily in western Europe, the United States and Asia Pacific.
Measurement & Control Solutions
Measurement & Control Solutions revenue decreased $29 million, or 7.7%, for the first quarter of 2020 (6.6% at constant currency) as compared to the prior year. Revenue was negatively impacted by $4 million of foreign currency translation for the quarter, with the change at constant currency coming entirely from an organic decline of $25 million. Organic weakness for the quarter was driven by a decline in the utility end market, primarily in the United States, Asia Pacific and India,the Middle East, partially offset by declinesorganic growth in Europe during the United Kingdom and Canada. quarter.
From an application perspective, the organic revenue fromdecline for the segment was driven by the water application, contributed very strong organic growth for the segment, withwhere we lapped strong project deployments in the United States and India. The strongIndia during the first quarter of the prior year, and the COVID-19 pandemic which negatively impacted organic growth in the Middle East. Organic revenue declines within the water wasapplication were partially offset by organic growth in Europe during the quarter, primarily driven by software sales. The test application also experienced organic revenue decline during the quarter, primarily driven by declines in the energy application, which is a combination of our electricwestern Europe, China and gas offerings,North America, largely due to impacts from the lapping of large project deployments in the prior year.COVID-19 pandemic, including component shortages from China. The software as a service ("SaaS") and other application alsoenergy applications had a modest declinedeclines in revenue while the test application remained relatively flat as compared to the prior year.year, primarily in the United States as we lapped a few large project deployments.
Orders / Backlog
An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the first quarter of 2020 were $1,261 million, a decrease of $54 million, or 4.1%, over the prior year (2.4% decrease at constant currency). Order intake was negatively impacted by $23 million of foreign currency translation for the quarter, with the change at constant currency coming entirely from an organic decline of $31 million. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem |
(in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change |
2018 Orders | $ | 554 |
| | | $ | 384 |
| | | $ | 382 |
| | | $ | 1,320 |
| |
Organic Growth | 13 |
| 2.3 | % | | 22 |
| 5.7 | % | | 18 |
| 4.7 | % | | 53 |
| 4.0 | % |
Acquisitions/(Divestitures) | — |
| — | % | | — |
| — | % | | (2 | ) | (0.5 | )% | | (2 | ) | (0.2 | )% |
Constant Currency | 13 |
| 2.3 | % | | 22 |
| 5.7 | % | | 16 |
| 4.2 | % | | 51 |
| 3.9 | % |
Foreign currency translation (a) | (35 | ) | (6.3 | )% | | (12 | ) | (3.1 | )% | | (9 | ) | (2.4 | )% | | (56 | ) | (4.2 | )% |
Total change in orders | (22 | ) | (4.0 | )% | | 10 |
| 2.6 | % | | 7 |
| 1.8 | % | | (5 | ) | (0.4 | )% |
2019 Orders | $ | 532 |
| | | $ | 394 |
| | | $ | 389 |
| | | $ | 1,315 |
| |
The following table illustrates the impact from organic declines, recent acquisitions and divestitures, and foreign currency translation in relation to orders during the three months ended March 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Water Infrastructure | | | Applied Water | | | Measurement & Control Solutions | | | Total Xylem | |
(in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change |
2019 Orders | $ | 532 | | | | $ | 394 | | | | $ | 389 | | | | $ | 1,315 | | |
Organic Impact | (3) | | (0.6) | % | | (18) | | (4.6) | % | | (10) | | (2.6) | % | | (31) | | (2.4) | % |
Acquisitions/(Divestitures) | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % |
Constant Currency | (3) | | (0.6) | % | | (18) | | (4.6) | % | | (10) | | (2.6) | % | | (31) | | (2.4) | % |
Foreign currency translation (a) | (15) | | (2.8) | % | | (4) | | (1.0) | % | | (4) | | (1.0) | % | | (23) | | (1.7) | % |
Total change in orders | (18) | | (3.4) | % | | (22) | | (5.6) | % | | (14) | | (3.6) | % | | (54) | | (4.1) | % |
2020 Orders | $ | 514 | | | | $ | 372 | | | | $ | 375 | | | | $ | 1,261 | | |
(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 Argentine Peso,Australian Dollar, the British Pound,Norwegian Krone, the Swedish Krona and the Chinese Yuan and the Australian Dollar.Yuan.
Orders received during the first quarter of 2019 were $1,315 million, a decrease of $5 million, or 0.4%, over the prior year (3.9% increase at constant currency). The order growth was negatively impacted by $56 million of foreign currency translation for the three months ended March 31, 2019. The order growth at constant currency consisted of organic order growth of $53 million, or 4.0%, partially offset by the net impact from acquisitions and divestitures.Water Infrastructure
Water Infrastructure segment orders decreased $22$18 million, or 4.0%3.4%, to $532$514 million (2.3% increase(0.6% decrease at constant currency) for the first quarter of 2020 as compared to the prior year. Order growth forintake during the segmentquarter was negatively impacted by $35$15 million of foreign currency translation, with the change at constant currency coming from an organic decline in orders in the transport application, which was largely offset by organic order growth in the treatment application. Transport orders were primarily impacted by reduced order intake in North America as compared to the prior year where we had a couple of large project orders, as well as market weakness in the dewatering transport applications in the United States and Europe. The treatment application saw organic order growth in the quarter, primarily driven by strong order intake in Europe, North America and Latin America during the quarter, which was partially offset by a reduction of orders in India. We believe that substantially all of the organic order decline during the quarter was due to COVID-19 impacts, partially offset by organic order growth in the treatment application.
Applied Water
Applied Water segment orders decreased $22 million, or 5.6%, to $372 million (4.6% decrease at constant currency) for the first quarter.quarter of 2020 as compared to the prior year. Order intake during the quarter was negatively impacted by $4 million of foreign currency translation. The order increasedecrease on a constant currency basis was primarily driven by organic weakness in the United States, where a decrease in industrial order intake was partially offset by commercial order growth during the quarter, and in Asia Pacific, which was significantly impacted by the COVID-19 pandemic during the quarter. We believe that substantially all of the organic order decline during the quarter was due to COVID-19 impacts.
Measurement & Control Solutions
Measurement & Control Solutions segment orders decreased $14 million, or 3.6%, to $375 million (2.6% decrease at constant currency) for the first quarter of 2020 as compared to the prior year. Order intake during the quarter was negatively impacted by $4 million of foreign currency translation. The order decrease on a constant currency basis was driven by an organic order growthdecline in the transport application. Transport organic order growth was primarily driven by strong order intake in North America and Europe, as well as dewatering rental order strength in Latin America. Organic orders for the treatmentSaaS application declined during the quarter, primarily driven by project timing in China and North America as the first quarter of the prior year had very strong project order growth.
Applied Water segment orders increased $10 million, or 2.6%, to $394 million (5.7% increase at constant currency) for the first quarter of 2019 as compared to the prior year. Order growth for the quarterwhich was negatively impacted by $12 millionthe lapping of foreign currency translation. The order increase on a constant currency basis was driven by strong industrial and commercial order intake in the United States, China and Europe, which were partially offset by a reduction of orders in the Middle East.
Measurement & Control Solutions segment orders increased $7 million, or 1.8%, to $389 million (4.2% increase at constant currency) for the first quarter of 2019 as compared to the prior year. Order growth in the quarter was negatively impacted by $9 million of foreign currency translation. The order increase at constant currency included organic order growth of $18 million, or 4.7%, partially offset by the net impact from acquisitions and divestitures. Organic order growth was driven by large project deployment orders in North America and India forduring the prior year. The water application contributed a more modest decline in organic orders during the quarter as well as SaaS and other, and to a lesser extent, energy applicationssignificant prior year project
deployments within the AIA platform were largely offset by water metrology orders in North America. OrganicThese order growth wasdeclines were partially offset by a decline in orders in western Europeorganic growth in the water and SaaS and other applications during the period. Organic orders forquarter in the test application, primarily in Europe, and in the energy application in North America. We believe that substantially all of the organic order decline during the quarter remained relatively consistent withfor the prior year.segment was due to COVID-19 impacts.
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 can occur from time to time. Total backlog was $1,833$1,887 million at March 31, 2019,2020, an increase of $98$54 million or 5.6%2.9%, as compared to March 31, 20182019 backlog of $1,735$1,833 million, and an increase of $144$86 million or 8.5%4.8%, as compared to December 31, 20182019 backlog of $1,689$1,801 million. We anticipate that approximately 57%56% of the backlog at March 31, 20192020 will be recognized as revenue in the remainder of 2019.2020. Cancellations in the quarter were materially consistent with the prior year.
Gross Margin
Gross margin as a percentage of revenue increased 50decreased 190 basis points to 38.3%36.4% for the three months ended March 31, 20192020 as compared to 37.8%38.3% for the comparative 20182019 period. The gross margin increasedecrease for the quarter was primarily driven by unfavorable volume, impacted by COVID-19, cost inflation, increased cost of quality due to a product warranty issue in our Sensus business and unfavorable mix, which were partially offset by cost reductions from global procurement and productivity improvement initiatives and price realization, which were partially offset by the negative impact of cost inflation and lower overhead cost absorption.initiatives.
Operating Expenses
The following table presents operating expenses for the three months ended March 31, 20192020 and 2018:2019: | | | Three Months Ended | | Three Months Ended | |
| March 31, | | March 31, | |
(In millions) | 2019 | | 2018 | | Change | (In millions) | 2020 | | 2019 | | Change | |
Selling, general and administrative expenses ("SG&A") | $ | 303 |
| | $ | 296 |
| | 2.4 |
| % | Selling, general and administrative expenses ("SG&A") | $ | 297 | | | $ | 303 | | | (2.0) | | % | |
SG&A as a % of revenue | 24.5 | % | | 24.3 | % | | 20 |
| bp | SG&A as a % of revenue | 26.4 | % | | 24.5 | % | | 190 | | bp | |
Research and development expenses ("R&D") | 51 |
| | 41 |
| | 24.4 |
| % | Research and development expenses ("R&D") | 49 | | | 51 | | | (3.9) | | % | |
R&D as a % of revenue | 4.1 | % | | 3.4 | % | | 70 |
| bp | R&D as a % of revenue | 4.4 | % | | 4.1 | % | | 30 | | bp | |
Restructuring and asset impairment charges | 11 |
| | 10 |
| | 10.0 |
| % | Restructuring and asset impairment charges | 2 | | | 11 | | | (81.8) | | % | |
| Operating expenses | $ | 365 |
| | $ | 347 |
| | 5.2 |
| % | Operating expenses | $ | 348 | | | $ | 365 | | | (4.7) | | % | |
Expense to revenue ratio | 29.5 | % | | 28.5 | % | | 100 |
| bp | Expense to revenue ratio | 31.0 | % | | 29.5 | % | | 150 | | bp | |
Selling, General and Administrative ("SG&A") Expenses
SG&A increasedexpenses decreased by $7$6 million to $297 million, or 26.4% of revenue, in the first quarter of 2020, as compared to $303 million, or 24.5% of revenue, in the comparable 2019 period. The increase in SG&A as a percent of revenue for the quarter was primarily driven by the drop in revenue, which was significantly impacted by the COVID-19 pandemic, as well as in cost inflation and additional investment in strategic growth initiatives, which were partially offset by cost reductions from global procurement and productivity improvement initiatives, including restructuring savings.
Research and Development ("R&D") Expenses
R&D expense was $49 million, or 4.4% of revenue, in the first quarter of 2019,2020, as compared to $296$51 million, or 24.3%4.1% of revenue, in the comparable 2018 period.period of 2019. The slight increase in SG&AR&D as a percent of revenue for the period was primarily driven by cost inflationthe drop in revenue, which was significantly impacted by the COVID-19 pandemic.
Restructuring and additional spending on strategic initiatives, which were partially offset by favorable volume impacts.Asset Impairment Charges
Research and Development ("R&D") ExpensesRestructuring
R&D spending was $51 million or 4.1% of revenue in the first quarter of 2019 as compared to $41 million or 3.4% of revenue in the comparable period of 2018. Additionally, we capitalized R&D on external sale software of $17 million forDuring the three months ended March 31, 20192020, we recognized restructuring charges of $2 million. We incurred
these charges primarily as compareda continuation of our efforts to $20 million inreposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the prior year period. Our overall increased spending on R&D is driven by development needs to drive product growth.
Restructuring Chargesreduction of headcount and Asset Impairment
Restructuringconsolidation of facilities within our Water Infrastructure segment.
During the three months ended March 31, 2019, we recognized restructuring charges of $8 million. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Measurement & Control Solutions and Water Infrastructure segments. Included in the charges recorded during the three months ended March 31, 2019 were $2 million related to actions commenced in prior years.
During the three months ended March 31, 2018, we recognized restructuring charges of $10 million. We incurred these charges related to actions taken in 2018 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 and consolidation of facilities within our Measurement & Control Solutions and Water Infrastructure segments, as well as headcount reductions within our Applied Water segment. Included in the charges recorded during
The following is a roll-forward for the three months ended March 31, 2018 were2020 and 2019 of employee position eliminations associated with restructuring activities:
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
Planned reductions - January 1 | | 196 | | | 69 | |
Additional planned reductions | | 50 | | | 158 | |
Actual reductions and reversals | | (60) | | | (134) | |
Planned reductions - March 31 | | 186 | | | 93 | |
$2 million related to actions commenced in prior years.
The following table presents expected restructuring spend for actions commenced as of March 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | | | Total |
Actions Commenced in 2020: | | | | | | | | | | |
Total expected costs | | $ | 1 | | | $ | — | | | $ | — | | | | | $ | 1 | |
Costs incurred during Q1 2020 | | 1 | | | — | | | — | | | | | 1 | |
Total expected costs remaining | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | |
| | | | | | | | | | |
Actions Commenced in 2019: | | | | | | | | | | |
Total expected costs | | $ | 20 | | | | $ | 5 | | | | $ | 27 | | | | | | $ | 52 | |
Costs incurred during 2019 | | 18 | | | | 5 | | | | 27 | | | | | | 50 | |
Costs incurred during Q1 2020 | | 1 | | | | — | | | | — | | | | | | 1 | |
| | | | | | | | | | |
Total expected costs remaining | | $ | 1 | | | $ | — | | | $ | — | | | | | $ | 1 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Actions Commenced in 2017: | | | | | | | | | | |
Total expected costs | | $ | 12 | | | $ | 7 | | | $ | 4 | | | | | $ | 23 | |
Costs incurred during 2017 | | 5 | | | 4 | | | 2 | | | | | 11 | |
Costs incurred during 2018 | | 2 | | | 1 | | | 1 | | | | | 4 | |
Costs incurred during 2019 | | 1 | | | — | | | 1 | | | | | 2 | |
| | | | | | | | | | |
Costs incurred during Q1 2020 | | — | | | — | | | — | | | | | — | |
Total expected costs remaining | | $ | 4 | | | $ | 2 | | | $ | — | | | | | $ | 6 | |
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Corporate | | Total |
Actions Commenced in 2019: | | | | | | | | | | |
Total expected costs | | $ | 5 |
|
| $ | — |
|
| $ | 6 |
|
| $ | — |
| | $ | 11 |
|
Costs incurred during Q1 2019 | | 3 |
|
| — |
|
| 3 |
|
| — |
| | 6 |
|
Total expected costs remaining | | $ | 2 |
|
| $ | — |
|
| $ | 3 |
|
| $ | — |
|
| $ | 5 |
|
| | | | | | | | | | |
Actions Commenced in 2018: | | | | | | | | | | |
Total expected costs | | $ | 9 |
|
| $ | 1 |
|
| $ | 7 |
|
| $ | — |
| | $ | 17 |
|
Costs incurred during 2018 | | 7 |
|
| 1 |
|
| 7 |
|
| — |
| | 15 |
|
Costs incurred during Q1 2019 | | 1 |
|
| — |
|
| — |
|
| — |
| | 1 |
|
Total expected costs remaining | | $ | 1 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 1 |
|
| | | | | | | | | | |
Actions Commenced in 2017: | | | | | | | | | | |
Total expected costs | | $ | 16 |
| | $ | 8 |
| | $ | 4 |
| | $ | — |
| | $ | 28 |
|
Costs incurred during 2017 | | 5 |
| | 4 |
| | 2 |
| | — |
| | 11 |
|
Costs incurred during 2018 | | 2 |
| | 1 |
| | 1 |
| | — |
| | 4 |
|
Costs incurred during Q1 2019 | | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total expected costs remaining | | $ | 9 |
|
| $ | 3 |
|
| $ | — |
|
| $ | — |
|
| $ | 12 |
|
The Water Infrastructure actions commenced in 2020 consist primarily of severance charges and are substantially complete. The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2019 consist primarily of severance charges and are expected to continue through the end of 2019.charges. The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2018 consist primarily of severance chargesare complete and the Water Infrastructure actions are expected to continue through the thirdfourth quarter of 2019.2020. The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2017 consist primarily of severance chargescharges. The Measurement & Control Solutions actions are complete and the Water Infrastructure and Applied Water actions are expected to continue through 2021.
Due to the fourth quarterimpact of the COVID-19 pandemic, we are reevaluating the restructuring actions planned for 2020.
We currently expect to incur between $35 million and $45 million in restructuring costs for the full year. Included in these costs are costs to implement our Global Business Services platform, which will enable us to simplify, standardize and centralize many of our transactional processes. As a result of all of the actions taken and expected to be taken in 2019, we anticipate approximately $15 million of total net savings to be realized during 2019.
Asset Impairment
During the first quarter of 2019 we determined that certain assets within our Measurement and& Control Solutions segment, including a customer relationship,relationships, were impaired. Accordingly we recognized an impairment chargecharges of $3 million. Refer to Note 10,9, "Goodwill and Other Intangible Assets," for additional information.
Operating Income
Operating income forduring the first quarter of 20192020 was $109$61 million, reflecting a decrease of 3.5%44.0% compared to $113$109 million in the first quarter of 2018.2019. Operating margin was 5.4% for 2020 versus 8.8% for 2019, versus 9.3% for 2018, a decrease of 50340 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of $11 million and special charges of $4 million incurred in 2019 that did not recur during the year. Excluding these restructuring and realignment costs and special charges, adjusted operating income was $70 million with an adjusted operating margin of 6.2% in the first quarter of 2020 as compared to adjusted operating income of $133 million with an adjusted operating margin of 10.8% in the first quarter of 2019. The decrease in adjusted operating margin was primarily due to unfavorable volume, impacted significantly by COVID-19, cost inflation, increased cost of quality, unfavorable mix and increased spending on strategic investments, lower overhead cost absorption and unfavorable mix.investments. These unfavorable impacts on operating margin were largelypartially offset by cost reductions from our global procurement and productivity initiatives, favorable volume impactsincluding restructuring savings, and improved price realization.
Adjusted operating income was $133 million with an operating margin of 10.8% in 2019 as compared to adjusted operating income of $135 million with an adjusted operating margin of 11.1% in the first quarter of 2018. The decrease in adjusted operating margin was primarily due to the same factors impacting operating income.
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 | | Three Months Ended | |
| March 31, | | March 31, | |
(In millions) | 2019 | | 2018 | | Change | (In millions) | 2020 | | 2019 | | Change | |
Water Infrastructure | | | | | | | Water Infrastructure | | | | | | |
Operating income | $ | 51 |
| | $ | 49 |
| | 4.1 |
| % | Operating income | $ | 39 | | | $ | 51 | | | (23.5) | | % | |
Operating margin | 10.6 | % | | 10.2 | % | | 40 |
| bp | Operating margin | 8.9 | % | | 10.6 | % | | (170) | | bp | |
Restructuring and realignment costs | 9 |
| | 5 |
| | 80.0 |
| % | Restructuring and realignment costs | 5 | | | 9 | | | (44.4) | | % | |
| Adjusted operating income | $ | 60 |
| | $ | 54 |
| | 11.1 |
| % | Adjusted operating income | $ | 44 | | | $ | 60 | | | (26.7) | | % | |
Adjusted operating margin | 12.4 | % | | 11.3 | % | | 110 |
| bp | Adjusted operating margin | 10.0 | % | | 12.4 | % | | (240) | | bp | |
Applied Water | | | | | | | Applied Water | | |
Operating income | $ | 56 |
| | $ | 50 |
| | 12.0 |
| % | Operating income | $ | 47 | | | $ | 56 | | | (16.1) | | % | |
Operating margin | 14.8 | % | | 13.7 | % | | 110 |
| bp | Operating margin | 13.9 | % | | 14.8 | % | | (90) | | bp | |
Restructuring and realignment costs | 3 |
| | 3 |
| | — |
| % | Restructuring and realignment costs | 2 | | | 3 | | | (33.3) | | % | |
| Adjusted operating income | $ | 59 |
| | $ | 53 |
| | 11.3 |
| % | Adjusted operating income | $ | 49 | | | $ | 59 | | | (16.9) | | % | |
Adjusted operating margin | 15.6 | % | | 14.5 | % | | 110 |
| bp | Adjusted operating margin | 14.5 | % | | 15.6 | % | | (110) | | bp | |
Measurement & Control Solutions | | | | | | | Measurement & Control Solutions | | |
Operating income | $ | 16 |
| | $ | 33 |
| | (51.5 | ) | % | |
Operating (loss) income | | Operating (loss) income | $ | (12) | | | $ | 16 | | | (175.0) | | % | |
Operating margin | 4.3 | % | | 8.9 | % | | (460 | ) | bp | Operating margin | (3.5) | % | | 4.3 | % | | (780) | | bp | |
| Restructuring and realignment costs | 8 |
| | 8 |
| | — |
| % | Restructuring and realignment costs | 2 | | | 8 | | | (75.0) | | % | |
Special charges | 4 |
| | 2 |
| | 100.0 |
| % | Special charges | — | | | 4 | | | NM | | | |
Adjusted operating income | $ | 28 |
| | $ | 43 |
| | (34.9 | ) | % | |
Adjusted operating (loss) income | | Adjusted operating (loss) income | $ | (10) | | | $ | 28 | | | (135.7) | | % | |
Adjusted operating margin | 7.4 | % | | 11.6 | % | | (420 | ) | bp | Adjusted operating margin | (2.9) | % | | 7.4 | % | | (1,030) | | bp | |
Corporate and other | | | | | | | Corporate and other | | |
Operating loss | $ | (14 | ) | | $ | (19 | ) | | (26.3 | ) | % | Operating loss | $ | (13) | | | $ | (14) | | | (7.1) | | % | |
Special charges | — |
| | 4 |
| | NM |
| | |
| Adjusted operating loss | $ | (14 | ) | | $ | (15 | ) | | (6.7 | ) | % | Adjusted operating loss | $ | (13) | | | $ | (14) | | | (7.1) | | % | |
Total Xylem | | | | | | | Total Xylem | | |
Operating income | $ | 109 |
| | $ | 113 |
| | (3.5 | ) | % | Operating income | $ | 61 | | | $ | 109 | | | (44.0) | | % | |
Operating margin | 8.8 | % | | 9.3 | % | | (50 | ) | bp | Operating margin | 5.4 | % | | 8.8 | % | | (340) | | bp | |
Restructuring and realignment costs | 20 |
| | 16 |
| | 25.0 |
| % | Restructuring and realignment costs | 9 | | | 20 | | | (55.0) | | % | |
| Special charges | 4 |
| | 6 |
| | (33.3 | ) | % | Special charges | — | | | 4 | | | NM | | | |
Adjusted operating income | $ | 133 |
| | $ | 135 |
| | (1.5 | ) | % | Adjusted operating income | $ | 70 | | | $ | 133 | | | (47.4) | | % | |
Adjusted operating margin | 10.8 | % | | 11.1 | % | | (30 | ) | bp | Adjusted operating margin | 6.2 | % | | 10.8 | % | | (460) | | bp | |
NM - Not meaningful percentage change
Water Infrastructure
Operating income for our Water Infrastructure segment increased $2decreased $12 million, or 4.1%23.5%, for the first quarter of 20192020 compared to the prior year, with operating margin also increasingdecreasing from 10.2%10.6% to 10.6%8.9%. Operating margin was negatively impacted by increasedbenefited from a decrease in restructuring and realignment costs of $4 million in 2019.2020. Excluding these restructuring and realignment costs, adjusted operating income increased $6decreased $16 million, or 11.1%26.7%, with adjusted operating margin increasingdecreasing from 11.3%12.4% to 12.4%10.0%. The increasedecrease in adjusted operating margin for the quarter was primarily due to cost inflation, unfavorable volume, impacted significantly by COVID-19, unfavorable mix, negative currency impacts and increased spending on strategic investments. These impacts were partially offset by cost reductions from our global procurement and productivity initiatives favorable volume,and price realization and favorable mix, which were partially offset by cost inflation, lower overhead cost absorption and increased spending on strategic investments.realization.
Applied Water
Operating income for our Applied Water segment increased $6decreased $9 million, or 12.0%16.1%, for the first quarter of 20192020 compared to the prior year, with operating margin also increasingdecreasing from 13.7%14.8% to 14.8%13.9%. RestructuringOperating margin
benefited from a decrease in restructuring and realignment costs incurred during the quarter were $3of $1 million for both years.in 2020. Excluding these restructuring and realignment costs, adjusted operating income increased $6decreased $10 million, or 11.3%16.9%, with adjusted operating margin increasingdecreasing from 14.5%15.6% to 15.6%14.5%. The increasedecrease in adjusted operating margin was primarily due to cost inflation, unfavorable volume, impacted significantly by COVID-19, and increased cost of quality. These impacts were partially offset by cost reductions from our global procurement and productivity initiatives favorable volume and price realization, which were partially offset by cost inflation, negative currency impacts, lower overhead cost absorption and increased spending on strategic investments.realization.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment decreased $17$28 million, or 51.5%175.0%, for the first quarter of 20192020 compared to the prior year, resulting in an operating loss of $12 million, with operating margin also decreasing from 8.9%4.3% to 4.3%(3.5)%. Operating margin was negatively impacted by increased special charges of $2 million whilebenefited from a decrease in restructuring and realignment costs of $6 million during the year and $4 million of special charges incurred during the quarter were $8 million for both years.2019 that did not recur in 2020. Excluding these items, adjusted operating income decreased $15$38 million, or 34.9%135.7%, for the quarter, resulting in an adjusted operating loss of $10 million, with adjustingadjusted operating margin decreasing from 11.6%7.4% to 7.4%(2.9)%. The decrease in adjusted operating margin was primarily due to increasesincreased cost of quality, primarily due to a $15 million warranty charge recorded during the quarter for a firmware issue in some of our meters, unfavorable volume, impacted significantly by COVID-19, cost inflation, unfavorable mix impacts and increased spending on strategic investments. Purchase accounting impacts from prior year first quarter acquisitions also negatively affected operating margin. These impacts were partially offset by cost reductions from our global procurement and productivity initiatives favorable volume impacts and price realization.
Corporate and other
Operating loss for corporate and other decreased $5$1 million, or 26.3%7.1%, for the first quarter of 2019 compared to the prior year, primarily due to $4 million of special charges incurred during the quarter in 2018 that did not recur. Excluding these costs, adjusted operating loss decreased $1 million, or 6.7%,2020 compared to the prior year.
Interest Expense
Interest expense was $16 million for the three months ended March 31, 2020 and $18 million for the three months ended March 31, 2019, and $21 million for the three months ended March 31, 2018.2019. The decrease in interest expense for the three month period ended March 31, 2020 is primarily driven by additionalthe impact of cross currency swaps during the quarter and, to a lesser extent, the favorable interest expense that was incurred in the first quarter of 2018 relatedrates associated with our Euro Commercial Paper Program borrowings as compared to debt that was entered into to fund our acquisition of Pure Technologies.borrowings from U.S. Dollar Commercial Paper Program during 2019. See Note 13,10, "Derivative Financial Instruments", of our condensed consolidated financial statements for a description of our cross currency swaps. See Note 12, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt and related interest.
Income Tax Expense
The income tax provision for the three months ended March 31, 20192020 was $15$4 million resulting in an effective tax rate of 16.6%10.0%, compared to $16a $15 million charge resulting in an effective tax rate of 17.1%16.6% for the same period in 2018. 2019. The effective tax rate was lower thanfor the U.S.three month period ended March 31, 2020 differs from the United States federal statutory rate primarily due to the mix of earnings in jurisdictions, partially offset by the Global Intangible Low-Taxed Income ("GILTI") inclusion.
Additionally, the effective tax rate for the three month period ended March 31, 2020 is lower than the same period in 2019 due to the relative impact of the benefit from favorable equity compensation deductions on the effective tax rate.
Other Comprehensive (Loss) Income
Other comprehensive incomeloss was $20$87 million for both the three months ended March 31, 2019 and 2018.2020 compared to income of $20 million for the same period in 2019. Foreign currency translation contributed favorableunfavorable year-over-year impacts duringfor the quarter of $21 million.$107 million, driven primarily by the weakening of the Great British Pound, the Canadian Dollar, the Australian Dollar and the Chinese Yuan as compared to the U.S. Dollar in 2020 versus the strengthening of these currencies in the same prior year period. Additionally, the weakening of the Euro and the South African Rand as compared to the U.S. Dollar was greater in 2020 than the weakening of these currencies in the prior year. These favorableunfavorable currency translation impacts were drivenpartially offset by the positive movement in our Euro net investment hedges andduring the strengthening of the Canadian dollar as comparedquarter. In addition to the U.S. dollar in the current quarter versus the weakening of these currency movements in the same prior year period. These increases were partially offset by the weakening of the currency translation impacts of the Euro, the South African rand and the Polish zloty as compared to the U.S. Dollar in the current quarter versus the strengthening of these same currencies in the comparable prior year period. Also contributing as an offset was a decease in favorablenet unfavorable foreign currency translation impacts, due to lesser strengthening ofthere was an unfavorable impact from the Chinese Yuan and the Great British pound as compared to the U.S. dollar in the current quarter versus a greater strengthening of the currencies in the same prior year period. Net favorable foreign currency translation impacts were largely offset by the negative impactmovement of tax impact on the movement in the net investment hedges during the quarter as compared to the prior year of $14 million. The remaining offset$10 million during the quarter that contributed to the favorable currency translation impacts came from an increaseloss. Partially offsetting these unfavorable drivers was the decreased loss in loss impacts from derivative hedge arrangements of $6 million.agreements during the year.
Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash: | | | Three Months Ended | | Three Months Ended | |
| March 31, | | March 31, | |
(In millions) | 2019 | | 2018 | | Change | (In millions) | 2020 | | 2019 | | Change |
Operating activities | $ | 83 |
| | $ | 63 |
| | $ | 20 |
| Operating activities | $ | (2) | | | $ | 83 | | | $ | (85) | |
Investing activities | (77 | ) | | (491 | ) | | 414 |
| Investing activities | (48) | | | (77) | | | 29 | |
Financing activities | (29 | ) | | 302 |
| | (331 | ) | Financing activities | 87 | | | (29) | | | 116 | |
Foreign exchange (a) | 2 |
| | 9 |
| | (7 | ) | Foreign exchange (a) | (22) | | | 2 | | | (24) | |
Total | $ | (21 | ) | | $ | (117 | ) | | $ | 96 |
| Total | $ | 15 | | | $ | (21) | | | $ | 36 | |
| |
(a) | The impact is primarily due to the weakness of the Euro and Chinese Yuan against the U.S. Dollar. |
(a)The impact is primarily due to the weakness of the Euro, the Canadian Dollar, the Chinese Yuan, the Russian Ruble and various other currencies against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
DuringNet cash used by operating activities was $2 million for the three months ended March 31, 2019,2020 as compared to net cash provided by operating activities wasof $83 million an increase of $20 million as compared toin the samecomparable prior year period. This increasenet decrease was primarily driven by improvementthe change in working capital levels and timing of other current asset activities as compared to the prior year, period.largely resulting from the sequential use of working capital following the low levels we saw at the end of 2019, and a decrease in cash from earnings.
Investing Activities
Cash used in investing activities was $77$48 million for the three months ended March 31, 20192020 as compared to $491$77 million in the comparable prior year period. This decrease in cash used of $29 million was mainly driven by the $430 million spent on acquisitions during the first quarter of 2018, primarily for the acquisition of Pure Technologies, versus the $5 million spent for acquisition activity during the current quarter. This decrease is partially offset by an $8 million increase in capitallower spending on additional plant improvements, includingcapital expenditures compared to the prior year, which included the purchase of a building and new software tools.tools, and a $5 million reduction in spending on acquisitions.
Financing Activities
Cash usedgenerated by financing activities was $29$87 million for the three months ended March 31, 20192020 as compared to cash generatedused of $302$29 million in the comparable prior year period. TheThis net decreaseincrease in cash generated byfrom financing activities during the period was primarily due to higher levels of short termshort-term debt related to acquisition financing during the first quarter of 2018.
2020, partially offset by an increase in share repurchase activity of $21 million.
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 by the COVID-19 pandemic, we are reevaluating aspects of our spending, including capital expenditures, strategic investments and dividends. We are also considering available federal, state and foreign tax programs related to timing of tax payments and deductions to further manage our liquidity. Historically, we have generated operating cash flow sufficient to fund our primary cash needs centered onneeds. The potentially prolonged economic effects of the COVID-19 pandemic may impact the Company’s future operating activities, working capital, capital expenditures, strategic investments and dividend payments.cash flows. 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.
We monitor our global funding requirements and seek to meet our liquidity needs on a cost effective basis. The future impact of the COVID-19 pandemic is uncertain and may increase our borrowing costs and other costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity.
We have considered the impacts of the COVID-19 pandemic on our liquidity and capital resources and do not currently expect it to impact our ability to meet future liquidity needs or continue to comply with debt covenants. Based on our current global cash positions, cash flows from operations and access to the commercial papercapital markets, we believe there is sufficient liquidity to meet our funding requirements. In addition, 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 $1.7 billion, consisting of cash and available credit facilities, including term loan facilities as disclosed in Note 12, "Credit Facilities and Debt", of our condensed consolidated financial statements. Our debt repayment obligations in 2020 consist of $268 million in outstanding commercial paper and $191 million of other borrowings. Our next long term debt maturity is October 2021.
We anticipate that our present sources of funds, including funds from operationsRisk related to these items are described below and additional borrowings, will provide us with sufficient liquidity and capital resources to meet our liquidity and capital needs both inside and outside of the United States over the next twelve months.under Item 1A, "Risk Factors".
Credit Facilities & Long-Term Contractual Commitments
See Note 13,12, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.
Non-U.S.Non-United States Operations
We generated approximately 51%50% and 55%51% of our revenue from non-U.S.non-United States operations for the three months ended March 31, 20192020 and 2018,2019, respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of the United States, we expect to continue to generate significant revenue from non-U.S.non-United States operations and we expect that a substantial portion of our cash will be predominately 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.United States and other international subsidiaries when we believe it is cost effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities and reassess whether there is a demonstrated need to repatriate funds held internationally to support our U.S.United States operations. As of March 31, 2019,2020, we have provided a deferred tax liability of $12$8 million for net foreign withholding taxes and state income taxes on $769$505 million of earnings expected to be repatriated to the U.S.United States parent as deemed necessary. Repatriation is not expected to have a material impact on liquidity. As of March 31, 2019, our foreign subsidiaries were holding $241 millionnecessary in cash or marketable securities.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.uncertain, particularly at this time and moving forward given the uncertainty around the magnitude and duration of the COVID-19 pandemic. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 20182019 Annual Report on Form 10-K ("2018 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. ThereOther than as discussed below, there have been no significant changes in the information concerning our critical accounting estimates as stated in our 20182019 Annual Report.
The carrying value of our Advanced Infrastructure Analytics (“AIA”) goodwill reporting unit is $169 million as of March 31, 2020. During the fourth quarter of 2019 we completed our annual goodwill assessment. Our 2019 impairment analysis indicated that the fair value of the AIA reporting unit exceeded its carrying value by less than 20%. We used the income approach to determine the fair value of our goodwill reporting units. Under the income approach, the fair value of the reporting units was based on the present value of the estimated cash flows that the reporting unit is expected to generate over its remaining life. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate was based on the weighted average cost of capital appropriate for the reporting unit.
Given the uncertainty of the future impact of the COVID-19 pandemic, further deterioration of our future cash flows may lead to a charge to earnings. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances indicate there may be a potential impairment.
See Item 1A, "Risk Factors" for a discussion of the potential impacts of COVID-19 on the fair value of our assets.
New Accounting Pronouncements
See Note 2,, "Recently Issued Accounting Pronouncements,"Pronouncements", to the condensed consolidated financial statements for a complete discussion of recent accounting pronouncements. We are currently evaluating the impact of certain recently issued guidance on our financial condition and results of operations in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Effective July 1, 2018, Argentina was determined to be a highly inflationary economy, and as such we evaluated the impact of revaluing our monetary assets and liabilities under the applicable guidance and do not expect it to have a material impact.
There has been no other material change in the information concerning market risk as stated in our 20182019 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with 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.
In 2017, the Company undertook steps to advance a multi-year effort to transform many of our support functions and related technologies, including Finance, Human Resources and Procurement. In connection with these restructuring and transformation plans, we continue to centralize certain accounting functions within shared service centers operated by an outsourced provider. This initiative is not in response to any identified deficiency or weakness in the Company’s internal control over financial reporting. In response to this initiative, the Company has and will continue to align and streamline the design and operation of its financial control environment.
Other than as described in the preceding paragraph, thereThere have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during ourthe fiscal quarter ended March 31, 2019, whichcovered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 environmental matters, tax, intellectual property matters, acquisitions or divestitures, product liability and personal injury claims, privacy, employment, labor and pension matters, government contract issues and commercial or contractual disputes. See Note 1918, "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 theInformation regarding our risk factors previously disclosedappears in Item 1A. of our2018 Annual Report on Form 10-K underfor the fiscal year ended December 31, 2019 filed with the SEC on February 28, 2020 ("Annual Report"). These risk factors describe some of the assumptions, risks, uncertainties and other factors that could materially and adversely affect our business, financial condition or operating results. In addition, the following risk factor represents a material change in our risk factors from those disclosed in Item 1A. Risk Factors.of our Annual Report.
Our business, results of operations and stock price have been adversely impacted by the coronavirus disease 2019 (COVID-19), and we are unable to predict the full extent to which COVID-19 may adversely impact our business, operations, financial condition, results of operations, and stock price in the future.
The coronavirus disease 2019 (COVID-19) pandemic has created significant global volatility, uncertainty and economic disruption. The global spread of the COVID-19 pandemic has curtailed the movement of people, goods and services worldwide, including in many of the regions where we sell our products and services and conduct operations. Public health officials have recommended, or governments have mandated, precautions to mitigate the spread of COVID-19, including stay at home or similar measures in many of the areas in which we operate. This has resulted in temporary production impacts at several of our facilities over the past several months, and also curtailed the business and operations of some of our customers and suppliers.
The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and businesses, and we have experienced, and expect to continue to experience, unpredictable interruptions at our suppliers and reductions in demand for certain of our products and services as the COVID-19 pandemic has also had an adverse impact on many of the customers we serve. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our business, operations, financial condition and results, and stock price remains uncertain and difficult to predict, but we expect our results to be adversely impacted beyond the quarter ending March 31, 2020.
The extent to which the COVID-19 pandemic impacts our business, operations, financial condition and results, and stock price will depend on numerous evolving factors that remain uncertain, many of which are not within our control or which we may not effectively respond to, including: the duration and scope of the pandemic; governmental, business and individuals’ mandates, actions and protocols that have been and continue to be taken in response to the pandemic; shortage of labor due to stay at home mandates, quarantines or prolonged illness of our employees or that of our customers or suppliers; the impact of the pandemic on economic activity and actions taken in response; the effect on our customers’ demand for our products and services, including slowed decision-making, delay or cancellation of orders or planned projects, or termination of existing agreements; the ability of our suppliers to supply us with products, parts and raw materials, including the ability of our suppliers to meet logistics or delivery requirements; our ability to sell and provide our products and services, including as a result of travel restrictions and people working from home; the ability of our customers to pay for our products and services; any closures of our and our customers’ facilities or suspension of operations; commodity cost volatilities; and the pace of recovery when the COVID-19 pandemic subsides, as well as response to potential recurrence.
Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has, and may continue to, adversely impact our stock price. The financial and capital market volatility may also increase our cost of capital or may limit the availability of additional capital or make it more difficult to secure, possibly only on terms less favorable to us. A sustained downturn may impact our liquidity position, including our ability to continue to pay dividends. A sustained downturn in the financial markets and asset
values may also result in the carrying value of our goodwill or other intangible assets exceeding their fair value, which may require us to recognize an impairment to those assets. The effects of the COVID-19 pandemic, including remote working arrangements for employees, may also impact our financial reporting systems and internal control over financial reporting.
Further, the COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic, could also precipitate or aggravate the other risk factors that we identify in our 2019 Annual Report on Form 10-K, which could materially adversely affect our business, financial condition, results of operations and/or stock price. Additionally, the COVID-19 pandemic may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended March 31, 2019:2020:
|
| | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PERIOD | | TOTAL NUMBER OF SHARES PURCHASED | | AVERAGE PRICE PAID PER SHARE (a) | | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b) | | APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b) |
1/1/19 - 1/31/19 | | — | | — | | — | | $363 |
2/1/19 - 2/28/19 | | 0.3 | | 72.69 | | 0.3 | | $338 |
3/1/19 - 3/31/19 | | — | | — | | — | | $338 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PERIOD | | TOTAL NUMBER OF SHARES PURCHASED | | AVERAGE PRICE PAID PER SHARE (a) | | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b) | | APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b) |
1/1/20 - 1/31/20 | | — | | — | | — | | $338 |
2/1/20 - 2/29/20 | | — | | — | | — | | $338 |
3/1/20 - 3/31/20 | | 0.7 | | 77.06 | | 0.7 | | $288 |
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 shareholders and maintains our focus on growth. For the three months ended March 31, 2019, we repurchased 0.3 million shares for $25 million. There are up to $338 million in shares that may still be purchased under this plan as of March 31, 2019. |
(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 shareholders and maintains our focus on growth. For the three months ended March 31, 2020, we repurchased 0.7 million shares for $50 million. There are up to $288 million in shares that may still be purchased under this plan as of March 31, 2020.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See the Exhibit Index for a list of exhibits filed as part of this report and incorporated herein by reference.
XYLEM INC.
EXHIBIT INDEX
|
| | | | | | | |
Exhibit Number | Description | Location |
| | |
| Fourth Amended and Restated Articles of Incorporation of Xylem Inc. | Incorporated by reference to Exhibit 3.1 of Xylem Inc.’s Form 8-K filed on May 15, 2017 (CIK No. 1524472, File No. 1-35229). |
| | |
| Fourth Amended and Restated By-laws of Xylem Inc. | Incorporated by reference to Exhibit 3.2 of Xylem Inc.’s Form 8-K filed on May 15, 2017 (CIK No. 1524472, File No. 1-35229). |
| | |
| | |
| | |
| Five-Year Revolving Credit Facility Agreement, dated as of March 5, 2019 among Xylem Inc. and the Lenders party thereto. | Incorporated by reference to Exhibit 10.34 of Xylem Inc.’s Form 8-K filed on March 5, 2019 (CIK No. 1524472, File No. 1-35229). |
| | |
| Second Amendment to Term Loan Agreement, dated as of January 26, 2018 among Xylem Europe GmbH, as borrower, Xylem Inc., as parent guarantor and ING Bank, as lender (including Form of Parent Guarantee).
| Filed herewith. |
| | |
| 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 | Filed herewith. |
| | |
| 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 | Filed herewith. |
| | |
| 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 | Term Loan Agreement, dated as of April 25, 2020 among Xylem Europe GmbH, as borrower, Xylem Inc., as parent guarantor and ING Bank, as lender (including Form of Parent Guarantee) | Filed herewith. |
| | |
| Term Loan Agreement, dated April 30, 2020 among Xylem Inc., as borrower, and Australia and New Zealand Banking Group Limited, as lender | Filed herewith. |
| | |
101.0 | The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019,2020, formatted in XBRL (ExtensibleInline Extensible Business Reporting Language)Language (Inline XBRL): (i) Condensed Consolidated Income Statements, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements
| The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
|
104.0 | The cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2020 formatted in Inline XBRL and contained in Exhibit 101.0. | |
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.
| | | | | | | | |
| | XYLEM INC. |
| | (Registrant) |
| | |
| | XYLEM INC. |
| | (Registrant) |
| |
| | /s/ Geri McShane |
| | Geri McShane |
| | Vice President, Controller and Chief Accounting Officer |
| | |
May 2, 2019
5, 2020