WASHINGTON, D.C. 20549
Xylem Inc.
Xylem Inc.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XYLEM INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
Note 1. Background and Basis of Presentation
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.
Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries.
The interim condensed consolidated financial statements reflect our financial position and results of operations in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions between our businesses have been eliminated.
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair statement of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 20202021 ("20202021 Annual Report") in preparing these unaudited condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 20202021 Annual Report.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, post-retirement obligations and assets, revenue recognition, income taxes, valuation of intangible assets, goodwill and indefinite-lived intangible impairment testing and contingent liabilities. Actual results could differ from these estimates. The global outbreak of the novel coronavirus ("COVID-19") disease in March 2020, declared a pandemic by the World Health Organization, has created significant global volatility, uncertainty and economicrelated macroeconomic disruption. The COVID-19 pandemic and macroeconomic conditions have also has caused increased uncertainty in estimates and assumptions affecting the condensed consolidated financial statements. Actual results could differ from these estimates.
Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends on December 31. For ease of presentation, the condensed consolidated financial statements included herein are described as ending on the last day of the calendar quarter.
Note 2. Recently Issued Accounting Pronouncements
Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of September 30, 2021,2022, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $489$567 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months.three years. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.
From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position itself. During the three and nine months ended September 30, 2022, we incurred restructuring costs of $3 million and $9 million, respectively. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across all segments.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 20202022 consist primarily of severance charges across segmentscharges. The actions commenced in 2022 are complete.
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
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,Vaxjo, which rendered a decision adverse to Xylem in June 2022 for SEK788 million (approximately $70 million USD), consisting of the full tax assessment amount plus penalties and interest. Xylem has appealed this decision with the intermediate appellate court, the Administrative Court of Appeal (the “Court”). At this time, management, in consultation with external legal advisors, believescontinues to believe it is more likely than not that Xylem will prevail on the proposed assessment and iswill continue to vigorously defendingdefend our position through litigation.the appellate process. The appeal to the Court is expected to take approximately one year; however, there can be no assurance as to the timing of the Court’s decision. Both parties will have the ability to seek appeal of the Court’s decision to the Supreme Administrative Court of Sweden. There can be no assurance that the final determination by the authorities will not be materially different than our position. As of September 30, 2021,2022, we have not recorded any unrecognized tax benefits related to this uncertain tax position.
Note 8.9. 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 also reduce the volatility in stockholders' equity.
Cash Flow Hedges of Foreign Exchange Risk
We are exposed to fluctuations in various foreign currencies against our functional currencies. We use foreign currency derivatives, including currency forward agreements, to manage our exposure to fluctuations in the various exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.
Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures for which we enter into cash flow hedges relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling $130 million and $0$301 million as of September 30, 20212022 and December 31, 2020,2021, respectively. As of September 30, 2021,2022, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar, and to sell Canadian Dollar and purchase Euro, sell Australian Dollar and purchase Euro, and to purchase Polish Zloty and sell Euro. The purchased
notional amounts associated with these currency derivatives are $47$50 million, $42$39 million, $17$16 million, $7$8 million, $7$6 million, $6 million and $5 million, respectively. As of December 31, 2021 the purchased notional amounts associated with these currency derivatives are $130 million, $88 million, $31 million, $14 million, $14 million, $13 million and $11 million, respectively.
Hedges of Net Investments in Foreign Operations
We are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.
Cross-Currency Swaps
Beginning in 2015, we entered into cross-currency swaps to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. During the second quarter of 2019, and third quarter of 2020, and second quarter of 2022 we entered into additional cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was $1,184$1,469 million and $1,249$1,151 million as of September 30, 20212022 and December 31, 2020,2021, 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
On June 2, 2022, we de-designated the entirety of the outstanding balance of the €500 million 2.250% Senior Notes, or $533 million from the net investment hedge relationship. Previously, the entirety of the outstanding balance, or $579 million and $610$563 million as of September 30, 2021 and December 31, 2020, respectively,2021, net of unamortized discount, was designated as a hedge of a net investment in certain foreign subsidiaries.
Fair Value Hedges of Foreign Exchange Risk
The de-designation of our 2.250% Senior Notes of €500 million resulted in exposure to fluctuations in the Euro-U.S. Dollar exchange rate. We use currency forward agreements to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.
On June 2, 2022, we entered into a currency forward agreement with a total notional amount of €500 million, designating the agreement as a fair value hedge of our Euro denominated notes. As of September 30, 2022, the total notional amount of the fair value hedge was $483 million.
Effectiveness of derivatives designated as fair value hedges is assessed using the spot method. The changes in the fair value of these derivatives due to movements in spot exchange rates are recorded in Selling, general and administrative Expenses. Changes in the fair value of the 2.250% Senior Notes of €500 million related to spot exchange rates are also recorded in Selling, general and administrative expenses. Changes in the spot-forward differential and counterparty non-performance risk of the derivatives are excluded from the assessment of hedge effectiveness and will be recognized in Accumulated other comprehensive loss ("AOCL"). Amounts in AOCL are recognized in earnings, specifically Interest expense, using a systematic and rational method over the life of the hedging instrument.
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 | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | September 30, | | September 30, |
| (in millions) | (in millions) | 2021 | | 2020 | | 2021 | | 2020 | (in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Cash Flow Hedges | Cash Flow Hedges | | | | | | | | Cash Flow Hedges | | | | | | | |
| Foreign Exchange Contracts | Foreign Exchange Contracts | | Foreign Exchange Contracts | |
| Amount of (loss) gain recognized in OCI | $ | (1) | | | $ | 4 | | | $ | (8) | | | $ | 7 | | |
| Amount of loss (gain) reclassified from OCI into revenue | 2 | | | (2) | | | 1 | | | — | | |
| Amount of (gain) loss reclassified from OCI into cost of revenue | — | | | — | | | (1) | | | 2 | | |
| Amount of (loss) recognized in OCL | | Amount of (loss) recognized in OCL | $ | (6) | | | $ | (1) | | | $ | (25) | | | $ | (8) | |
| Amount of loss reclassified from OCL into Revenue | | Amount of loss reclassified from OCL into Revenue | 6 | | | 2 | | | 10 | | | 1 | |
| Amount of (gain) loss reclassified from OCL into Cost of revenue | | Amount of (gain) loss reclassified from OCL into Cost of revenue | — | | | — | | | 1 | | | (1) | |
| | Net Investment Hedges | Net Investment Hedges | | Net Investment Hedges | |
| Cross-Currency Swaps | Cross-Currency Swaps | | Cross-Currency Swaps | |
| Amount of gain (loss) recognized in OCI | $ | 27 | | | $ | (53) | | | $ | 59 | | | $ | (30) | | |
| Amount of income recognized in Interest Expense | 6 | | | 5 | | | $ | 16 | | | $ | 14 | | |
| Amount of gain recognized in OCL | | Amount of gain recognized in OCL | $ | 113 | | | $ | 27 | | | $ | 207 | | | $ | 59 | |
| Amount of income recognized in Interest expense | | Amount of income recognized in Interest expense | 9 | | | 6 | | | 22 | | | 16 | |
| Foreign Currency Denominated Debt | Foreign Currency Denominated Debt | | Foreign Currency Denominated Debt | |
| Amount of gain (loss) recognized in OCI | $ | 12 | | | $ | (21) | | | $ | 32 | | | $ | (26) | | |
| Amount of gain recognized in OCL | | Amount of gain recognized in OCL | $ | — | | | $ | 12 | | | $ | 31 | | | $ | 32 | |
| | Fair Value Hedges | | Fair Value Hedges | |
| Foreign Exchange Contracts | | Foreign Exchange Contracts | |
| Amount of (loss) gain recognized in OCL | | Amount of (loss) gain recognized in OCL | $ | (2) | | | $ | — | | | $ | 2 | | | $ | — | |
| Amount of (loss) recognized in Selling, general and administrative expenses | | Amount of (loss) recognized in Selling, general and administrative expenses | $ | (39) | | | $ | — | | | $ | (50) | | | $ | — | |
| Amount recognized in Interest expense | | Amount recognized in Interest expense | $ | (1) | | | $ | — | | | $ | (2) | | | $ | — | |
|
As of September 30, 2021, $52022, $17 million of net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.
As of September 30, 2021,2022, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration.
As of September 30, 2022, $2 million of net gains on the fair value hedges are expected to be reclassified into earnings in the next 12 months.
The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and are determined through the use of models that consider various assumptions including yield curves, time value and other measurements.
The fair values of our derivative contracts currently included in our hedging program were as follows: | | (in millions) | (in millions) | September 30,
2021 | | December 31,
2020 | (in millions) | September 30,
2022 | | December 31,
2021 |
| Derivatives designated as hedging instruments | Derivatives designated as hedging instruments | | | | Derivatives designated as hedging instruments | | | |
| Assets | Assets | | Assets | |
| | Cash Flow Hedges | | Cash Flow Hedges | |
| Prepaid and other current assets | | Prepaid and other current assets | $ | 1 | | | $ | — | |
| Net Investment Hedges | Net Investment Hedges | | Net Investment Hedges | |
| Other non-current assets | Other non-current assets | $ | 1 | | | $ | — | | Other non-current assets | $ | 185 | | | $ | 8 | |
| Liabilities | Liabilities | | Liabilities | |
| Cash Flow Hedges | Cash Flow Hedges | | Cash Flow Hedges | |
| Other current liabilities | $ | (4) | | | $ | — | | |
| Accrued and other current liabilities | | Accrued and other current liabilities | $ | (12) | | | $ | (1) | |
| Net Investment Hedges | Net Investment Hedges | | Net Investment Hedges | |
| Other non-current accrued liabilities | Other non-current accrued liabilities | $ | (55) | | | $ | (117) | | Other non-current accrued liabilities | $ | — | | | $ | (26) | |
| Fair Value Hedges | | Fair Value Hedges | |
| Accrued and other current liabilities | | Accrued and other current liabilities | $ | (51) | | | $ | — | |
|
The fair value of ourOur long-term debt, due in 2023, was de-designated from the hedging relationship in June 2022. The fair value of the long-term debt designated as a net investment hedge was $598 million and $640$577 million as of September 30, 2021 and December 31, 2020, respectively.2021.
Note 9.10. Accrued and Other Current Liabilities
The components of total accruedAccrued and other current liabilities are as follows: | | (in millions) | (in millions) | September 30,
2021 | | December 31,
2020 | (in millions) | September 30,
2022 | | December 31,
2021 |
| Compensation and other employee-benefits | Compensation and other employee-benefits | $ | 246 | | | $ | 258 | | Compensation and other employee-benefits | $ | 246 | | | $ | 273 | |
| Customer-related liabilities | Customer-related liabilities | 189 | | | 186 | | Customer-related liabilities | 195 | | | 186 | |
| Accrued taxes | Accrued taxes | 77 | | | 103 | | Accrued taxes | 136 | | | 86 | |
| Lease liabilities | Lease liabilities | 70 | | | 63 | | Lease liabilities | 63 | | | 69 | |
| Accrued warranty costs | Accrued warranty costs | 46 | | | 54 | | Accrued warranty costs | 35 | | | 40 | |
| Other accrued liabilities | Other accrued liabilities | 109 | | | 123 | | Other accrued liabilities | 153 | | | 98 | |
| Total accrued and other current liabilities | Total accrued and other current liabilities | $ | 737 | | | $ | 787 | | Total accrued and other current liabilities | $ | 828 | | | $ | 752 | |
Note 10.11. Credit Facilities and Debt
Total debt outstanding is summarized as follows: | | (in millions) | (in millions) | September 30,
2021 | | December 31,
2020 | (in millions) | September 30,
2022 | | December 31,
2021 |
| | 4.875% Senior Notes due 2021 (a) | $ | — | | | $ | 600 | | |
| 2.250% Senior Notes due 2023 (a) | 2.250% Senior Notes due 2023 (a) | 580 | | | 612 | | 2.250% Senior Notes due 2023 (a) | 483 | | | 564 | |
| 3.250% Senior Notes due 2026 (a) | 3.250% Senior Notes due 2026 (a) | 500 | | | 500 | | 3.250% Senior Notes due 2026 (a) | 500 | | | 500 | |
| 1.950% Senior Notes due 2028 (a) | 1.950% Senior Notes due 2028 (a) | 500 | | | 500 | | 1.950% Senior Notes due 2028 (a) | 500 | | | 500 | |
| 2.250% Senior Notes due 2031 (a) | 2.250% Senior Notes due 2031 (a) | 500 | | | 500 | | 2.250% Senior Notes due 2031 (a) | 500 | | | 500 | |
| 4.375% Senior Notes due 2046 (a) | 4.375% Senior Notes due 2046 (a) | 400 | | | 400 | | 4.375% Senior Notes due 2046 (a) | 400 | | | 400 | |
| | Debt issuance costs and unamortized discount (b) | Debt issuance costs and unamortized discount (b) | (25) | | | (28) | | Debt issuance costs and unamortized discount (b) | (20) | | | (24) | |
| | Total debt | Total debt | 2,455 | | | 3,084 | | Total debt | 2,363 | | | 2,440 | |
| Less: short-term borrowings and current maturities of long-term debt | Less: short-term borrowings and current maturities of long-term debt | — | | | 600 | | Less: short-term borrowings and current maturities of long-term debt | 483 | | | — | |
| Total long-term debt | Total long-term debt | $ | 2,455 | | | $ | 2,484 | | Total long-term debt | $ | 1,880 | | | $ | 2,440 | |
(a)The fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due 20212023 was $0$477 million and $620$577 million as of September 30, 20212022 and December 31, 2020, respectively. The fair value of our Senior Notes due 2023 was $598 million and $640 million as of September 30, 2021, and December 31, 2020, respectively. The fair value of our Senior Notes due 2026 was $545$465 million and $563$537 million as of September 30, 20212022 and December 31, 20202021 respectively. The fair value of our Senior Notes due 2028 was $505$424 million and $529$497 million as of September 30, 20212022 and December 31, 2020,
2021, respectively. The fair value of our Senior Notes due 2031 was $503$400 million and $527$496 million as of September 30, 20212022 and December 31, 2020,2021, respectively. The fair value of our Senior Notes due 2046 was $481$332 million and $496$481 million as of September 30, 20212022 and December 31, 2020,2021, respectively.
(b)The debt issuance costs and unamortized discount are recognized as a reduction in the carrying value of the Senior Notes in the Condensed Consolidated Balance Sheets and are being amortized to interest expense in our Condensed Consolidated Income Statements over the expected remaining terms of the Senior Notes.
Senior Notes
On June 26, 2020, we issued 1.950% Senior Notes of $500 million aggregate principal amount due January 2028 (the “Senior Notes due 2028”) and 2.250% Senior Notes of $500 million aggregate principal amount due January 2031 (the “Senior Notes due 2031" and, together with the Senior Notes due 2028, the “Green Bond”).
The Green Bond includes covenants that restrict our ability, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Green Bond at any time, at our option, subject to certain conditions, at specified redemption prices, plus accrued and unpaid interest to the redemption date.
If a change of control triggering event (as defined in the applicable Green Bond indenture) occurs, we will be required to make an offer to purchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase.
Interest on the Green Bond is payable on January 30 and July 30 of each year. As of September 30, 2021,2022, we are in compliance with all covenants for the Green Bond.
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, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may also redeem the Senior Notes in certain other circumstances, as set forth in the applicable Senior Notes indenture.
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 iswas payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable on March 11 of each year. Interest on the Senior Notes due 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of September 30, 2021,2022, we are in compliance with all covenants for the Senior Notes.
On October 1st, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of $600 million.
Credit Facilities
2019 Five-Year Revolving Credit Facility
On March 5, 2019, Xylem entered into a Five-Year Revolving Credit Facility (the “2019 Credit Facility”) with Citibank, N.A., as Administrative Agent, and a syndicate of lenders. The 2019 Credit Facility provides for an aggregate principal amount of up to $800 million (available in U.S. Dollars and in Euros), with 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 ("ESG") score, determined based on the methodology in effect as of March 5, 2019. Xylem will also pay quarterly fees to each lender for such lender’s commitment to lend accruing on such commitment at a rate based on our credit rating, whether such commitment is used or unused, as well as a quarterly letter of credit fee accruing on the letter of credit exposure of such lender during the preceding quarter at a rate based on the credit rating of Xylem (as adjusted for the ESG score).
The 2019 Credit Facility requires that Xylem maintain a consolidated total debt to consolidated EBITDA ratio (or maximum leverage ratio), which will be based on the last four fiscal quarters; and in addition contains a number of customary covenants, including limitations on the incurrence of secured debt and debt of subsidiaries, liens, sale and lease-back transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. The 2019 Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the 2019 Credit Facility, subject to certain requirements and conditions set forth in the 2019 Credit Facility.
On June 22, 2020, Xylem entered into Amendment No. 1 to the 2019 Credit Facility (the "Amendment") which modified the financial covenant from a test based on the maximum leverage ratio (defined as consolidated total debt to consolidated EBITDA) to a test based on the net leverage ratio (defined as consolidated total debt less unrestricted cash and cash equivalents to consolidated EBITDA). This modification is effective through the quarter ending September 30, 2021, after which the covenant will revert back to the prior maximum leverage ratio test. The Amendment also restricted stock repurchases until March 31, 2021, except for shares of common stock in an amount not to exceed the number of shares issued after the date of the Amendment, subject to customary exceptions. As of September 30, 2021,2022, the 2019 Credit Facility was undrawn and we are in compliance with all revolver covenants.
Commercial Paper
U.S. Dollar Commercial Paper Program
Our U.S. Dollar commercial paper program generally serves as a means of short-term funding with a $600 million maximum issuing balance and a combined limit of $800 million inclusive of the 2019 Credit Facility. As of September 30, 20212022 and December 31, 2020,2021, 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 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 $580$483 million) which may be denominated in a variety of currencies. The maximum issuing balance may be increased in accordance with the Dealer Agreement. As of September 30, 20212022 and December 31, 2020,2021, none of the Company's Euro commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.
Note 11.12. Post-retirement Benefit Plans
The components of net periodic benefit cost for our defined benefit pension plans are as follows: | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | September 30, | | September 30, |
| (in millions) | (in millions) | 2021 | | 2020 | | 2021 | | 2020 | (in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Domestic defined benefit pension plans: | Domestic defined benefit pension plans: | | | | | | | | Domestic defined benefit pension plans: | | | | | | | |
| Service cost | Service cost | $ | 1 | | | $ | — | | | $ | 2 | | | $ | 2 | | Service cost | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 2 | |
| Interest cost | Interest cost | — | | | 1 | | | 2 | | | 3 | | Interest cost | — | | | — | | | 2 | | | 2 | |
| Expected return on plan assets | Expected return on plan assets | (2) | | | (1) | | | (5) | | | (5) | | Expected return on plan assets | (1) | | | (2) | | | (4) | | | (5) | |
| | Amortization of net actuarial loss | Amortization of net actuarial loss | 1 | | | — | | | 3 | | | 2 | | Amortization of net actuarial loss | 1 | | | 1 | | | 2 | | | 3 | |
| Net periodic benefit cost | Net periodic benefit cost | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | | Net periodic benefit cost | $ | 1 | | | $ | — | | | $ | 2 | | | $ | 2 | |
| International defined benefit pension plans: | International defined benefit pension plans: | | | | | | | | International defined benefit pension plans: | | | | | | | |
| Service cost | Service cost | $ | 4 | | | $ | 3 | | | $ | 11 | | | $ | 9 | | Service cost | $ | 3 | | | $ | 4 | | | $ | 10 | | | $ | 11 | |
| Interest cost | Interest cost | 2 | | | 3 | | | 8 | | | 11 | | Interest cost | 4 | | | 2 | | | 11 | | | 8 | |
| Expected return on plan assets | Expected return on plan assets | (3) | | | (4) | | | (10) | | | (10) | | Expected return on plan assets | (4) | | | (3) | | | (11) | | | (10) | |
| | Amortization of net actuarial loss | Amortization of net actuarial loss | 5 | | | 4 | | | 13 | | | 10 | | Amortization of net actuarial loss | 3 | | | 5 | | | 9 | | | 13 | |
| | U.K. pension settlement expense | | U.K. pension settlement expense | 140 | | | — | | | 140 | | | — | |
| Net periodic benefit cost | Net periodic benefit cost | $ | 8 | | | $ | 6 | | | $ | 22 | | | $ | 20 | | Net periodic benefit cost | $ | 146 | | | $ | 8 | | | $ | 159 | | | $ | 22 | |
| Total net periodic benefit cost | Total net periodic benefit cost | $ | 8 | | | $ | 6 | | | $ | 24 | | | $ | 22 | | Total net periodic benefit cost | $ | 147 | | | $ | 8 | | | $ | 161 | | | $ | 24 | |
The components of net periodic benefit cost, other than the service cost component and the U.K, pension settlement expense are included in the line item "Other non-operating expense,income, net" in the Condensed Consolidated Income Statements.
The total net periodic benefit cost for other post-retirement employee benefit plans was less than $1 million, including net credits recognized into other comprehensive income of less than $1 million, for both the three and nine months ended September 30, 20212022 and 2020,2021, respectively.
We contributed $16$15 million and $19$16 million to our defined benefit plans during the nine months ended September 30, 20212022 and 2020,2021, respectively. Additional contributions ranging between approximately $4$3 million and $8$7 million are expected to be made during the remainder of 2021.2022.
The Company initiated the process for a full buy-out of its largest defined benefit plan in the U.K. in 2019. During the first quarter of 2020, the Company purchased a bulk annuity policy with an insurance company for its largest defined benefit plan in the U.K., as a plan asset to facilitate the termination and buy-out of the plan. The bulk annuity fully insuresbuyout was completed in September 2022, at which point the benefits payableremaining benefit obligations were transferred to the participantsinsurer and we were relieved of the plan untilany further obligation. As a full buy-outresult, we recorded a pension settlement charge of the plan can be executed, which is expected to occur in 2022. Included in the Company's nine months ended September 30, 2020 contributions is $5£123 million paid to meet the shortfall between the cost(approximately $140 million), primarily consisting of the bulk annuity policy and the plan assets. Subsequent to the end of the quarter, we made a payment of approximately $6 million related to the previously disclosed buy-out of the UK pension plan. The remaining payments will be completed in Q4 2021.unrecognized actuarial losses.
Note 12.13. Equity
The following table shows the changes in stockholders' equity for the nine months ended September 30, 2021:2022: | | | Common
Stock | | Capital in Excess of Par Value | | Retained
Earnings | | Accumulated Other
Comprehensive Loss | | Treasury Stock | | Non-Controlling Interest | | Total | | Common
Stock | | Capital in Excess of Par Value | | Retained
Earnings | | Accumulated Other
Comprehensive Loss | | Treasury Stock | | Non-Controlling Interest | | Total |
| Balance at January 1, 2021 | $ | 2 | | | $ | 2,037 | | | $ | 1,930 | | | $ | (413) | | | $ | (588) | | | $ | 8 | | | $ | 2,976 | | |
| Other | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | |
| Balance at January 1, 2022 | | Balance at January 1, 2022 | $ | 2 | | | $ | 2,089 | | | $ | 2,154 | | | $ | (371) | | | $ | (656) | | | $ | 8 | | | $ | 3,226 | |
| | | Net income | Net income | — | | | — | | | 87 | | | — | | | — | | | — | | | 87 | | Net income | — | | | — | | | 82 | | | — | | | — | | | — | | | 82 | |
| Other comprehensive loss, net | Other comprehensive loss, net | — | | | — | | | — | | | (13) | | | — | | | — | | | (13) | | Other comprehensive loss, net | — | | | — | | | — | | | (6) | | | — | | | — | | | (6) | |
| Dividends declared ($0.28 per share) | — | | | — | | | (50) | | | — | | | — | | | — | | | (50) | | |
| Dividends declared ($0.30 per share) | | Dividends declared ($0.30 per share) | — | | | — | | | (55) | | | — | | | — | | | — | | | (55) | |
| Stock incentive plan activity | Stock incentive plan activity | — | | | 12 | | | — | | | — | | | (7) | | | — | | | 5 | | Stock incentive plan activity | — | | | 10 | | | — | | | — | | | (6) | | | — | | | 4 | |
| Repurchase of common stock | Repurchase of common stock | — | | | — | | | — | | | — | | | (60) | | | — | | | (60) | | Repurchase of common stock | — | | | — | | | — | | | — | | | (45) | | | — | | | (45) | |
| Balance at March 31, 2021 | $ | 2 | | | $ | 2,049 | | | $ | 1,967 | | | $ | (426) | | | $ | (655) | | | $ | 9 | | | $ | 2,946 | | |
| Balance at March 31, 2022 | | Balance at March 31, 2022 | $ | 2 | | | $ | 2,099 | | | $ | 2,181 | | | $ | (377) | | | $ | (707) | | | $ | 8 | | | $ | 3,206 | |
| | Net income | Net income | — | | | — | | | 113 | | | — | | | — | | | — | | | 113 | | Net income | — | | | — | | | 112 | | | — | | | — | | | — | | | 112 | |
| Other comprehensive income, net | Other comprehensive income, net | — | | | — | | | — | | | 28 | | | — | | | — | | | 28 | | Other comprehensive income, net | — | | | — | | | — | | | (71) | | | — | | | — | | | (71) | |
| Dividends declared ($0.28 per share) | — | | | — | | | (51) | | | — | | | — | | | — | | | (51) | | |
| Dividends declared ($0.30 per share) | | Dividends declared ($0.30 per share) | — | | | — | | | (55) | | | — | | | — | | | — | | | (55) | |
| Stock incentive plan activity | Stock incentive plan activity | — | | | 14 | | | — | | | — | | | (1) | | | — | | | 13 | | Stock incentive plan activity | — | | | 12 | | | — | | | — | | | (1) | | | — | | | 11 | |
| | Balance at June 30, 2021 | $ | 2 | | | $ | 2,063 | | | $ | 2,029 | | | $ | (398) | | | $ | (656) | | | $ | 9 | | | $ | 3,049 | | |
| Balance at June 30, 2022 | | Balance at June 30, 2022 | $ | 2 | | | $ | 2,111 | | | $ | 2,238 | | | $ | (448) | | | $ | (708) | | | $ | 8 | | | $ | 3,203 | |
| | Net income | Net income | — | | | — | | | 114 | | | — | | | — | | | — | | | 114 | | Net income | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 | |
| Other comprehensive loss, net | Other comprehensive loss, net | — | | | — | | | — | | | (24) | | | — | | | — | | | (24) | | Other comprehensive loss, net | — | | | — | | | — | | | 49 | | | — | | | — | | | 49 | |
| | Dividends declared ($0.28 per share) | — | | | — | | | (51) | | | — | | | — | | | — | | | (51) | | |
| Distribution to minority shareholders | | Distribution to minority shareholders | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Dividends declared ($0.30 per share) | | Dividends declared ($0.30 per share) | — | | | — | | | (53) | | | — | | | — | | | — | | | (53) | |
| Stock incentive plan activity | Stock incentive plan activity | — | | | 14 | | | — | | | — | | | — | | | — | | | 14 | | Stock incentive plan activity | — | | | 12 | | | — | | | — | | | — | | | — | | | 12 | |
| | Balance at September 30, 2021 | $ | 2 | | | $ | 2,077 | | | $ | 2,092 | | | $ | (422) | | | $ | (656) | | | $ | 9 | | | $ | 3,102 | | |
| Balance at September 30, 2022 | | Balance at September 30, 2022 | $ | 2 | | | $ | 2,123 | | | $ | 2,197 | | | $ | (399) | | | $ | (708) | | | $ | 7 | | | $ | 3,222 | |
The following table shows the changes in stockholders' equity for the nine months ended September 30, 2020:2021: | | | Common
Stock | |
Capital in Excess of Par Value | | Retained
Earnings | | Accumulated Other
Comprehensive Loss | | Treasury Stock | | Non-Controlling Interest | | Total | | Common
Stock | |
Capital in Excess of Par Value | | Retained
Earnings | | Accumulated Other
Comprehensive 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) | | |
| Balance at January 1, 2021 | | Balance at January 1, 2021 | $ | 2 | | | $ | 2,037 | | | $ | 1,930 | | | $ | (413) | | | $ | (588) | | | $ | 8 | | | $ | 2,976 | |
| Other | | Other | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Net income | Net income | — | | | — | | | 38 | | | — | | | — | | | — | | | 38 | | Net income | — | | | — | | | 87 | | | — | | | — | | | — | | | 87 | |
| Other comprehensive loss, net | Other comprehensive loss, net | — | | | — | | | — | | | (86) | | | — | | | (1) | | | (87) | | Other comprehensive loss, net | — | | | — | | | — | | | (13) | | | — | | | — | | | (13) | |
| Dividends declared ($0.26 per share) | — | | | — | | | (48) | | | — | | | — | | | — | | | (48) | | |
| Dividends declared ($0.28 per share) | | Dividends declared ($0.28 per share) | — | | | — | | | (50) | | | — | | | — | | | — | | | (50) | |
| Stock incentive plan activity | Stock incentive plan activity | — | | | 13 | | | — | | | — | | | (10) | | | — | | | 3 | | Stock incentive plan activity | — | | | 12 | | | — | | | — | | | (7) | | | — | | | 5 | |
| Repurchase of common stock | Repurchase of common stock | — | | | — | | | — | | | — | | | (50) | | | — | | | (50) | | Repurchase of common stock | — | | | — | | | — | | | — | | | (60) | | | — | | | (60) | |
| Balance at March 31, 2020 | $ | 2 | | | $ | 2,004 | | | $ | 1,854 | | | $ | (461) | | | $ | (587) | | | $ | 9 | | | $ | 2,821 | | |
| Balance at March 31, 2021 | | Balance at March 31, 2021 | $ | 2 | | | $ | 2,049 | | | $ | 1,967 | | | $ | (426) | | | $ | (655) | | | $ | 9 | | | $ | 2,946 | |
| Net income | Net income | — | | | — | | | 31 | | | — | | | — | | | — | | | 31 | | Net income | — | | | — | | | 113 | | | — | | | — | | | — | | | 113 | |
| Other comprehensive income, net | Other comprehensive income, net | — | | | — | | | — | | | 52 | | | — | | | — | | | 52 | | Other comprehensive income, net | — | | | — | | | — | | | 28 | | | — | | | — | | | 28 | |
| Dividends declared ($0.26 per share) | — | | | — | | | (47) | | | — | | | — | | | — | | | (47) | | |
| Dividends declared ($0.28 per share) | | Dividends declared ($0.28 per share) | — | | | — | | | (51) | | | — | | | — | | | — | | | (51) | |
| Stock incentive plan activity | Stock incentive plan activity | — | | | 8 | | | — | | | — | | | — | | | — | | | 8 | | Stock incentive plan activity | — | | | 14 | | | — | | | — | | | (1) | | | — | | | 13 | |
| Balance at June 30, 2020 | $ | 2 | | | $ | 2,012 | | | $ | 1,838 | | | $ | (409) | | | $ | (587) | | | $ | 9 | | | $ | 2,865 | | |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 2 | | | $ | 2,063 | | | $ | 2,029 | | | $ | (398) | | | $ | (656) | | | $ | 9 | | | $ | 3,049 | |
| Net income | Net income | — | | | — | | | 37 | | | — | | | — | | | — | | | 37 | | Net income | — | | | — | | | 114 | | | — | | | — | | | — | | | 114 | |
| Other comprehensive income, net | Other comprehensive income, net | — | | | — | | | — | | | 13 | | | — | | | — | | | 13 | | Other comprehensive income, net | — | | | — | | | — | | | (24) | | | — | | | — | | | (24) | |
| Distribution to minority stockholders | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | | |
| Dividends declared ($0.26 per share) | — | | | — | | | (47) | | | — | | | — | | | — | | | (47) | | |
| | Dividends declared ($0.28 per share) | | Dividends declared ($0.28 per share) | — | | | — | | | (51) | | | — | | | — | | | — | | | (51) | |
| Stock incentive plan activity | Stock incentive plan activity | — | | | 9 | | | — | | | — | | | (1) | | | — | | | 8 | | Stock incentive plan activity | — | | | 14 | | | — | | | — | | | — | | | — | | | 14 | |
| Balance at September 30, 2020 | $ | 2 | | | $ | 2,021 | | | $ | 1,828 | | | $ | (396) | | | $ | (588) | | | $ | 8 | | | $ | 2,875 | | |
| Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 2 | | | $ | 2,077 | | | $ | 2,092 | | | $ | (422) | | | $ | (656) | | | $ | 9 | | | $ | 3,102 | |
Note 13.14. Share-Based Compensation Plans
Share-based compensation expense was $10 million and $28 million during the three and nine months ended September 30, 2022, respectively, and $8 million and $25 million during the three and nine months ended September 30, 2021, respectively, and $3 million and $19 million during the three and nine months ended September 30, 2020, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $8$7 million, $27$31 million and $15 million, respectively, at September 30, 20212022 and is expected to be recognized over a weighted average period of 1.9,1.8, 1.9 and 2.62.2 years, respectively. The amount of cash received from the exercise of stock options was $15$6 million and $10$15 million for the nine months ended September 30, 20212022 and 2020,2021, respectively.
Stock Option Grants
The following is a summary of the changes in outstanding stock options for the nine months ended September 30, 20212022: | | | | | | | | | | | | | | | | | | | | | | | |
| Share units (in thousands) | | Weighted Average Exercise Price / Share | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) |
| Outstanding at January 1, 2021 | 1,961 | | | $ | 56.66 | | | 6.4 | | |
| Granted | 262 | | | 102.61 | | | | | |
| Exercised | (264) | | | 54.82 | | | | | |
| Forfeited and expired | (24) | | | 84.39 | | | | | |
| Outstanding at September 30, 2021 | 1,935 | | | $ | 62.63 | | | 6.2 | | $ | 113 | |
| Options exercisable at September 30, 2021 | 1,280 | | | $ | 51.49 | | | 4.8 | | $ | 89 | |
| Vested and expected to vest as of September 30, 2021 | 1,872 | | | $ | 61.89 | | | 6.1 | | $ | 111 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Share units (in thousands) | | Weighted Average Exercise Price / Share | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) |
| Outstanding at January 1, 2022 | 1,827 | | | $ | 64.12 | | | 6.1 | | 102 |
| Granted | 306 | | | 86.76 | | | | | |
| Exercised | (101) | | | 57.52 | | | | | |
| Forfeited and expired | (39) | | | 90.75 | | | | | |
| Outstanding at September 30, 2022 | 1,993 | | | $ | 67.41 | | | 6.1 | | $ | 43 | |
| Options exercisable at September 30, 2022 | 1,387 | | | $ | 58.75 | | | 5.0 | | $ | 41 | |
| Vested and expected to vest as of September 30, 2022 | 1,932 | | | $ | 66.76 | | | 5.9 | | $ | 43 | |
The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the nine months ended September 30, 20212022 was $17.1$3.2 million.
Stock Option Fair Value
The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for 20212022 grants: | | | | | | | | |
| Volatility | 26.2926.20 | | % |
| Risk-free interest rate | 0.861.59 | | % |
| Dividend yield | 1.101.38 | | % |
| Expected term (in years) | 5.75.6 | |
| Weighted-average fair value / share | $ | 23.2619.86 | | |
Expected volatility is calculated based on an analysis of historic volatility measures for Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.
Restricted Stock Unit Grants
The following is a summary of restricted stock unit activity for the nine months ended September 30, 20212022. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant: | | | Share units (in thousands) | | Weighted
Average
Grant Date
Fair Value / Share | | Share units (in thousands) | | Weighted
Average
Grant Date
Fair Value / Share |
| Outstanding at January 1, 2021 | 537 | | | $ | 74.62 | | |
| Outstanding at January 1, 2022 | | Outstanding at January 1, 2022 | 484 | | | $ | 88.47 | |
| Granted | Granted | 230 | | | 105.77 | | Granted | 344 | | | 86.76 | |
| Vested | Vested | (249) | | | 74.59 | | Vested | (226) | | | 84.73 | |
| Forfeited | Forfeited | (25) | | | 87.02 | | Forfeited | (39) | | | 90.96 | |
| Outstanding at September 30, 2021 | 493 | | | $ | 88.42 | | |
| Outstanding at September 30, 2022 | | Outstanding at September 30, 2022 | 563 | | | $ | 88.76 | |
ROIC Performance Share Unit Grants
The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the nine months ended September 30, 2021.2022. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant: | | | Share units (in thousands) | | | Weighted
Average
Grant Date
Fair Value / Share | | Share units (in thousands) | | | Weighted
Average
Grant Date
Fair Value / Share |
| Outstanding at January 1, 2021 | 182 | | | | $ | 76.12 | | |
| Outstanding at January 1, 2022 | | Outstanding at January 1, 2022 | 177 | | | | $ | 84.84 | |
| Granted | Granted | 61 | | | | 102.69 | | Granted | 35 | | | | 86.76 | |
| | Forfeited (a) | Forfeited (a) | (66) | | | | 76.13 | | Forfeited (a) | (64) | | | | 76.60 | |
| Outstanding at September 30, 2021 | 177 | | | | $ | 84.85 | | |
| Outstanding at September 30, 2022 | | Outstanding at September 30, 2022 | 148 | | | | $ | 88.86 | |
(a) Includes ROIC performance share unit awards forfeited during the period as a result of the final performance condition not being achieved on vest date.
TSR Performance Share Unit Grants
The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the nine months ended September 30, 2021:2022: | | | Share units (in thousands) | | | Weighted
Average
Grant Date
Fair Value / Share | | Share units (in thousands) | | | Weighted
Average
Grant Date
Fair Value / Share |
| Outstanding at January 1, 2021 | 182 | | | | $ | 96.98 | | |
| Outstanding at January 1, 2022 | | Outstanding at January 1, 2022 | 177 | | | | $ | 102.96 | |
| Granted | Granted | 61 | | | | 117.56 | | Granted | 70 | | | | 71.14 | |
| Adjustment for Market Condition Achieved (a) | Adjustment for Market Condition Achieved (a) | 35 | | | | 98.79 | | Adjustment for Market Condition Achieved (a) | 22 | | | | 89.62 | |
| Vested | Vested | (93) | | | | 98.79 | | Vested | (75) | | | | 89.62 | |
| Forfeited | Forfeited | (8) | | | | 103.10 | | Forfeited | (13) | | | | 88.37 | |
| Outstanding at September 30, 2021 | 177 | | | | $ | 102.98 | | |
| Outstanding at September 30, 2022 | | Outstanding at September 30, 2022 | 181 | | | | $ | 100.58 | |
(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 20212022 grants:
| | | | | | | | |
| | |
| | |
| Volatility | 33.533.3 | | % |
| Risk-free interest rate | 0.241.44 | | % |
| | |
| | |
ESGRevenue Performance Share Unit Grants
During the first quarterThe following is a summary of 2021, we issued a special grant of less than 0.1 million ESGour Revenue performance share units.unit grants for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | |
| Share units (in thousands) | | | | | | Weighted
Average
Grant Date
Fair Value / Share |
| Outstanding at January 1, 2022 | — | | | | | | | $ | — | |
| Granted | 35 | | | | | | | 86.76 | |
| | | | | | | |
| | | | | | | |
| Forfeited | (2) | | | | | | | 86.76 | |
| Outstanding at September 30, 2022 | 33 | | | | | | | $ | 86.76 | |
The fair value of the Revenue performance share unit awards is determined using the closing price of our common stock on date of grant. The shares will vest on March 1, 2026 based on our performance ascontingent upon the achievement of December 31, 2025 against certain of the Company's 2025 sustainability goals.a pre-set, three-year Revenue target.
Note 14.15. Capital Stock
For the three and nine months ended September 30, 2022, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and approximately 0.6 million shares of common stock for $52 million, respectively. For the three and nine months ended September 30, 2021, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and approximately 0.7 million shares of common stock for $68 million, respectively. For the three and nine months ended September 30, 2020, the Company repurchased less than 0.1 million shares of common stock for approximately $1 million and approximately 0.8 million shares of common stock for $61 million, 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 stockholders and maintains our focus on growth. There were no shares repurchased under the program for the three months ended September 30, 2022. For the nine months ended September 30, 2022, we repurchased 0.5 million shares for approximately $46 million. There were no shares repurchased under the program for the three months ended September 30, 2021. For the nine months ended September 30, 2021, we repurchased approximately 0.6 million shares for $60 million. There were no shares repurchased under the program for the three months ended September 30, 2020. For the nine months ended September 30, 2020, we repurchased approximately 0.7 million shares for $50 million. There are up to $228$182 million in shares that may still be purchased under this plan as of September 30, 2021.2022.
Aside from the aforementioned repurchase program, we repurchased less than 0.1 million shares and approximately 0.1 million shares for less than $1 million and $8approximately $6 million for the three and nine months ended September 30, 2021,2022, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. Likewise, we repurchased less than 0.1 million shares and approximately 0.1 million shares for approximately $1 million and $11$8 million for the three and nine months ended September 30, 2020,2021, respectively.
Note 15.16. Accumulated Other Comprehensive Loss
The following table provides the components of accumulated other comprehensive lossAOCL for the nine months ended September 30, 2021:2022: | | (in millions) | (in millions) | Foreign Currency Translation | | Post-retirement Benefit Plans | | Derivative Instruments | | Total | (in millions) | Foreign Currency Translation | | Post-retirement Benefit Plans | | Derivative Instruments | | Total |
| Balance at January 1, 2021 | $ | (86) | | | $ | (330) | | | $ | 3 | | | $ | (413) | | |
| Balance at January 1, 2022 | | Balance at January 1, 2022 | $ | (101) | | | $ | (268) | | | $ | (2) | | | $ | (371) | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | 10 | | | — | | | — | | | 10 | | Foreign currency translation adjustment | (3) | | | — | | | — | | | (3) | |
| Tax on foreign currency translation adjustment | Tax on foreign currency translation adjustment | (14) | | | — | | | — | | | (14) | | Tax on foreign currency translation adjustment | (2) | | | — | | | — | | | (2) | |
| | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | | | 5 | | | — | | | 5 | | |
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | — | | | 4 | | | — | | | 4 | |
| | Income tax impact on amortization of post-retirement benefit plan items | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | |
| Unrealized loss on derivative hedge agreements | Unrealized loss on derivative hedge agreements | — | | | — | | | (11) | | | (11) | | Unrealized loss on derivative hedge agreements | — | | | — | | | (6) | | | (6) | |
| Income tax benefit on unrealized loss on derivative hedge agreements | — | | | — | | | 1 | | | 1 | | |
| | | Reclassification of unrealized gain on foreign exchange agreements into revenue | Reclassification of unrealized gain on foreign exchange agreements into revenue | — | | | — | | | (2) | | | (2) | | Reclassification of unrealized gain on foreign exchange agreements into revenue | — | | | — | | | 2 | | | 2 | |
| Reclassification of unrealized gain on foreign exchange agreements into cost of revenue | — | | | — | | | (1) | | | (1) | | |
| | Balance at March 31, 2021 | $ | (90) | | | $ | (326) | | | $ | (10) | | | $ | (426) | | |
| | Balance at March 31, 2022 | | Balance at March 31, 2022 | $ | (106) | | | $ | (265) | | | $ | (6) | | | $ | (377) | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | 19 | | | — | | | — | | | 19 | | Foreign currency translation adjustment | (41) | | | — | | | — | | | (41) | |
| Tax on foreign currency translation adjustment | Tax on foreign currency translation adjustment | 1 | | | — | | | — | | | 1 | | Tax on foreign currency translation adjustment | (28) | | | — | | | — | | | (28) | |
| | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | | | 5 | | | — | | | 5 | | |
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | — | | | 4 | | | — | | | 4 | |
| Income tax impact on amortization of post-retirement benefit plan items | Income tax impact on amortization of post-retirement benefit plan items | — | | | (2) | | | — | | | (2) | | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | |
| | Unrealized gain on derivative hedge agreements | Unrealized gain on derivative hedge agreements | — | | | — | | | 4 | | | 4 | | Unrealized gain on derivative hedge agreements | — | | | — | | | (9) | | | (9) | |
| Income tax benefit on unrealized gain on derivative hedge agreements | | Income tax benefit on unrealized gain on derivative hedge agreements | — | | | — | | | 1 | | | 1 | |
| Reclassification of unrealized loss on foreign exchange agreements into revenue | | Reclassification of unrealized loss on foreign exchange agreements into revenue | — | | | — | | | 2 | | | 2 | |
| Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | | Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | — | | | — | | | 1 | | | 1 | |
| | Reclassification of unrealized loss on foreign exchange agreements into revenue | — | | | — | | | 1 | | | 1 | | |
| | Balance at June 30, 2021 | $ | (70) | | | $ | (323) | | | $ | (5) | | | $ | (398) | | |
| Balance at June 30, 2022 | | Balance at June 30, 2022 | $ | (175) | | | $ | (262) | | | $ | (11) | | | $ | (448) | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | (19) | | | — | | | — | | | (19) | | Foreign currency translation adjustment | (74) | | | — | | | — | | | (74) | |
| Tax on foreign currency translation adjustment | Tax on foreign currency translation adjustment | (10) | | | — | | | — | | | (10) | | Tax on foreign currency translation adjustment | (28) | | | — | | | — | | | (28) | |
| | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | | | 5 | | | — | | | 5 | | |
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | — | | | 3 | | | — | | | 3 | |
| | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | | |
| Unrealized gain on derivative hedge agreements | — | | | — | | | (1) | | | (1) | | |
| U.K. pension settlement expense | | U.K. pension settlement expense | — | | | 137 | | | — | | | 137 | |
| Foreign currency translation adjustment for post-retirement benefit plans | | Foreign currency translation adjustment for post-retirement benefit plans | | 46 | | | — | | | 46 | |
| Income tax impact on amortization of post-retirement benefit plan items and U.K. pension settlement expense | | Income tax impact on amortization of post-retirement benefit plan items and U.K. pension settlement expense | — | | | (35) | | | — | | | (35) | |
| Unrealized loss on derivative hedge agreements | | Unrealized loss on derivative hedge agreements | — | | | — | | | (8) | | | (8) | |
| | Reclassification of unrealized gain on foreign exchange agreements into revenue | — | | | — | | | 2 | | | 2 | | |
| | Balance at September 30, 2021 | $ | (99) | | | $ | (319) | | | $ | (4) | | | $ | (422) | | |
| Reclassification of unrealized loss on foreign exchange agreements into revenue | | Reclassification of unrealized loss on foreign exchange agreements into revenue | — | | | — | | | 6 | | | 6 | |
| Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | | Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | — | | | — | | | 2 | | | 2 | |
| Balance at September 30, 2022 | | Balance at September 30, 2022 | $ | (277) | | | $ | (111) | | | $ | (11) | | | $ | (399) | |
The following table provides the components of accumulated other comprehensive lossAOCL for the nine months ended September 30, 2020:2021: | | (in millions) | (in millions) | Foreign Currency Translation | | Post-retirement Benefit Plans | | Derivative Instruments | | Total | (in millions) | Foreign Currency Translation | | Post-retirement Benefit Plans | | Derivative Instruments | | Total |
| Balance at January 1, 2020 | $ | (103) | | | $ | (269) | | | $ | (3) | | | $ | (375) | | |
| Balance at January 1, 2021 | | Balance at January 1, 2021 | $ | (86) | | | $ | (330) | | | $ | 3 | | | $ | (413) | |
| | Foreign currency translation adjustment | Foreign currency translation adjustment | (77) | | | — | | | — | | | (77) | | Foreign currency translation adjustment | 10 | | | — | | | — | | | 10 | |
| Tax on foreign currency translation adjustment | Tax on foreign currency translation adjustment | (13) | | | — | | | — | | | (13) | | Tax on foreign currency translation adjustment | (14) | | | — | | | — | | | (14) | |
| | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | | | 4 | | | — | | | 4 | | |
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | — | | | 5 | | | — | | | 5 | |
| | Income tax impact on amortization of post-retirement benefit plan items | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | |
| Unrealized loss on derivative hedge agreements | Unrealized loss on derivative hedge agreements | — | | | — | | | (2) | | | (2) | | Unrealized loss on derivative hedge agreements | — | | | — | | | (11) | | | (11) | |
| Income tax benefit on unrealized loss on derivative hedge agreements | | Income tax benefit on unrealized loss on derivative hedge agreements | — | | | — | | | 1 | | | 1 | |
| | Reclassification of unrealized gain on foreign exchange agreements into revenue | | Reclassification of unrealized gain on foreign exchange agreements into revenue | — | | | — | | | (2) | | | (2) | |
| Reclassification of unrealized gain on foreign exchange agreements into cost of revenue | | Reclassification of unrealized gain on foreign exchange agreements into cost of revenue | — | | | — | | | (1) | | | (1) | |
| | 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) | | |
| Balance at March 31, 2021 | | Balance at March 31, 2021 | $ | (90) | | | $ | (326) | | | $ | (10) | | | $ | (426) | |
| | Foreign currency translation adjustment | Foreign currency translation adjustment | 35 | | | — | | | — | | | 35 | | Foreign currency translation adjustment | 19 | | | — | | | — | | | 19 | |
| Tax on foreign currency translation adjustment | Tax on foreign currency translation adjustment | 9 | | | — | | | — | | | 9 | | Tax on foreign currency translation adjustment | 1 | | | — | | | — | | | 1 | |
| | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | | | 4 | | | — | | | 4 | | |
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | — | | | 5 | | | — | | | 5 | |
| | Income tax impact on amortization of post-retirement benefit plan items | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | | Income tax impact on amortization of post-retirement benefit plan items | — | | | (2) | | | — | | | (2) | |
| Unrealized gain on derivative hedge agreements | Unrealized gain on derivative hedge agreements | — | | | — | | | 6 | | | 6 | | Unrealized gain on derivative hedge agreements | — | | | — | | | 4 | | | 4 | |
| Income tax benefit on unrealized gain on derivative hedge agreements | — | | | — | | | (1) | | | (1) | | |
| Reclassification of unrealized gain on foreign exchange agreements into revenue | — | | | — | | | (1) | | | (1) | | |
| Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | — | | | — | | | 1 | | | 1 | | |
| Balance at June 30, 2020 | $ | (149) | | | $ | (263) | | | $ | 3 | | | $ | (409) | | |
| | Reclassification of unrealized loss on foreign exchange agreements into revenue | | Reclassification of unrealized loss on foreign exchange agreements into revenue | — | | | — | | | 1 | | | 1 | |
| | Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | (70) | | | $ | (323) | | | $ | (5) | | | $ | (398) | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | (10) | | | — | | | — | | | (10) | | Foreign currency translation adjustment | (19) | | | — | | | — | | | (19) | |
| Tax on foreign currency translation adjustment | Tax on foreign currency translation adjustment | 18 | | | — | | | — | | | 18 | | Tax on foreign currency translation adjustment | (10) | | | — | | | — | | | (10) | |
| | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | | | 4 | | | — | | | 4 | | |
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | | Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net | — | | | 5 | | | — | | | 5 | |
| Income tax impact on amortization of post-retirement benefit plan items | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | | Income tax impact on amortization of post-retirement benefit plan items | — | | | (1) | | | — | | | (1) | |
| Unrealized gain on derivative hedge agreements | Unrealized gain on derivative hedge agreements | — | | | — | | | 4 | | | 4 | | Unrealized gain on derivative hedge agreements | — | | | — | | | (1) | | | (1) | |
| Reclassification of unrealized gain on foreign exchange agreements into revenue | Reclassification of unrealized gain on foreign exchange agreements into revenue | — | | | — | | | (2) | | | (2) | | Reclassification of unrealized gain on foreign exchange agreements into revenue | — | | | — | | | 2 | | | 2 | |
| | Balance at September 30, 2020 | $ | (141) | | | $ | (260) | | | $ | 5 | | | $ | (396) | | |
| Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | (99) | | | $ | (319) | | | $ | (4) | | | $ | (422) | |
Note 16.17. 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-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability,
property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes.
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; acquired by Delticus HoldCo, L.P., a portfolio company of Warburg Pincus LLC, on July 1, 2021), Exelis (acquired by Harris Corporation, now L3Harris Technologies, Inc.) and Xylem, 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 LLC remains a substantial entity with sufficient financial resources to honor its obligations to us.
See Note 4,5, "Income Taxes",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 $5 million and $6$4 million as of September 30, 20212022 and December 31, 2020,2021, respectively, for these general legal matters.
Indemnifications
As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC; acquired by Delticus HoldCo, L.P., a portfolio company of Warburg Pincus LLC, on July 1, 2021), Exelis Inc. (acquired by Harris Corporation, now L3Harris Technologies, 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. ITT LLC'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.
Guarantees
We obtain certain stand-by letters of credit, bank guarantees, surety bonds and insurance letters of credit from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of September 30, 20212022 and December 31, 2020,2021, the amount of surety bonds, bank guarantees, insurance letters of credit, and stand-by letters of credit as well as revenue and customs guarantees was $417$435 million and $378$415 million, respectively.
Environmental
In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned and/or operated by Xylem or for which we are responsible, 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 our best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis. We have estimated and accrued $3$4 million and $3 million as of September 30, 20212022 and December 31, 20202021 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 changes in the combined current and non-current product warranty accruals over each period: | | (in millions) | (in millions) | 2021 | | 2020 | (in millions) | 2022 | | 2021 |
| Warranty accrual – January 1 | Warranty accrual – January 1 | $ | 65 | | | $ | 41 | | Warranty accrual – January 1 | $ | 57 | | | $ | 65 | |
| Net charges for product warranties in the period | Net charges for product warranties in the period | 23 | | | 44 | | Net charges for product warranties in the period | 18 | | | 23 | |
| Settlement of warranty claims | Settlement of warranty claims | (25) | | | (24) | | Settlement of warranty claims | (19) | | | (25) | |
| Foreign currency and other | Foreign currency and other | (1) | | | 1 | | Foreign currency and other | (4) | | | (1) | |
| Warranty accrual - September 30 | Warranty accrual - September 30 | $ | 62 | | | $ | 62 | | Warranty accrual - September 30 | $ | 52 | | | $ | 62 | |
Note 17.18. Segment Information
Our business has 3three reportable segments: Water Infrastructure, Applied Water and Measurement & Control Solutions. The Water Infrastructure segment focuses on the transportation and treatment of water, offering a range of products including water, wastewater and storm water pumps, treatment equipment, and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on the residential, commercial and industrial markets. The Applied Water segment's major products include pumps, valves, heat exchangers, controls and dispensing equipment. The Measurement & Control Solutions segment focuses on developing advanced technology solutions that enable intelligent use and conservation of critical water and energy resources as well as analytical instrumentation used in the testing of water. The Measurement & Control Solutions segment's major products include smart metering, networked communications, measurement and control technologies, critical infrastructure technologies, software and services including cloud-based analytics, remote monitoring and data management, leak detection and pressure monitoring solutions and testing equipment.
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 section of Note 1 in the 20202021 Annual Report. The following table contains financial information for each reportable segment: | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | September 30, | | September 30, |
| (in millions) | (in millions) | 2021 | | 2020 | | 2021 | | 2020 | (in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue: | Revenue: | | | | | | | | Revenue: | | | | | | | |
| Water Infrastructure | Water Infrastructure | $ | 547 | | | $ | 524 | | | $ | 1,625 | | | $ | 1,463 | | Water Infrastructure | $ | 574 | | | $ | 547 | | | $ | 1,696 | | | $ | 1,625 | |
| Applied Water | Applied Water | 400 | | | 364 | | | 1,207 | | | 1,039 | | Applied Water | 458 | | | 400 | | | 1,312 | | | 1,207 | |
| Measurement & Control Solutions | Measurement & Control Solutions | 318 | | | 332 | | | 1,040 | | | 1,001 | | Measurement & Control Solutions | 348 | | | 318 | | | 1,008 | | | 1,040 | |
| Total | Total | $ | 1,265 | | | $ | 1,220 | | | $ | 3,872 | | | $ | 3,503 | | Total | $ | 1,380 | | | $ | 1,265 | | | $ | 4,016 | | | $ | 3,872 | |
| Operating Income (Loss): | Operating Income (Loss): | | | | | | | | Operating Income (Loss): | | | | | | | |
| Water Infrastructure | Water Infrastructure | $ | 101 | | | $ | 89 | | | $ | 265 | | | $ | 201 | | Water Infrastructure | $ | 104 | | | $ | 101 | | | $ | 286 | | | $ | 265 | |
| Applied Water | Applied Water | 60 | | | 56 | | | 190 | | | 144 | | Applied Water | 77 | | | 60 | | | 197 | | | 190 | |
| Measurement & Control Solutions | Measurement & Control Solutions | 7 | | | (62) | | | 29 | | | (120) | | Measurement & Control Solutions | (2) | | | 7 | | | (17) | | | 29 | |
| Corporate and other | Corporate and other | (16) | | | (10) | | | (39) | | | (37) | | Corporate and other | (11) | | | (16) | | | (41) | | | (39) | |
| Total operating income | Total operating income | $ | 152 | | | $ | 73 | | | $ | 445 | | | $ | 188 | | Total operating income | $ | 168 | | | $ | 152 | | | $ | 425 | | | $ | 445 | |
| Interest expense | Interest expense | $ | 21 | | | $ | 22 | | | $ | 63 | | | $ | 56 | | Interest expense | $ | 12 | | | $ | 21 | | | $ | 37 | | | $ | 63 | |
| Other non-operating income (expense), net | 2 | | | (1) | | | 1 | | | (5) | | |
| U.K. pension settlement expense | | U.K. pension settlement expense | 140 | | | — | | | 140 | | | — | |
| Other non-operating income, net | | Other non-operating income, net | 1 | | | 2 | | | 2 | | | 1 | |
| Gain from sale of business | Gain from sale of business | — | | | — | | | 2 | | | — | | Gain from sale of business | — | | | — | | | 1 | | | 2 | |
| Income before taxes | Income before taxes | $ | 133 | | | $ | 50 | | | $ | 385 | | | $ | 127 | | Income before taxes | $ | 17 | | | $ | 133 | | | $ | 251 | | | $ | 385 | |
| Depreciation and Amortization: | Depreciation and Amortization: | | | | | | | | Depreciation and Amortization: | | | | | | | |
| Water Infrastructure | Water Infrastructure | $ | 12 | | | $ | 13 | | | $ | 38 | | | $ | 44 | | Water Infrastructure | $ | 12 | | | $ | 12 | | | $ | 39 | | | $ | 38 | |
| Applied Water | Applied Water | 5 | | | 7 | | | 17 | | | 18 | | Applied Water | 4 | | | 5 | | | 14 | | | 17 | |
| Measurement & Control Solutions | Measurement & Control Solutions | 38 | | | 36 | | | 111 | | | 106 | | Measurement & Control Solutions | 35 | | | 38 | | | 103 | | | 111 | |
| Regional selling locations (a) | Regional selling locations (a) | 6 | | | 4 | | | 15 | | | 15 | | Regional selling locations (a) | 5 | | | 6 | | | 14 | | | 15 | |
| Corporate and other | Corporate and other | 1 | | | 3 | | | 5 | | | 6 | | Corporate and other | 2 | | | 1 | | | 6 | | | 5 | |
| Total | Total | $ | 62 | | | $ | 63 | | | $ | 186 | | | $ | 189 | | Total | $ | 58 | | | $ | 62 | | | $ | 176 | | | $ | 186 | |
| Capital Expenditures: | Capital Expenditures: | | | | | | | | Capital Expenditures: | | | | | | | |
| Water Infrastructure | Water Infrastructure | $ | 18 | | | $ | 9 | | | $ | 42 | | | $ | 27 | | Water Infrastructure | $ | 19 | | | $ | 18 | | | $ | 49 | | | $ | 42 | |
| Applied Water | Applied Water | 4 | | | 4 | | | 11 | | | 16 | | Applied Water | 6 | | | 4 | | | 14 | | | 11 | |
| Measurement & Control Solutions | Measurement & Control Solutions | 19 | | | 22 | | | 60 | | | 73 | | Measurement & Control Solutions | 19 | | | 19 | | | 61 | | | 60 | |
| Regional selling locations (b) | Regional selling locations (b) | 4 | | | 6 | | | 12 | | | 18 | | Regional selling locations (b) | 5 | | | 4 | | | 15 | | | 12 | |
| Corporate and other | Corporate and other | 2 | | | — | | | 2 | | | 2 | | Corporate and other | 4 | | | 2 | | | 9 | | | 2 | |
| Total | Total | $ | 47 | | | $ | 41 | | | $ | 127 | | | $ | 136 | | Total | $ | 53 | | | $ | 47 | | | $ | 148 | | | $ | 127 | |
(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").
This Report contains “forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” "contemplate," "predict," “forecast,” “likely,” “believe,” “target,” "goal," “will,” “could,” “would,” “should,” "potential," "may" and similar expressions or their negative, may, but are not necessary to, identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements that are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals;goals (including those related to our social, environmental and other sustainability goals); or address possible or future results of operations or financial performance, including statements relating to orders, revenues, operating margins and earnings per share growth.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by impacts from changes in international conditions, including as a result of the ongoingwar between Russia and Ukraine, coronavirus (“COVID-19”) pandemic.pandemic and macroeconomic conditions, including inflation. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector spending, inflation, interest rates and related monetary policy by governments in response to inflation, and the strength of the residential and commercial real estate markets;markets, on economic activity and our operations; geopolitical events, including the war between Russia and Ukraine, and regulatory, economic and other risks associated with international operations;our global sales and operations, including with respect to domestic content requirements applicable to projects with governmental funding; continued uncertainty around the ongoing impacts of the COVID-19 pandemic’s magnitude, durationpandemic on the macroeconomy and impacts on our business, operations, growth, and financial condition, as well as uncertainty around approved vaccines and the pace of recovery when the pandemic subsides;condition; actual or potential other epidemics, pandemics or global health crises; availability, shortage or delays in receiving products, parts, electronic components (in particular, semiconductors), parts, and raw materials from our supply chain; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, energy supply, supply chain shortages, logistics challenges, tight labor markets, prevailing price changes, tariffs and other factors; fluctuations in foreign currency exchange rates;demand for our products; disruption, competition andor pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; availability, regulation and interference with radio spectrum used by some of our products; our ability to retain and attract senior management and other diverse and key talent;talent, as well as competition for overall talent and labor; difficulty predicting our financial results; defects, security, warranty and liability claims, and recalls with respect to products; availability, regulation or interference with radio spectrum used by certain of our products; uncertainty related to restructuring and realignment actions and related chargescosts and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; risks relating to products, including defects, security, warranty and liability claims, and recalls; difficulty predicting our financial results, including uncertainties due to the nature of our short- and long-cycle businesses; volatility in our resultsserved markets or impacts on business and operations due to weather conditions, including the effects of climate change; fluctuations in foreign currency exchange rates; our ability to borrow or refinance our existing indebtedness and uncertainty around the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, our products, competition, and the environment and climate change; changes in our effective tax rates or tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20202021 ("20202021 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).
Forward-looking and other statements in this Report regarding our environmental and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or are required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking social, environmental and sustainability related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. All forward-looking statements made herein are based on information currently available to us as of the date of
this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
Xylem is a leading global water technology company. We design, manufacture and service highly engineered products and solutions ranging across a wide variety of critical applications in utility, industrial, residential and commercial building services settings. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test, treatment and analysis of wastewater to the return of water to the environment. Our product and service offerings are organized into three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control Solutions.
•Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater and storm water to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. Additionally, our offerings use monitoring and control, smart and connected technologies to allow for remote monitoring of performance and enable products to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for our customers. In the Water Infrastructure segment, we provide the majority of our sales directly to customers along with strong applications expertise, while the remaining amount is through distribution partners.
•Applied Water serves the water usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning, and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers and controls provide cooling to power plants and manufacturing facilities, circulation for food and beverage processing, as well as boosting systems for agricultural irrigation. In the Applied Water segment, we provide the majority of our sales through long-standing relationships with many of the leading independent distributors in the markets we serve, with the remainder going directly to customers.
•Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and critical infrastructure technologies that allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. We also provide analytical instrumentation used to measure and analyze water quality, flow and level in clean water, wastewater, surface water and coastal environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners, as well as direct sales depending on the regional availability of distribution channels and the type of product.
COVID-19 Pandemic Update and Macroeconomic Conditions
Depending onOur markets and operations have largely demonstrated resilience against the severity, magnitude and durationeffects of the COVID-19 pandemic and its economic consequences,pandemic. However, we anticipate that it will become more difficult to distinguish specific aspects of our operational and financial performance that are most directly related to the pandemic from those more broadly influenced by ongoing macroeconomic, market and industry dynamics that may be, to varying degrees, related to the pandemic and its consequences.
The COVID-19 pandemic, as well as broader global market supply and demand dynamics, have adversely affected, and are expected to continue to adversely affect, our supply chains. We have experienced, and expect tomay continue to experience, shortages in the supply of components, including electronics, particularly semiconductors ("chips"), parts and raw materials. We have also experienced,For example, China has adopted and continuecontinues to experience, increased freightrely upon a “zero-COVID” policy pursuant to which it has declared a number of total and logistics costs, including delivery delays related to port congestion and other related logistics challenges. To help mitigate the effects of these challenges and increase the resilience of our supply chain, we continue to enhance and augment our risk management activities, including supplier pulsing and redundancy. Additionally, we havepartial lockdowns in the past,cities throughout China that has, and may continue to adversely affect the global supply chain. Chip supply has modestly improved in each successive quarter in 2022, which we expect to continue through the future, take measures with respectfourth quarter assuming no new unforeseen impacts to buffer stock, the use of alternative suppliers or redesign of certain products to mitigate the impacts of freight and logistics delays and bolster our access to raw materials, parts and components. If these shortages and interruptions continue, or if additional interruptions occur, theyglobal supply chain.
could have a negative impactIn addition to impacts on our results of operations. Our current overall operating capacity approximates normal levels globally.
Xylem Watermark, our corporate social responsibility program, continues to support our communities in addressing the challenges posed by this global pandemic by strengthening access to Water, Sanitationsupply chain, we have also experienced, and Hygiene (WASH) facilities in schools and health centers through its partnership with Americares and UNICEF, as well as the Partner Community Grants program and matching donations program for employees and partners, and other philanthropic commitments.
Xylem continues to focus on the health and safety of our employees, working with our customers to help them minimize potential disruptions and positively impact our communities. Our support pay program for employees impacted by COVID-19 will remain in place into the fourth quarter of 2021, and we will continue to evaluate it for continuation, as necessary.
Manyexperience other impacts from the macroeconomic conditions, including increased inflation of materials and labor, energy, overhead, freight and logistics costs, and are engaging in various mitigation strategies and activities, including productivity and price realization efforts. Specifically, our offices globally remain in a substantially remote work from home statusproductivity efforts include selective chip allocation, product redesigns, alternate sourcing options, and our COVID-19 Response Team applies a set of Xylem "Return to Workplace" health and safety guidelines for remote workers to return to our facilities.
We continue to assess the evolving nature of the pandemic and its possible implications to our business, employees, supply chain, customers and communities, and to take actions in an effortglobal procurement efforts to mitigate adverse consequences.inflationary impacts. We have also initiated restructuring plans to further optimize our cost structure.
Risk
Risks related to the impact of COVID-19 as well as ourpandemic, supply chain and macroeconomic issues, including inflation, are described in further detail under "Item 1A. Risk Factors" in the Company's 20202021 Annual Report.
Executive Summary
Xylem reported revenue for the third quarter of 20212022 of $1,265$1,380 million, an increase of 3.7%9.1% compared to $1,220$1,265 million reported in the third quarter of 2020.2021. On a constant currency basis, revenue increased by $25$195 million, or 2.0%15.4%, driven by organic revenue growth in the Water Infrastructure and Applied Water segments, partially offset by Measurement & Control Solutions.all end markets. These results were driven by organic growth across all segments and in the industrial and commercialall end markets, offset by declines in the utilities end market.markets.
We generated operating income of $152$168 million (margin of 12.0%12.2%) during the third quarter of 2021,2022, as compared to $73$152 million (margin of 6.0%12.0%) in 2020.2021. Operating income in the third quarter of 2021 benefited2022 included an increase in special charges of $13 million and an unfavorable impact from a decrease inincreased restructuring and realignment costs of $13$6 million as compared to the third quarter of 2020 and a decrease in special charges of $69 million.2021. Excluding the impact of these items,special charges and restructuring and realignment costs, adjusted operating income was $187 million (adjusted margin of 13.6%) during the third quarter of 2022 as compared to $155 million (adjusted margin of 12.3%) during the third quarter of 2021 as compared to $158 million (adjusted margin of 13.0%) in 2020.2021. The decreaseincrease in adjusted operating margin was primarily duerelated to costprice realization, productivity savings and favorable volume, partially offset by inflation, increased spending on strategic investments increased logistics costs and unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives, price realization, favorable volume, and other lesser impacts.
Additional financial highlights for the quarter ended September 30, 20212022 include the following:
•Orders of $1,518$1,419 million, up 21.8%down 6.5% from $1,246$1,518 million in the prior year period, and up 20.1%down 0.7% on an organic basis.
•Earnings per share of $0.63, up 215.0% when$0.07, down 88.9% compared to the prior year ($0.63,0.79, up 1.6%25.4% versus prior year, on an adjusted basis).
•Net income as a percent of revenue of 9.0%.87%, up 600down 813 basis points compared to 3.0%9.0% in the prior year. EBITDA margin of 17.0%5.9%, up 610down 1,110 basis points when compared to 10.9%17.0% in the prior year (17.9%, down 30 basis points(18.3% on an adjusted basis)basis, up 40 basis points)
•Net cash flow provided bygenerated in operating activities of $318$234 million for the nine months ended September 30, 2021,2022, a decrease of $136$84 million from cash provided induring the same period of the prior year. Free cash flow was $191of $86 million, down $127$105 million from the prior year.
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, free cash flow, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and to provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures, our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following items to represent the non-GAAP measures we consider to be key performance indicators, as well as the related reconciling items to the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures may not be comparable to similarly-titled measures reported by other companies.
•"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales or discontinuance of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate.
•"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This approach is used for countries whose functional currency is not the U.S. Dollar.
•"adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share, respectively, adjusted to exclude restructuring and realignment costs, special charges, gain or loss from sale of businesses and tax-related special items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (In millions, except for per share data) | 2021 | | 2020 | | 2021 | | 2020 |
| Net income & Earnings per share | $ | 114 | | | $ | 0.63 | | | $ | 37 | | | $ | 0.20 | | | $ | 314 | | | $ | 1.73 | | | $ | 106 | | | $ | 0.58 | |
| Restructuring and realignment, net of tax of $1 and $4 for 2021 and $3 and $15 for 2020 | 1 | | | — | | | 12 | | | 0.06 | | | 12 | | | 0.07 | | | 52 | | | 0.28 | |
| | | | | | | | | | | | | | | |
| Special charges, net of tax of $0 and $1 for 2021 and $6 and $9 for 2020 | 2 | | | 0.01 | | | 65 | | | 0.36 | | | 7 | | | 0.04 | | | 76 | | | 0.42 | |
| Tax-related special items | (1) | | | (0.01) | | | — | | | — | | | 6 | | | 0.03 | | | (5) | | | (0.03) | |
| Gain from sale of business, net of tax of $0 for 2021 | — | | | — | | | — | | | — | | | (2) | | | (0.01) | | | — | | | — | |
| Adjusted net income & Adjusted earnings per share | $ | 116 | | | $ | 0.63 | | | $ | 114 | | | $ | 0.62 | | | $ | 337 | | | $ | 1.86 | | | $ | 229 | | | $ | 1.25 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in millions, except for per share data) | 2022 | | 2021 | | 2022 | | 2021 |
| Net income & Earnings per share | $ | 12 | | | $ | 0.07 | | | $ | 114 | | | $ | 0.63 | | | $ | 206 | | | $ | 1.14 | | | $ | 314 | | | $ | 1.73 | |
| Restructuring and realignment | 6 | | | 0.03 | | | 2 | | | 0.01 | | | 18 | | | 0.10 | | | 16 | | | 0.09 | |
| Special charges | 154 | | (b) | 0.84 | | | 2 | | | 0.01 | | | 159 | | | 0.88 | | | 8 | | | 0.04 | |
| | | | | | | | | | | | | | | |
| (Gain) loss from sale of business | — | | | — | | | — | | | — | | | (1) | | | (0.01) | | | (2) | | | (0.01) | |
| Tax effects of adjustments (a) | (28) | | (c) | (0.15) | | | (1) | | | (0.01) | | | (34) | | | (0.19) | | | 1 | | | (0.02) | |
| Adjusted net income & Adjusted earnings per share | $ | 144 | | | $ | 0.79 | | | $ | 116 | | | $ | 0.63 | | | $ | 348 | | | $ | 1.92 | | | $ | 337 | | | $ | 1.86 | |
| | | | | | | | | | | | | | | |
| | |
| (a) The tax effects of adjustments are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction. |
| (b) The special charges in the quarter primarily relates to the U.K. pension settlement expense of $140 million and asset impairment charges of $12 million recorded in the period. |
| (c) The $28 million in tax effects of adjustments in the quarter primarily consists of $23 million related to to the U.K. pension settlement expense. |
•"adjusted operating expenses" and "adjusted gross profit" defined as operating expenses and gross profit, respectively, adjusted to exclude restructuring and realignment costs and special charges.
•"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue.
•“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense "EBITDA margin" defined as EBITDA divided by total revenue, "adjusted EBITDA" reflects the adjustment to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, special charges and gain or loss from sale of businesses, and "adjusted EBITDA margin" defined as adjusted EBITDA divided by total revenue. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Net Income | $ | 114 | | | $ | 37 | | | $ | 314 | | | $ | 106 | |
| Income tax expense | 19 | | | 13 | | | 71 | | | 21 | |
| Interest expense, net | 20 | | | 20 | | | 58 | | | 50 | |
| Depreciation | 31 | | | 30 | | | 90 | | | 88 | |
| Amortization | 31 | | | 33 | | | 96 | | | 101 | |
| EBITDA | $ | 215 | | | $ | 133 | | | $ | 629 | | | $ | 366 | |
| EBITDA Margin | 17.0 | % | | 10.9 | % | | 16.2 | % | | 10.5 | % |
| Share-based compensation | $ | 8 | | | $ | 3 | | | $ | 25 | | | $ | 19 | |
| Restructuring and realignment | 2 | | | 15 | | | 16 | | | 67 | |
| Special charges | 2 | | | 71 | | | 8 | | | 85 | |
| Gain from sale of business | — | | | — | | | (2) | | | — | |
| Adjusted EBITDA | $ | 227 | | | $ | 222 | | | $ | 676 | | | $ | 537 | |
| Adjusted EBITDA Margin | 17.9 | % | | 18.2 | % | | 17.5 | % | | 15.3 | % |
•“realignment costs” defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs.
•“special charges" defined as costs incurred by the Company, such as acquisition and integration related costs, non-cash impairment charges and both operating and non-operating adjustments for costs related to the U.K. pension costs.plan buy-out.
•"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, excess tax benefits/losses and other discrete tax adjustments.
•"free cash flow" defined as net cash from operating activities, as reported in the Condensed Consolidated Statement of Cash Flows, less capital expenditures. Our definition of "free cash flow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow. | | | | | | | | | | | |
| Nine Months Ended |
| | September 30, |
| (In millions) | 2021 | | 2020 |
| Net cash provided by operating activities | $ | 318 | | | $ | 454 | |
| Capital expenditures | (127) | | | (136) | |
| Free cash flow | $ | 191 | | | $ | 318 | |
| Net cash used by investing activities | $ | (113) | | | $ | (326) | |
| Net cash (used) provided by financing activities | $ | (806) | | | $ | 550 | |
| | | | | | | | | | | |
| Nine Months Ended |
| | September 30, |
| (in millions) | 2022 | | 2021 |
| Net cash provided by operating activities | $ | 234 | | | $ | 318 | |
| Capital expenditures | (148) | | | (127) | |
| Free cash flow | $ | 86 | | | $ | 191 | |
| Net cash used in investing activities | $ | (123) | | | $ | (113) | |
| Net cash used in financing activities | $ | (210) | | | $ | (806) | |
20212022 Outlook
We are further updating our anticipated total revenue growth to be in the range of 5% to 7%approximately 4% in 2021,2022, with organic revenue growth anticipated to be in the range of 3%9% to 4%, including negative impacts due to the challenging supply chain environment.10%. The following is a summary of our organic revenue outlook by end markets:
•Utilities revenue increased by approximately 1% organically5% through the third quarter on an organic basis driven by strength in the U.S. and western Europe and the emerging markets, partially offset by weakness in North America.the emerging markets. For 2021,the remainder of 2022, we expect organic revenue to be essentially flat with continued resilience ongrowth in the wastewater side,mid-single-digit range, as utilities continue to remain focused on mission-critical applications in wastewater. Long-term capex outlook supported by aging infrastructure and anticipate modest growth on a global basis through the year. Theemerging markets’ continued advancement. On the clean water side, the timing of large clean water utility project deployments has been impacted by the global shortage of electronic components, whichcomponents. Although chip supply remains constrained, we do expect to continue throughout the remaindera continued, modest easing of 2021. We anticipate that these deployments will ramp up whenchip supply, constraints ease based on our strong backlog position and orders momentum.sequentially. Additionally, we can expect healthycontinued momentum in the test and treatment markets globallyfor water quality products and increased demand for our smart water solution and digital offerings.pipeline assessment services due to aging infrastructure.
•Industrial revenue increased by approximately 14% organically13% through the third quarter on an organic basis driven by strongstrength across all major geographic regions. For 2021,2022, we now expect organic revenue growth in the high-single-digit range as activity across all segments rebounds globally andlow-double-digit range. We expect to see continued robust growth in our dewatering business, continues to recover, especially in the emerging markets asfrom mining demand. We expect sustained demand increases and site access restrictions continue to ease. We anticipate growth to continue in the remainder of the year led by the emerging markets and western Europe with North America modest lagging growth.light industrial activity globally.
•In the commercial markets, organic revenue growth wasincreased by approximately 9%8% through the third quarter on an organic basis driven by strength inacross all major geographic regions. For the U.S. and the emerging markets. For 2021,remainder of 2022, we now expect organic revenue growth in the midhigh-single to high-single-digitlow-double digit range. We expect replacement businessincreased demand for green buildings and energy efficiency related projects, particularly in Europe, and strong commercial development in the U.S. to be solid during the year and anticipate continued healthy activity in Europe. We expect new construction activity in North America strengthening, through the year.Middle East.
•In the residential markets, organic revenue growth wasincreased by approximately 20%16% through the third quarter on an organic basis predominately driven by strength in the emerging markets, North America and western Europe.U.S. This market is primarily driven by solid replacement revenue serviced through our distribution network. For 2021,2022, we expect organic revenue growth in the low-teens, driven byhigh-teens. We anticipate dealer activity to remain healthy and order demand activity from increased residential users in the U.S.to normalize as supply chains and western Europe. Additionally, we anticipate strong demand in China for secondary water supply product applications.lead times improve.
We will continue to strategically execute restructuring and realignment actions in an effort to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. During 2021,2022, we expect to incur approximately $20$25 million and $30 million in restructuring and realignment costs. We expect to realize approximately $35 million of net savings in 2021, consisting of approximately $33 million of incremental net savings from restructuring and realignment actions initiated in 2020, and approximately $2 million of net savings from the restructuring, realignment and other structural cost actions initiated during this year.
Results of Operations | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| (In millions) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change | |
| (in millions) | | (in millions) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Revenue | Revenue | $ | 1,265 | | | $ | 1,220 | | | 3.7 | | % | | $ | 3,872 | | | $ | 3,503 | | | 10.5 | | % | Revenue | $ | 1,380 | | | $ | 1,265 | | | 9.1 | | % | | $ | 4,016 | | | $ | 3,872 | | | 3.7 | | % |
| Gross profit | Gross profit | 472 | | | 461 | | | 2.4 | | % | | 1,482 | | | 1,304 | | | 13.7 | | % | Gross profit | 524 | | | 472 | | | 11.0 | | % | | 1,511 | | | 1,482 | | | 2.0 | | % |
| Gross margin | Gross margin | 37.3 | % | | 37.8 | % | | (50) | | bp | | 38.3 | % | | 37.2 | % | | 110 | | bp | Gross margin | 38.0 | % | | 37.3 | % | | 70 | | bp | | 37.6 | % | | 38.3 | % | | (70) | | bp |
| | Total operating expenses | Total operating expenses | 320 | | | 388 | | | (17.5) | | % | | 1,037 | | | 1,116 | | | (7.1) | | % | Total operating expenses | 356 | | | 320 | | | 11.3 | | % | | 1,086 | | | 1,037 | | | 4.7 | | % |
| Expense to revenue ratio | Expense to revenue ratio | 25.3 | % | | 31.8 | % | | (650) | | bp | | 26.8 | % | | 31.9 | % | | (510) | | bp | Expense to revenue ratio | 25.8 | % | | 25.3 | % | | 50 | | bp | | 27.0 | % | | 26.8 | % | | 20 | | bp |
| Restructuring and realignment costs | Restructuring and realignment costs | 2 | | | 15 | | | (86.7) | | % | | 16 | | | 67 | | | (76.1) | | % | Restructuring and realignment costs | 6 | | | 2 | | | 200.0 | | % | | 18 | | | 16 | | | 12.5 | | % |
| | Special charges | Special charges | 1 | | | 70 | | | (98.6) | | % | | 3 | | | 81 | | | (96.3) | | % | Special charges | 13 | | | 1 | | | NM | | 15 | | | 3 | | | 400.0 | | % |
| Adjusted operating expenses | Adjusted operating expenses | 317 | | | 303 | | | 4.6 | | % | | 1,018 | | | 968 | | | 5.2 | | % | Adjusted operating expenses | 337 | | | 317 | | | 6.3 | | % | | 1,053 | | | 1,018 | | | 3.4 | | % |
| Adjusted operating expenses to revenue ratio | Adjusted operating expenses to revenue ratio | 25.1 | % | | 24.8 | % | | 30 | | bp | | 26.3 | % | | 27.6 | % | | (130) | | bp | Adjusted operating expenses to revenue ratio | 24.4 | % | | 25.1 | % | | (70) | | bp | | 26.2 | % | | 26.3 | % | | (10) | | bp |
| Operating income | Operating income | 152 | | | 73 | | | 108.2 | | % | | 445 | | | 188 | | | 136.7 | | % | Operating income | 168 | | | 152 | | | 10.5 | | % | | 425 | | | 445 | | | (4.5) | | % |
| Operating margin | Operating margin | 12.0 | % | | 6.0 | % | | 600 | | bp | | 11.5 | % | | 5.4 | % | | 610 | | bp | Operating margin | 12.2 | % | | 12.0 | % | | 20 | | bp | | 10.6 | % | | 11.5 | % | | (90) | | bp |
| U.K. pension settlement expense | | U.K. pension settlement expense | 140 | | | — | | | 100.0 | | % | | 140 | | | — | | | 100.0 | | % |
| Interest and other non-operating expense, net | Interest and other non-operating expense, net | 19 | | | 23 | | | (17.4) | | % | | 62 | | | 61 | | | 1.6 | | % | Interest and other non-operating expense, net | 11 | | | 19 | | | (42.1) | | % | | 35 | | | 62 | | | (43.5) | | % |
| Gain from sale of business | Gain from sale of business | — | | | — | | | NM | | 2 | | | — | | | NM | | Gain from sale of business | — | | | — | | | — | | | 1 | | | 2 | | | (50.0) | | % |
| Income tax expense | Income tax expense | 19 | | | 13 | | | 46.2 | | % | | 71 | | | 21 | | | 238.1 | | % | Income tax expense | 5 | | | 19 | | | (73.7) | | % | | 45 | | | 71 | | | (36.6) | | % |
| Tax rate | Tax rate | 13.9 | % | | 26.2 | % | | (1,230) | | bp | | 18.3 | % | | 16.6 | % | | 170 | | bp | Tax rate | 27.8 | % | | 13.9 | % | | 1,390 | | bp | | 17.8 | % | | 18.3 | % | | (50) | | bp |
| Net income | Net income | $ | 114 | | | $ | 37 | | | 208.1 | | % | | $ | 314 | | | $ | 106 | | | 196.2 | | % | Net income | $ | 12 | | | $ | 114 | | | (89.5) | | % | | $ | 206 | | | $ | 314 | | | (34.4) | | % |
NM - Not meaningful change
Revenue
Revenue generated during the three and nine months ended September 30, 20212022 was $1,265$1,380 million and $3,872$4,016 million, reflecting increases of $45$115 million, or 3.7%9.1%, and $369$144 million, or 10.5%3.7%, respectively, compared to the same prior year periods. On a constant currency basis, revenue grew 2.0%15.4% and 6.8%8.2% for the three and nine months ended September 30, 2021.2022. The increases on a constant currency basis were driven by organic revenue growth of $27$199 million and $246$326 million respectively. During the quarter, we experiencedrespectively, reflecting strong organic growth across the emerging markets and in western Europe, partially offset by declines in the U.S. On a year-to-date basis, we saw organic growth across all major geographies, where we recovered nicely fromgeographic regions for the significant impacts of the COVID-19 pandemic in the prior year.quarter and on a year-to-date basis, driven by strong backlog execution and price realization.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to revenue during the three and nine months ended September 30, 2021:2022: | | | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem | | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem | |
| (In millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | |
| 2020 Revenue | $ | 524 | | | | $ | 364 | | | | $ | 332 | | | | $ | 1,220 | | | | |
| (in millions) | | (in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | |
| 2021 Revenue | | 2021 Revenue | $ | 547 | | | | $ | 400 | | | | $ | 318 | | | | $ | 1,265 | | | |
| Organic Growth | Organic Growth | 13 | | 2.5 | % | | 29 | | 8.0 | % | | (15) | | (4.5) | % | | 27 | | 2.2 | % | | Organic Growth | 73 | | 13.3 | % | | 79 | | 19.8 | % | | 47 | | 14.8 | % | | 199 | | 15.7 | % | |
| Divestitures | Divestitures | — | | — | % | | — | | — | % | | (2) | | (0.6) | % | | (2) | | (0.2) | % | | Divestitures | — | | — | % | | — | | — | % | | (4) | | (1.3) | % | | (4) | | (0.3) | % | |
| Constant Currency | Constant Currency | 13 | | 2.5 | % | | 29 | | 8.0 | % | | (17) | | (5.1) | % | | 25 | | 2.0 | % | | Constant Currency | 73 | | 13.3 | % | | 79 | | 19.8 | % | | 43 | | 13.5 | % | | 195 | | 15.4 | % | |
| Foreign currency translation (a) | Foreign currency translation (a) | 10 | | 1.9 | % | | 7 | | 1.9 | % | | 3 | | 0.9 | % | | 20 | | 1.7 | % | | Foreign currency translation (a) | (46) | | (8.4) | % | | (21) | | (5.3) | % | | (13) | | (4.1) | % | | (80) | | (6.3) | % | |
| Total change in revenue | Total change in revenue | 23 | | 4.4 | % | | 36 | | 9.9 | % | | (14) | | (4.2) | % | | 45 | | 3.7 | % | | Total change in revenue | 27 | | 4.9 | % | | 58 | | 14.5 | % | | 30 | | 9.4 | % | | 115 | | 9.1 | % | |
| 2021 Revenue | $ | 547 | | | $ | 400 | | | $ | 318 | | | $ | 1,265 | | | | |
| 2022 Revenue | | 2022 Revenue | $ | 574 | | | $ | 458 | | | $ | 348 | | | $ | 1,380 | | | |
|
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Chinese Yuan, the British Pound, the Canadian Dollar, the Euro and the South African Rand.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem |
| (In millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change |
| 2020 Revenue | $ | 1,463 | | | | $ | 1,039 | | | | $ | 1,001 | | | | $ | 3,503 | | |
| Organic Growth | 92 | | 6.3 | % | | 132 | | 12.7 | % | | 22 | | 2.2 | % | | 246 | | 7.0 | % |
| Divestitures | — | | — | % | | — | | — | % | | (7) | | (0.7) | % | | (7) | | (0.2) | % |
| Constant Currency | 92 | | 6.3 | % | | 132 | | 12.7 | % | | 15 | | 1.5 | % | | 239 | | 6.8 | % |
| Foreign currency translation (a) | 70 | | 4.8 | % | | 36 | | 3.5 | % | | 24 | | 2.4 | % | | 130 | | 3.7 | % |
| Total change in revenue | 162 | | 11.1 | % | | 168 | | 16.2 | % | | 39 | | 3.9 | % | | 369 | | 10.5 | % |
| 2021 Revenue | $ | 1,625 | | | | $ | 1,207 | | | | $ | 1,040 | | | | $ | 3,872 | | |
(a)Foreign currency translation impact for the quarter due to the strengtheningweakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Chinese Yuan and the Swedish Krona.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem |
| (in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change |
| 2021 Revenue | $ | 1,625 | | | | $ | 1,207 | | | | $ | 1,040 | | | | $ | 3,872 | | |
| Organic Growth | 170 | | 10.5 | % | | 149 | | 12.3 | % | | 7 | | 0.7 | % | | 326 | | 8.4 | % |
| Divestitures | — | | — | % | | — | | — | % | | (9) | | (0.9) | % | | (9) | | (0.2) | % |
| Constant Currency | 170 | | 10.5 | % | | 149 | | 12.3 | % | | (2) | | (0.2) | % | | 317 | | 8.2 | % |
| Foreign currency translation (a) | (99) | | (6.1) | % | | (44) | | (3.6) | % | | (30) | | (2.9) | % | | (173) | | (4.5) | % |
| Total change in revenue | 71 | | 4.4 | % | | 105 | | 8.7 | % | | (32) | | (3.1) | % | | 144 | | 3.7 | % |
| 2022 Revenue | $ | 1,696 | | | | $ | 1,312 | | | | $ | 1,008 | | | | $ | 4,016 | | |
(a)Foreign currency translation impact for the year due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Australian DollarSwedish Krona and the CanadianAustralian Dollar.
Water Infrastructure
Water Infrastructure revenue increased $23$27 million, or 4.4%4.9%, for the third quarter of 2021 (2.5%2022 (13.3% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $10was negatively impacted by $46 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $13$73 million. Organic growth for the quarter was driven by strength in both the utility and industrial end markets. The utilities end market experienced organic growth of $49 million across all major geographic regions, with particular strength in the U.S. driven by good price realization and strength in the construction sector, and in western Europe where we saw strong demand in utilities' capital spending coupled with good price realization. The industrial end market particularly across thealso had organic growth of $24 million spanning all major geographic regions, with particular strength in emerging markets led by strong dewatering demand in Latin America and Africa, as well as strength in western Europe. Organic growth for the quarter was partially offset by weakness in the utility end market, particularly in emerging markets driven by project revenue in India and China in the prior year that did not recur, as well as in the U.S., with weakness in the dewatering construction and municipal business due to project timing.Europe where we benefited from strong backlog execution.
From an application perspective, organic revenue growth for the third quarter was driven by our transport applications. Theapplications with $67 million of organic growth, with dewatering accounting for almost half of that. All three of our major geographic regions contributed to the organic revenue growth in transport, applicationsled by the U.S. where we continued to experience strong price realization and healthy market conditions, followed by western Europe which had strong revenuedemand from utility capital projects and solid project execution. We also experienced strong growth in the emerging markets where thedriven by strong price realization a well as robust mining demand in our dewatering business, particularity in Latin America and Africa benefited from strong market conditions in mining, as well as modest oil and gas recovery, duringAfrica. Organic revenue for the treatment application was up $6 million for the quarter, and in western Europe, driven by strong industrial and wastewater utility demand. This growth was partially offset by softness in the transport applications in the U.S. due to supply chain constraints. The treatment applications also had organic growth in the quarter, primarilybacklog execution in western Europe.
For the nine months ended September 30, 2021,2022, revenue increased $162$71 million, or 11.1% (6.3%4.4% (10.5% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $99 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $170 million. Organic growth for the period was driven by strength in both the utility and industrial end markets. The utilities end market experienced organic growth of $90 million led by strength in the U.S. and western Europe, bolstered by strong price realization, solid backlog execution and timing of projects as compared to prior year; which was partially offset by weakness in the emerging markets, primarily due to the negative impact of continued COVID impacts in China. The industrial end market had $80 million of organic growth across all major geographies, particularly in western Europe due to strong backlog execution, and the emerging markets, driven by mining projects and price realization in both Latin America and Africa.
From an application perspective, organic revenue growth during the nine-month period was driven by our transport applications. Transport experienced $160 million of revenue growth, almost half of which came from the dewatering application. The increase in organic revenue was led by the U.S. and western Europe, where we experienced solid price realization and executed on strong backlog in both regions. The emerging markets also had strong growth in dewatering from mining demand in Latin America and Africa, which was partially offset by declines in China due to COVID impacts. Organic revenue for the treatment application also contributed $10 million for the period, as revenue growth from strong backlog execution in western Europe and the U.S., partially offset by declines in emerging markets led by the continued negative COVID impacts on China.
Applied Water
Applied Water revenue increased $58 million, or 14.5%, for the third quarter of 2022 (19.8% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $21 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $79 million, led by strength in the industrial end market, followed by strength in the commercial and residential end markets. Organic revenue growth in the third quarter was $40 million for the industrial water application, driven by the emerging markets, due to strong backlog execution driven by market recovery in China and in western Europe where we benefited from $70strength in the marine and food & beverage sectors and continued investments that drove strong growth in manufacturing output. The U.S. also experienced continued strength in the industrial water application, driven by strong price realization. The commercial and residential building services applications grew organically $26 million and $13 million, respectively. Growth in these applications was driven by price realization and strong backlog execution in the U.S. due to supply chain improvements.
For the nine months ended September 30, 2022, revenue increased $105 million, or 8.7% (12.3% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $44 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $92$149 million. Organic growth during the yearperiod was driven by strength in both the industrialall three end markets and utility end markets. Organic growthacross all major geographic regions, with particular strength in the industrial end market was particularly strong across the emerging markets, which included recovery from prior year COVID-19 impacts, particularly in Asia, AfricaU.S. and Latin America, and in western Europe with continued strength in general industrial. Strength in the utility end market was led by western Europe, where operation spending was strong in the first half of the year, and in the emerging markets, where China benefited from healthy order intake coming into the year. This utility growth was partially offset by weakness in the U.S.
From an application perspective, organicEurope. Organic revenue growth during the nine month period was primarily drivenled by our transport applications. The transport applications hadstrength in the industrial water application of $78 million, where in the U.S. where we benefited from price realization and strong revenue growth acrossbacklog execution, in the emerging markets where we benefited fromsaw market recovery in China, and in Western Europe where we had healthy order intake in China and Africa and a strong recovery in Latin America,across the sector. Commercial building services grew $38 million organically during the period, particularly in the dewatering application, as well as growth inU.S. and western Europe, where we benefited from price realization and strong backlog execution. The residential building services application had $33 million of organic revenue growth during the COVID-19 pandemic had a significant impact in the first half of the prior year. Transport application growth in these regions was partially offset by weaknessperiod, primarily in the U.S. driven by our dewatering application. Organic revenue from our treatment applications also contributed to the segment's growth during the period, driven by project orders in Chinaprice realization and Korea, as well as in western Europe and Australia, which were partially offset by the timing of project deliveries in North America.strong backlog execution.
Applied WaterMeasurement & Control Solutions
Applied WaterMeasurement & Control Solutions revenue increased $36$30 million, or 9.9%9.4%, for the third quarter of 2021 (8.0%2022 (13.5% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $7 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $29 million. Organic growth for the quarter was drivennegatively impacted by strength in commercial building services, particularly in the U.S, as we continued to execute
on healthy backlog and order intake, and in the emerging markets, driven by recovery in China. The industrial water business also grew organically in the quarter across all of our major geographic regions, where we benefited from strong order intake and timing of price increases, as well as strength in the specialty flow control applications (marine and food & beverage). The residential building services application had continued modest growth during the quarter.
For the nine months ended September 30, 2021, revenue increased $168 million, or 16.2% (12.7% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $36 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $132 million. Organic growth during the period included growth across all three of the applications and end markets in the segment. The organic growth was led by strength in industrial, which was primarily driven by market recovery and good backlog execution in the emerging markets, particularly in China and India, as well as strong performance in western Europe, driven by market recovery from COVID-19 impacts and strength in specialty flow control applications. Commercial building services had strong organic growth in North America, as we executed on healthy backlog coming into the year. Residential building services had strong organic growth during the first half of the year, primarily driven by the emerging markets, where we experienced strong second water supply business and a favorable prior year comparison in China, as markets conditions recovered from the COVID-19 pandemic. Strength in North America also contributed to the growth in residential building services for the year-to-date, as we executed on healthy backlog coming into the year.
Measurement & Control Solutions
Measurement & Control Solutions revenue decreased $14 million, or 4.2%, for the third quarter of 2021 (5.1% decrease on a constant currency basis) as compared to the prior year. Revenue benefited from $3$13 million of foreign currency translation, with the change at constant currency coming from an organic declinegrowth of $15$47 million (14.8% growth) and reduced revenue related to divestiture impacts of $2$4 million. Organic weaknessgrowth in the quarter was driven by declines$42 million in the utility end market, primarily in North America, which more than offset modest strength in themarkets across all major geographies. The industrial end market.market experienced modest growth of $5 million.
In order to simplify and focus the application discussion, beginning with the first quarter of 2021, we are aggregating the test application into the water application and the software as a service and other application into the water and energy applications, as applicable, as both of these sub-applications provide products and services to the broader, ultimate applications of water and energy. From an application perspective, organic revenue declinegrowth during the quarter was driven by declinesthe water application of $38 million, primarily in the electric business within theU.S., as a result of easing of electronic component shortages and strong price realization. The energy application in North America, marginally offsetapplications grew $9 million driven by increased revenuegas metering backlog execution in the gas business. The water application also experienced a decrease, primarily due to supply chain constraints in North America in our metrology business, which were partially offset by growth in our test and assessment service businesses.U.S.
For the nine months ended September 30, 2021,2022, revenue increased $39decreased $32 million, or 3.9% (1.5% increase3.1% (0.2% decrease on a constant currency basis) as compared to the prior year. Revenue benefited from $24was negatively impacted by $30 million of foreign currency translation, during the nine month period, with the change at constant currency driven bycoming from an organic growthincrease of $22$7 million which was partially offset by(0.7% increase) and reduced revenue related to divestiture impacts of $7$9 million. Organic revenue growth duringin the period was driven by strength in the industrial end market across allconsisted of our major geographic regions. Organic growth in the industrial end market was marginallyof $8 million, driven by strength in our test business in the emerging markets, slightly offset by weakness$1 million of declines in the utility end market in North America.market.
From an application perspective, organic revenue growth during the nine-month period consisted of growth in the water application of $27 million, partially offset by declines in the energy applications of $20 million. Organic revenue growth in the water application was driven by strength in the water application, with growth across all major geographic regions,U.S. due to strong price realization, and backlog execution in the emerging markets. Declines in the energy applications were driven by COVID-19 recovery, coupled with strong backlog execution. Growthimpacts from electronic component shortages in the water applications was largely attributable to our test business, as well as growth in our metrology business inU.S. during the first half of the year. Organic revenue growth was partially offset by a decline in the energy application during the period driven by both the electric and gas businesses, primarily in the U.S. Declines in the electric business resulted from electronic component shortages while declines in the gas business reflect large project deployments in the U.S. during the prior year that did not repeat, as well as project delays during the year driven by the COVID-19 pandemic.
Orders / Backlog
An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the third quarter of 20212022 were $1,518$1,419 million, an
increasea decrease of $272$99 million, or 21.8%6.5%, over the prior year (19.9% increase(1.1% decrease on a constant currency basis). Orders received during the nine months ended September 30, 20212022 were $4,716$4,818 million, an increase of $977$102 million, or 26.1%2.2%, over the prior year (22.2%(6.2% increase on a constant currency basis). Order intake benefited from $24was negatively impacted by $82 million and $147$189 million of foreign currency translation for the three and nine months ended September 30, 2021,2022, respectively. The decrease on a constant currency basis for the quarter was primarily driven by organic order declines of $10 million. The increase on a constant currency basis for the nine month period was primarily driven by organic order growth of $250 million and $840 million for the three and nine months ended September 30, 2021, respectively.$309 million.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three and nine months ended September 30, 2021:2022: | | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem |
| (in millions) | (in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | (in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change |
| 2020 Orders | $ | 558 | | | | $ | 375 | | | | $ | 313 | | | | $ | 1,246 | | | |
| 2021 Orders | | 2021 Orders | $ | 623 | | | | $ | 446 | | | | $ | 449 | | | | $ | 1,518 | | |
| Organic Growth | Organic Growth | 53 | | 9.5 | % | | 64 | | 17.1 | % | | 133 | | 42.5 | % | | 250 | | 20.1 | % | Organic Growth | 18 | | 2.9 | % | | (17) | | (3.8) | % | | (11) | | (2.4) | % | | (10) | | (0.7) | % |
| Divestitures | Divestitures | — | | — | % | | — | | — | % | | (2) | | (0.6) | % | | (2) | | (0.2) | % | Divestitures | — | | — | % | | — | | — | % | | (7) | | (1.6) | % | | (7) | | (0.4) | % |
| Constant Currency | Constant Currency | 53 | | 9.5 | % | | 64 | | 17.1 | % | | 131 | | 41.9 | % | | 248 | | 19.9 | % | Constant Currency | 18 | | 2.9 | % | | (17) | | (3.8) | % | | (18) | | (4.0) | % | | (17) | | (1.1) | % |
| Foreign currency translation (a) | Foreign currency translation (a) | 12 | | 2.2 | % | | 7 | | 1.9 | % | | 5 | | 1.6 | % | | 24 | | 1.9 | % | Foreign currency translation (a) | (47) | | (7.5) | % | | (20) | | (4.5) | % | | (15) | | (3.3) | % | | (82) | | (5.4) | % |
| Total change in orders | Total change in orders | 65 | | 11.6 | % | | 71 | | 18.9 | % | | 136 | | 43.5 | % | | 272 | | 21.8 | % | Total change in orders | (29) | | (4.7) | % | | (37) | | (8.3) | % | | (33) | | (7.3) | % | | (99) | | (6.5) | % |
| 2021 Orders | $ | 623 | | | $ | 446 | | | $ | 449 | | | $ | 1,518 | | | |
| 2022 Orders | | 2022 Orders | $ | 594 | | | $ | 409 | | | $ | 416 | | | $ | 1,419 | | |
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Chinese Yuan, the British Pound, the Canadian Dollar, the Euro and the South African Rand.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem |
| (in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change |
| 2020 Orders | $ | 1,670 | | | | $ | 1,073 | | | | $ | 996 | | | | $ | 3,739 | | |
| Organic Growth | 123 | | 7.4 | % | | 296 | | 27.6 | % | | 421 | | 42.3 | % | | 840 | | 22.5 | % |
| Divestitures | — | | — | % | | — | | — | % | | (10) | | (1.0) | % | | (10) | | (0.3) | % |
| Constant Currency | 123 | | 7.4 | % | | 296 | | 27.6 | % | | 411 | | 41.3 | % | | 830 | | 22.2 | % |
| Foreign currency translation (a) | 80 | | 4.8 | % | | 40 | | 3.7 | % | | 27 | | 2.7 | % | | 147 | | 3.9 | % |
| Total change in orders | 203 | | 12.2 | % | | 336 | | 31.3 | % | | 438 | | 44.0 | % | | 977 | | 26.1 | % |
| 2021 Orders | $ | 1,873 | | | | $ | 1,409 | | | | $ | 1,434 | | | | $ | 4,716 | | |
(a)Foreign currency translation impact for the quarter due to the strengtheningweakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Chinese Yuan and the Swedish Krona.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Total Xylem |
| (in millions) | $ Change | % Change | | $ Change | % Change | | $ Change | % Change | | $ Change | % Change |
| 2021 Orders | $ | 1,873 | | | | $ | 1,409 | | | | $ | 1,434 | | | | $ | 4,716 | | |
| Organic Growth | 225 | | 12.0 | % | | 30 | | 2.1 | % | | 54 | | 3.8 | % | | 309 | | 6.6 | % |
| Divestitures | — | | — | % | | — | | — | % | | (18) | | (1.3) | % | | (18) | | (0.4) | % |
| Constant Currency | 225 | | 12.0 | % | | 30 | | 2.1 | % | | 36 | | 2.5 | % | | 291 | | 6.2 | % |
| Foreign currency translation (a) | (113) | | (6.0) | % | | (45) | | (3.2) | % | | (31) | | (2.2) | % | | (189) | | (4.0) | % |
| Total change in orders | 112 | | 6.0 | % | | (15) | | (1.1) | % | | 5 | | 0.3 | % | | 102 | | 2.2 | % |
| 2022 Orders | $ | 1,985 | | | | $ | 1,394 | | | | $ | 1,439 | | | | $ | 4,818 | | |
(a)Foreign currency translation impact for the year due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Australian DollarSwedish Krona and the CanadianAustralian Dollar.
Water Infrastructure
Water Infrastructure segment orders increased $65decreased $29 million, or 11.6%4.7%, to $623$594 million (9.5%(2.9% increase on a constant currency basis) for the third quarter of 20212022 as compared to the prior year. Order growthintake for the quarter benefited from $12 million of foreign currency translation. Organic orders increased during the quarter as strength in the transport application benefited from strong order intake in North America and western Europe drivenwas negatively impacted by healthy demand, as well as increased demand for dewatering applications in the emerging markets. Treatment orders were down slightly for the quarter.
For the nine months ended September 30, 2021, orders increased $203 million, or 12.2%, to $1,873 million (7.4% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from $80$47 million of foreign currency translation. The order increase on a constant currency basis consisted ofin the quarter was driven by organic order growth in bothour transport applications in the transportU.S. and treatment applications. Organicwestern Europe, where we benefited from healthy market conditions, large infrastructure projects and price realization. Transport order growth in the transport application was driven by healthy market conditions in North AmericaU.S. and western Europe marginallywas slightly offset by a slight net declinedeclines in the emerging markets, where we had a significant projectdewatering strength in Latin America and Africa was more than offset by order of greater than $100 millionsoftness in India, during the second quarter of 2020 which offset order strength in the rest of the emerging markets during period. Organic orders for the treatment application also increased during the period due to order growth in theChina and
Russia. For the treatment application, organic orders declined modestly in the quarter, primarily due to modest weakness in the emerging markets and western Europe more than offsetting growth in the U.S.
For the nine months ended September 30, 2022, orders increased $112 million, or 6.0%, to $1,985 million (12.0% on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by $113 million of foreign currency translation. Organic orders increased during the period as strength in the transport applications came primarily from the U.S. where we benefited from strong market demand and timing of large infrastructure projects in utilities. There was also order growth from water utility customers in western Europe mainly from increased demand in utility capital projects and healthy market conditions in the first half of the year,year. The treatment application saw a decrease in orders driven by strength in North America,the emerging markets particularlydue to declines in China and western Europe.related to COVID impacts, which more than offset modest growth in the U.S.
Applied Water
Applied Water segment orders increased $71decreased $37 million, or 18.9%8.3%, to $446$409 million (17.1% increase(3.8% decrease on a constant currency basis) for the third quarter of 20212022 as compared to the prior year. Order growthweakness for the quarter benefited from $7was negatively impacted by $20 million of foreign currency translation. The order increasedecrease on a constant currency basis was driven entirely by organic order growth,weakness in the U.S. following strong demand recovery in the prior year. The declines in the U.S. were primarily in the U.S. commercial building services andspecialty flow control business in the industrial end markets, where we benefited from strong demand recovery, amplifiedmarket, as well as in residential building services. This decline was partially offset by longer lead times for delivering product, and to a lesser extent,higher order intake in the emerging markets and western Europe.markets.
For the nine months ended September 30, 2021,2022, orders increased $336decreased $15 million, or 31.3%1.1%, to $1,409$1,394 million (27.6%(2.1% increase on a constant currency basis) as compared to the same prior year period.year. Order growth duringweakness for the period benefited from $40was negatively impacted by $45 million of foreign currency translation. The order increase on a constant currency basis was driven by organic order growth in the U.S. across all end markets and applications, where we benefited from strong demand, amplified by early ordering to mitigate longer lead times;strength in the emerging markets particularlyand western Europe as a result of strong market conditions and stocking by channel partners, partially offset by weakness in China where order intake was weakened by COVID-19 impactsthe U.S. following very strong demand recovery in the prior year; as well asyear reflecting order growth of 28% in western Europe.the prior year period.
Measurement & Control Solutions
Measurement & Control Solutions segment orders increased $136decreased $33 million, or 43.5%7.3%, to $449$416 million (41.9% increase(4.0% decrease on a constant currency basis) for the third quarter of 20212022 as compared to the prior year. Order weakness for the quarter was negatively impacted by $15 million of foreign currency translation and reduced orders related to divestiture impacts of $7 million. The order decrease on a constant currency basis consisted primarily of organic order declines of $11 million, or (2.4)%. The order declines in the current quarter are lapping very strong organic order growth of 42% in the same prior year period. Organic orders for the quarter decreased in the energy applications, primarily driven by moderation of the increased demand and advanced ordering to address electronic component shortages that we benefited from in the prior year. This decline was partially offset by strength in the water application driven by large project orders in the U.S. and the emerging markets.
For the nine months ended September 30, 2022, orders increased $5 million or 0.3%, to $1,439 million (2.5% increase on a constant currency basis) as compared to the prior year. Order growth for the quarter benefited from $5period was negatively impacted by $31 million of foreign currency translation.translation and reduced orders related to divestiture impacts of $18 million. The order increase on a constant currency basis consisted almost entirelyprimarily of organic order growth of $133$54 million, or 42.5%3.8%. OrganicThe modest order growth was led byin the period is lapping very strong order growth of 42% in the same period during the prior year. Organic orders for the period increased in the energy application,applications, primarily driven by demand and advanced ordering in our metrology business, where the electric and gas businesses benefited from COVID-19 recovery, coupled with increased order intake duefirst half of the year to address electronic component shortages. Order intakeThis increase was partially offset by weakness in the water application also grew organically duringdriven by the quarter, which experienced strongmoderation of early orders to mitigate electronic component shortages and longer lead times that drove order intakegrowth in the U.S. metrology business, which also benefited from COVID-19 recovery and increased order intake due to electronic component shortages.
For the nine months ended September 30, 2021, orders increased $438 million, or 44.0%, to $1,434 million (41.3% increase on a constant currency basis) as compared to the same prior year, period. Order growth during the period benefited from $27 million of foreign currency translation. The order increase on a constant currency basis included organicas well as modest order growth of $421 million, or 42.3%, which was partially offset by a $10 million reduction in orders related to divestiture impacts during the period. Organic order growth was led by the water application, primarily in our metrology business, but also from our test business as well. The energy applications also had good organic growth during the period. The growth on a year-to-date basis across all the applications in this segment was impacted by similar dynamics impacting the order growth for the quarter.and assessment service offerings.
Backlog
Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays occur from time to time. Total backlog was $2,964$3,667 million at September 30, 2021,2022, an increase of $772$703 million or 35.2%23.7%, as compared to September 30, 20202021 backlog of $2,192$2,964 million, and an increase of $840$427 million or 39.5%13.2%, as compared to December 31, 20202021 backlog of $2,124 $3,240
million, driven by the significant increase in orders in the year. We anticipate that approximately 35%30% of the backlog at September 30, 20212022 will be recognized as revenue in the remainder of 2021, subject to supply constraints.2022. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue increased 70 and decreased 5070 basis points to 37.3%38.0% and increased 110 basis points to 38.3%37.6% for the three and nine months ended September 30, 2021,2022, as compared to 37.8%37.3% and 37.2%38.3% for the comparative 2020 periods.2021 period. The gross margin increase for the quarter included favorable impacts of 840 basis points, driven by 570 basis points of price realization and 250 basis points of productivity savings. Favorable impacts in the quarter were partially offset by 770 basis points of negative impacts, driven by 570 basis points of inflation, 80 basis points of unfavorable mix and 50 basis points of spending on strategic investments. The gross margin decrease for the quarter was primarily driven by cost inflation and increased logistics costs, partially offset by cost reductions from our global procurement and productivity improvement initiatives. The gross margin increase for the nine month period was primarilyincluded 770 basis points of negative impacts, driven by 610 basis points of cost
reductions from our productivity, restructuring inflation, as well as increased spending on strategic investments of 60 basis points and other cost saving initiatives and favorable volume,unfavorable mix of 60 basis points. These impacts were partially offset favorable impacts of 700 basis points, driven by inflation.440 basis points of price realization and 230 basis points of productivity savings.
Operating Expenses
The following table presents operating expenses for the three and nine months ended September 30, 20212022 and 2020:2021: | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | September 30, | | September 30, |
| (In millions) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change | |
| (in millions) | | (in millions) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Selling, general and administrative expenses ("SG&A") | Selling, general and administrative expenses ("SG&A") | $ | 273 | | | $ | 266 | | | 2.6 | | % | | $ | 878 | | | $ | 851 | | | 3.2 | | % | Selling, general and administrative expenses ("SG&A") | $ | 294 | | | $ | 273 | | | 7.7 | | % | | $ | 912 | | | $ | 878 | | | 3.9 | | % |
| SG&A as a % of revenue | SG&A as a % of revenue | 21.6 | % | | 21.8 | % | | (20) | | bp | | 22.7 | % | | 24.3 | % | | (160) | | bp | SG&A as a % of revenue | 21.3 | % | | 21.6 | % | | (30) | | bp | | 22.7 | % | | 22.7 | % | | — | | bp |
| Research and development expenses ("R&D") | Research and development expenses ("R&D") | 49 | | | 45 | | | 8.9 | | % | | 152 | | | 138 | | | 10.1 | | % | Research and development expenses ("R&D") | 47 | | | 49 | | | (4.1) | | % | | 152 | | | 152 | | | — | | % |
| R&D as a % of revenue | R&D as a % of revenue | 3.9 | % | | 3.7 | % | | 20 | | bp | | 3.9 | % | | 3.9 | % | | — | | bp | R&D as a % of revenue | 3.4 | % | | 3.9 | % | | (50) | | bp | | 3.8 | % | | 3.9 | % | | (10) | | bp |
| Restructuring and asset impairment charges | Restructuring and asset impairment charges | (2) | | | 19 | | | (110.5) | | % | | 7 | | | 69 | | | (89.9) | | % | Restructuring and asset impairment charges | 15 | | | (2) | | | (850.0) | | % | | 22 | | | 7 | | | 214.3 | | % |
| Goodwill impairment charge | — | | | 58 | | | — | | % | | — | | | 58 | | | — | | % | |
| | Operating expenses | Operating expenses | $ | 320 | | | $ | 388 | | | (17.5) | | % | | $ | 1,037 | | | $ | 1,116 | | | (7.1) | | % | Operating expenses | $ | 356 | | | $ | 320 | | | 11.3 | | % | | $ | 1,086 | | | $ | 1,037 | | | 4.7 | | % |
| Expense to revenue ratio | Expense to revenue ratio | 25.3 | % | | 31.8 | % | | (650) | | bp | | 26.8 | % | | 31.9 | % | | (510) | | bp | Expense to revenue ratio | 25.8 | % | | 25.3 | % | | 50 | | bp | | 27.0 | % | | 26.8 | % | | 20 | | bp |
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased by $7$21 million to $294 million, or 21.3% of revenue, in the third quarter of 2022, as compared to $273 million, or 21.6% of revenue, in the third quarter ofcomparable 2021 as compared to $266 million, or 21.8% of revenue, in the comparable 2020 period; and increased by $27 million to $878 million, or 22.7% of revenue, in the nine months ended September 30, 2021, as compared to $851 million, or 24.3% of revenue, in the comparable 2020 period. Revenue growth driven by favorable volume was higher than SG&A increases resulting in a lower SG&A as a percentage of sales.sales for the third quarter. Cost increases in both periods were driven by cost inflation and increased investments in strategic growth initiatives of $18 million and inflation of $9 million, partially offset by cost reductions from our$5 million productivity restructuringsavings.
SG&A expenses increased by $34 million to $912 million, or 22.7% of revenue, in the nine months ended September 30, 2022, as compared to $878 million, or 22.7% of revenue, in the comparable 2021 period. Cost increases were driven by increased investments in strategic growth initiatives of $41 million and other cost saving initiativesinflation of $28 million, partially offset by $29 million of favorable currency impacts and decreased quality management costs.$15 million productivity savings.
Research and Development ("R&D") Expenses
R&D expense was $47 million, or 3.4% of revenue, in the third quarter of 2022, as compared to $49 million, or 3.9% of revenue in the third quarter of 2021, as compared to $45 million, or 3.7% of revenue, in the comparable 2020 period;2021; and was $152 million, or 3.9%3.8% of revenue, in the nine months ended September 30, 2021,2022, as compared to $138$152 million, or 3.9% of revenue, in the comparable 20202021 period. The R&D spend was fairly consistent year over year in both periods.
Restructuring and Asset Impairment Charges
Restructuring
During the three and nine months ended September 30, 2022, we incurred restructuring costs of $3 million and $9 million, respectively. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across all segments.
During the three and nine months ended September 30, 2021, we recognized restructuring net chargesrecoveries of $(2) million and charges of $6 million, respectively, of which $(2) million and $4 million, respectively, relate to actions previously announced in 2020 and prior. These charges included reduction of headcount across all segments, asset impairments within our Measurement & Control Solutions segment, and accrual recoveries in our Measurement & Control Solutions segment.
In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, in June 2020 management committed to a restructuring plan that includes actions across our businesses and functions globally. The plan is designed to support our long-term financial resilience, simplify our operations, strengthen our competitive positioning and better serve our customers. During the three and nine months ended September 30, 2020, we recognized restructuring charges of $8 million and $48 million, respectively.2020. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment.
The following is a roll-forward for the nine months ended September 30, 20212022 and 20202021 of employee position eliminations associated with restructuring activities: | | | 2021 | | 2020 | | 2022 | | 2021 |
| Planned reductions - January 1 | Planned reductions - January 1 | | 319 | | | 196 | | Planned reductions - January 1 | | 60 | | | 319 | |
| Additional planned reductions | Additional planned reductions | | 73 | | | 670 | | Additional planned reductions | | 92 | | | 73 | |
| Actual reductions and reversals | Actual reductions and reversals | | (234) | | | (604) | | Actual reductions and reversals | | (66) | | | (234) | |
| Planned reductions - September 30 | Planned reductions - September 30 | | 158 | | | 262 | | Planned reductions - September 30 | | 86 | | | 158 | |
The following table presents expected restructuring spend in 20212022 and thereafter: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Corporate | | Total |
| Actions Commenced in 2021: | | | | | | | | | | |
| Total expected costs | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4 | |
| Costs incurred during Q1 2021 | | 1 | | | — | | | — | | | — | | | 1 | |
| Costs incurred during Q2 2021 | | 1 | | | — | | | — | | | — | | | 1 | |
| Costs incurred during Q3 2021 | | — | | | — | | | — | | | — | | | — | |
| Total expected costs remaining | | $ | 2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | |
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| Actions Commenced in 2020: | | | | | | | | | | |
| Total expected costs | | $ | 23 | | | $ | 7 | | | $ | 31 | | | $ | — | | | $ | 61 | |
| Costs incurred during 2020 | | 19 | | | 4 | | | 30 | | | — | | | 53 | |
| Costs incurred during Q1 2021 | | 2 | | | 1 | | | 1 | | | — | | | 4 | |
| Costs incurred during Q2 2021 | | 2 | | | — | | | — | | | — | | | 2 | |
| Costs incurred during Q3 2021 | | — | | | 1 | | | — | | | — | | | 1 | |
| Total expected costs remaining | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
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| (in millions) | | Water Infrastructure | | Applied Water | | Measurement & Control Solutions | | Corporate | | Total |
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| Total expected costs | | $ | 4 | | | $ | 1 | | | $ | 3 | | | $ | — | | | $ | 8 | |
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| Costs incurred during Q1 2022 | | — | | | — | | | — | | | — | | | — | |
| Costs incurred during Q2 2022 | | 2 | | | 1 | | | 2 | | | — | | | 5 | |
| Costs incurred during Q3 2022 | | 2 | | | — | | | 1 | | | — | | | 3 | |
| Total expected costs remaining | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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| Total expected costs | | $ | 3 | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 4 | |
| Costs incurred during 2021 | | 3 | | | — | | | — | | | — | | | 3 | |
| Costs incurred during Q1 2022 | | — | | | — | | | — | | | — | | | — | |
| Costs incurred during Q2 2022 | | — | | | — | | | — | | | — | | | — | |
| Costs incurred during Q3 2022 | | — | | | — | | | — | | | — | | | — | |
| Total expected costs remaining | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
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During the thirdsecond quarter of 2021,2022, we recorded an adjustmentalso incurred charges of $3$1 million to decrease the liability within the Measurement & Control Solutions segment, related to our 2019 actions. As a result of this adjustment, the estimated total cost of the 2019 actions decreased to $24 million for the Measurement & Control Solutions segment. The 2019 actions are complete.
The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. These actions are expectedprior to continue through the second quarter of 2022.2021.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 20202022 consist primarily of severance charges across segmentscharges. The actions commenced in 2022 are complete.
The Water Infrastructure and asset impairment charges in our Measurement & Control Solutions segment. Theseactions commenced in 2021 consist primarily of severance charges. The Water Infrastructure actions are complete and the Measurement & Control Solutions actions are expected to continue through the secondfirst quarter of 2022.2023.
During the second quarter of 2020 the discontinuance of a product line resulted in $17 million of asset impairments, primarily related to customer relationships, trademarks and fixed assets within our Measurement & Control Solutions segment.
We currently expect to incur approximately $8between $10 million and $15 million in restructuring costs for the full year. These restructuring chargescosts are primarily related to actions taken in response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic as well as other efforts to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. We expect to realize approximately $33 million of incremental net savings in 2021 from restructuring actions initiated in 2020. As a result of all of the actions taken and expected to be taken in 2021, we anticipate approximately $1 million of total net savings to be realized during 2021.
Asset Impairment
During the third quarter of 2020,2022, we determined that certain assets including software and proprietary technologycustomer relationships within our Measurement & Control Solutions segment were impaired. Accordingly, we recognized an impairment charge of $11$12 million. Refer to Note 7,8, "Goodwill and Other Intangible Assets," for additional information.
During the second quarter of 2020 we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments. Accordingly, we recognized an impairment charge of $10 million. Refer to Note 7, "Goodwill and Other Intangible Assets," for additional information.
Operating Income and Adjusted EBITDA
Operating income was $168 million (operating margin of 12.2%) during the third quarter of 2021 was $152 million, reflecting2022, an increase of 108.2%$16 million, or 10.5%, when compared to $73operating income of $152 million in(operating margin of 12.0%) during the third quarterprior year, or a total increase of 2020.20 basis points. Operating margin expansion included unfavorable impacts of 110 basis points from increases in special charges and restructuring and realignment costs as compared to the prior year. Additionally, operating margin included 1200 basis points of expansion from favorable operating impacts, which consisted of an 800 basis point increase related to price realization, 300 basis points related to productivity savings and 100 basis points of favorable volume. Margin expansion was 12.0%offset by negative operating impacts of 1070 basis points driven by 650 basis points of inflation, 190 basis points of increased spending on strategic investments and 80 basis points of unfavorable mix. Excluding special charges and restructuring and realignment costs, adjusted operating income was $187 million (adjusted operating margin of 13.6%) for the third quarter of 2021 versus 6.0% for the comparable period in 2020, an increase of 600 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of $13 million as compared to the third quarter of 2020 and a decrease in special charges of $69 million. Excluding the impact of these items, adjusted operating income was $155 million with an adjusted operating margin of 12.3% in the third quarter of 20212022 as compared to adjusted operating income of $158$155 million with an adjusted(adjusted operating margin of 13.0% in12.3%) or the third quarter of 2020. The decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments, increased logistics costs and unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives, price realization, favorable volume, and other lesser impacts.2021.
Operating income was $425 million (operating margin of 10.6%) for the nine months ended September 30, 2021 was2022, a decrease of $20 million, or 4.5%, when compared to operating income of $445 million reflecting an increase(operating margin of 136.7%11.5%) during the prior year, or a total decrease of 90 basis points. Operating margin declines included unfavorable impacts of 30 basis points from increases in special charges and restructuring and realignment costs as compared to $188 million in 2020.the prior year, as well as 990 basis points of unfavorable operating impacts, driven by 700 basis points of inflation and 180 basis points of increased spending on strategic investments. Operating margin declines were offset by 930 basis points from favorable operating impacts, which were driven by a 630 basis point increase from price realization and 280 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was 11.5%$458 million (adjusted operating margin of 11.4%) for the nine months ended September 30, 2021 versus 5.4% for the comparable period in 2020, an increase of 610 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of $51 million and a decrease in special charges of $78 million2022 as compared to 2020. Excluding the impact of these items, adjusted operating income wasof $464 million with an adjusted(adjusted operating margin of 12.0%) for the nine months ended September 30, 2021 as2021.
Adjusted EBITDA was $252 million (adjusted EBITDA margin of 18.3%) during the third quarter of 2022, an increase of $25 million, or 11.0%, when compared to adjusted operating incomeEBITDA of $336$227 million with an adjusted operating(adjusted EBITDA margin of 9.6%17.9%) during the comparable quarter in 2020.the prior year. The increase in adjusted operatingEBITDA margin was primarily due to cost reductionsthe same factors impacting adjusted operating margin noted above; however, adjusted EBITDA margin expansion excludes the benefit from our productivity, restructuringa year over year reduction in depreciation and other cost saving initiativesamortization expense.
Adjusted EBITDA for the nine months ended September 30, 2022 was $659 million (adjusted EBITDA margin of 16.4%), a decrease of $17 million, or 2.5%, when compared to adjusted EBITDA of $676 million (adjusted EBITDA margin of 17.5%) during the comparable period in prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting adjusted operating margin noted above; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation and increased spending on strategic investments.amortization expense.
The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin: | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | September 30, | | September 30, |
| (In millions) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change | |
| (in millions) | | (in millions) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Water Infrastructure | Water Infrastructure | | | | | | | | | | | | Water Infrastructure | | | | | | | | | | | |
| Operating income | Operating income | $ | 101 | | | $ | 89 | | | 13.5 | | % | | $ | 265 | | | $ | 201 | | | 31.8 | | % | Operating income | $ | 104 | | | $ | 101 | | | 3.0 | | % | | $ | 286 | | | $ | 265 | | | 7.9 | | % |
| Operating margin | Operating margin | 18.5 | % | | 17.0 | % | | 150 | | bp | | 16.3 | % | | 13.7 | % | | 260 | | bp | Operating margin | 18.1 | % | | 18.5 | % | | (40) | | bp | | 16.9 | % | | 16.3 | % | | 60 | | bp |
| Restructuring and realignment costs | Restructuring and realignment costs | 1 | | | 8 | | | (87.5) | | % | | 10 | | | 21 | | | (52.4) | | % | Restructuring and realignment costs | 3 | | | 1 | | | 200.0 | | % | | 7 | | | 10 | | | (30.0) | | % |
| | Special charges | | Special charges | — | | | — | | | NM | | — | | | — | | | NM | |
| Adjusted operating income | Adjusted operating income | $ | 102 | | | $ | 97 | | | 5.2 | | % | | $ | 275 | | | $ | 222 | | | 23.9 | | % | Adjusted operating income | $ | 107 | | | $ | 102 | | | 4.9 | | % | | $ | 293 | | | $ | 275 | | | 6.5 | | % |
| Adjusted operating margin | Adjusted operating margin | 18.6 | % | | 18.5 | % | | 10 | | bp | | 16.9 | % | | 15.2 | % | | 170 | | bp | Adjusted operating margin | 18.6 | % | | 18.6 | % | | — | | bp | | 17.3 | % | | 16.9 | % | | 40 | | bp |
| Applied Water | Applied Water | | Applied Water | |
| Operating income | Operating income | $ | 60 | | | $ | 56 | | | 7.1 | | % | | $ | 190 | | | $ | 144 | | | 31.9 | | % | Operating income | $ | 77 | | | $ | 60 | | | 28.3 | | % | | $ | 197 | | | $ | 190 | | | 3.7 | | % |
| Operating margin | Operating margin | 15.0 | % | | 15.4 | % | | (40) | | bp | | 15.7 | % | | 13.9 | % | | 180 | | bp | Operating margin | 16.8 | % | | 15.0 | % | | 180 | | bp | | 15.0 | % | | 15.7 | % | | (70) | | bp |
| Restructuring and realignment costs | Restructuring and realignment costs | 2 | | | 2 | | | — | | % | | 5 | | | 8 | | | (37.5) | | % | Restructuring and realignment costs | 1 | | | 2 | | | (50.0) | | % | | 4 | | | 5 | | | (20.0) | | % |
| Special charges | Special charges | — | | | — | | | — | | % | | 1 | | | — | | | NM | | Special charges | — | | | — | | | NM | | — | | | 1 | | | NM | |
| Adjusted operating income | Adjusted operating income | $ | 62 | | | $ | 58 | | | 6.9 | | % | | $ | 196 | | | $ | 152 | | | 28.9 | | % | Adjusted operating income | $ | 78 | | | $ | 62 | | | 25.8 | | % | | $ | 201 | | | $ | 196 | | | 2.6 | | % |
| Adjusted operating margin | Adjusted operating margin | 15.5 | % | | 15.9 | % | | (40) | | bp | | 16.2 | % | | 14.6 | % | | 160 | | bp | Adjusted operating margin | 17.0 | % | | 15.5 | % | | 150 | | bp | | 15.3 | % | | 16.2 | % | | (90) | | bp |
| Measurement & Control Solutions | Measurement & Control Solutions | | Measurement & Control Solutions | |
| Operating income (loss) | Operating income (loss) | $ | 7 | | | $ | (62) | | | 111.3 | | % | | $ | 29 | | | $ | (120) | | | 124.2 | | % | Operating income (loss) | $ | (2) | | | $ | 7 | | | (128.6) | | % | | $ | (17) | | | $ | 29 | | | 158.6 | | % |
| Operating margin | Operating margin | 2.2 | % | | (18.7) | % | | 2,090 | | bp | | 2.8 | % | | (12.0) | % | | 1,480 | | bp | Operating margin | (0.6) | % | | 2.2 | % | | (280) | | bp | | (1.7) | % | | 2.8 | % | | (450) | | bp |
| | Restructuring and realignment costs | Restructuring and realignment costs | (1) | | | 5 | | | 120.0 | | % | | 1 | | | 38 | | | (97.4) | | % | Restructuring and realignment costs | 2 | | | (1) | | | NM | | 7 | | | 1 | | | 600.0 | | % |
| Special charges | Special charges | — | | | 69 | | | NM | | — | | | 79 | | | NM | | Special charges | 12 | | | — | | | 100.0 | | % | | 13 | | | — | | | 100.0 | | % |
| Adjusted operating income (loss) | $ | 6 | | | $ | 12 | | | 50.0 | | % | | $ | 30 | | | $ | (3) | | | 1,100.0 | | % | |
| Adjusted operating income | | Adjusted operating income | $ | 12 | | | $ | 6 | | | 100.0 | | % | | $ | 3 | | | $ | 30 | | | 90.0 | | % |
| Adjusted operating margin | Adjusted operating margin | 1.9 | % | | 3.6 | % | | (170) | | bp | | 2.9 | % | | (0.3) | % | | 320 | | bp | Adjusted operating margin | 3.4 | % | | 1.9 | % | | 150 | | bp | | 0.3 | % | | 2.9 | % | | (260) | | bp |
| Corporate and other | Corporate and other | | Corporate and other | |
| Operating loss | Operating loss | $ | (16) | | | $ | (10) | | | 60.0 | | % | | $ | (39) | | | $ | (37) | | | 5.4 | | % | Operating loss | $ | (11) | | | $ | (16) | | | 31.3 | | % | | $ | (41) | | | $ | (39) | | | 5.1 | | % |
| | Special charges | Special charges | 1 | | | 1 | | | — | | % | | 2 | | | 2 | | | — | | % | Special charges | 1 | | | 1 | | | NM | | 2 | | | 2 | | | — | | % |
| Adjusted operating loss | Adjusted operating loss | $ | (15) | | | $ | (9) | | | 66.7 | | % | | $ | (37) | | | $ | (35) | | | 5.7 | | % | Adjusted operating loss | $ | (10) | | | $ | (15) | | | (33.3) | | % | | $ | (39) | | | $ | (37) | | | 5.4 | | % |
| Total Xylem | Total Xylem | | Total Xylem | |
| Operating income | Operating income | $ | 152 | | | $ | 73 | | | 108.2 | | % | | $ | 445 | | | $ | 188 | | | 136.7 | | % | Operating income | $ | 168 | | | $ | 152 | | | 10.5 | | % | | $ | 425 | | | $ | 445 | | | (4.5) | | % |
| Operating margin | Operating margin | 12.0 | % | | 6.0 | % | | 600 | | bp | | 11.5 | % | | 5.4 | % | | 610 | | bp | Operating margin | 12.2 | % | | 12.0 | % | | 20 | | bp | | 10.6 | % | | 11.5 | % | | (90) | | bp |
| Restructuring and realignment costs | Restructuring and realignment costs | 2 | | | 15 | | | (86.7) | | % | | 16 | | | 67 | | | (76.1) | | % | Restructuring and realignment costs | 6 | | | 2 | | | 200.0 | | % | | 18 | | | 16 | | | 12.5 | | % |
| | Special charges | Special charges | 1 | | | 70 | | | (98.6) | | % | | 3 | | | 81 | | | (96.3) | | % | Special charges | 13 | | | 1 | | | 1,200.0 | | % | | 15 | | | 3 | | | 400.0 | | % |
| Adjusted operating income | Adjusted operating income | $ | 155 | | | $ | 158 | | | (1.9) | | % | | $ | 464 | | | $ | 336 | | | 38.1 | | % | Adjusted operating income | $ | 187 | | | $ | 155 | | | 20.6 | | % | | $ | 458 | | | $ | 464 | | | (1.3) | | % |
| Adjusted operating margin | Adjusted operating margin | 12.3 | % | | 13.0 | % | | (70) | | bp | | 12.0 | % | | 9.6 | % | | 240 | | bp | Adjusted operating margin | 13.6 | % | | 12.3 | % | | 130 | | bp | | 11.4 | % | | 12.0 | % | | (60) | | bp |
NM - Not meaningful percentage change
The table below provides a reconciliation of net income to consolidated EBITDA and adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| (in millions) | September 30, | | September 30, |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Net Income | $ | 12 | | | $ | 114 | | | (89) | | % | | $ | 206 | | | $ | 314 | | | (34) | | % |
| Net Income margin | 0.9 | % | | 9.0 | % | | (810) | | bp | | 5.1 | % | | 8.1 | % | | (30.0) | | bp |
| Depreciation | 27 | | | 31 | | | (13) | | % | | 83 | | | 90 | | | (8) | | % |
| Amortization | 31 | | | 31 | | | — | | % | | 93 | | | 96 | | | (3) | | % |
| Interest expense, net | 7 | | | 20 | | | (65) | | % | | 28 | | | 58 | | | (52) | | % |
| Income tax expense | 5 | | | 19 | | | (74) | | % | | 45 | | | 71 | | | (37) | | % |
| EBITDA | $ | 82 | | $ | 215 | | | (62) | | % | | $ | 455 | | $ | 629 | | | (28) | | % |
| Share-based compensation | 10 | | | 8 | | | 25 | | % | | 28 | | | 25 | | | 12 | | % |
| Restructuring & realignment | 6 | | | 2 | | | 200 | | % | | 18 | | | 16 | | | 13 | | % |
| U.K. pension settlement expense | 140 | | | — | | | 100.0 | | % | | 140 | | | — | | | 100.0 | | % |
| Special charges | 14 | | | 2 | | | 600 | | % | | 19 | | | 8 | | | 138 | | % |
| Gain from sale of business | — | | | — | | | NM | | | (1) | | | (2) | | | (50) | | % |
| Adjusted EBITDA | $ | 252 | | | $ | 227 | | | 11 | | % | | $ | 659 | | | $ | 676 | | | (3) | | % |
| Adjusted EBITDA margin | 18.3 | % | | 17.9 | % | | 40 | | bp | | 16.4 | % | | 17.5 | % | | (110) | | bp |
The tables below provide a reconciliation of each segment's operating income (loss) to EBITDA and adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2022 |
| (in millions) | | Water Infrastructure | | Applied Water Systems | | Measurement & Control Solutions |
| Operating Income (Loss) | | $ | 104 | | | $ | 77 | | | $ | (2) | |
| Depreciation | | 11 | | | 4 | | | 8 | |
| Amortization | | 1 | | | — | | | 27 | |
| Other non-operating expense | | — | | | (1) | | | (1) | |
| EBITDA | | $ | 116 | | | $ | 80 | | | $ | 32 | |
| Share-based compensation | | — | | | 2 | | | 2 | |
| Restructuring & realignment | | 3 | | | 1 | | | 2 | |
| Special charges | | — | | | — | | | 12 | |
| Adjusted EBITDA | | $ | 119 | | | $ | 83 | | | $ | 48 | |
| Adjusted EBITDA margin | | 20.7 | % | | 18.1 | % | | 13.8 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2021 |
| (in millions) | | Water Infrastructure | | Applied Water Systems | | Measurement & Control Solutions |
| Operating Income | | $ | 101 | | | $ | 60 | | | $ | 7 | |
| Depreciation | | 11 | | | 5 | | | 11 | |
| Amortization | | 1 | | | — | | | 27 | |
| Other non-operating expense | | 1 | | | — | | | — | |
| EBITDA | | $ | 114 | | | $ | 65 | | | $ | 45 | |
| Share-based compensation | | 1 | | | 1 | | | 1 | |
| Restructuring & realignment | | 1 | | | 2 | | | (1) | |
| Adjusted EBITDA | | $ | 116 | | | $ | 68 | | | $ | 45 | |
| Adjusted EBITDA margin | | 21.2 | % | | 17.0 | % | | 14.2 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 versus 2021 |
| (in millions) | | Water Infrastructure | | Applied Water Systems | | Measurement & Control Solutions |
| Operating Income (Loss) | | $ | 3 | | | $ | 17 | | | $ | (9) | |
| Depreciation | | — | | | (1) | | | (3) | |
| Amortization | | — | | | — | | | — | |
| Other non-operating expense | | (1) | | | (1) | | | (1) | |
| EBITDA | | $ | 2 | | | $ | 15 | | | $ | (13) | |
| Share-based compensation | | (1) | | | 1 | | | 1 | |
| Restructuring & realignment | | 2 | | | (1) | | | 3 | |
| Special charges | | — | | | — | | | 12 | |
| Adjusted EBITDA | | $ | 3 | | | $ | 15 | | | $ | 3 | |
| Adjusted EBITDA margin | | (0.5) | % | | 1.1 | % | | (0.4) | % |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2022 |
| (in millions) | | Water Infrastructure | | Applied Water Systems | | Measurement & Control Solutions |
| Operating Income (Loss) | | $ | 286 | | | $ | 197 | | | $ | (17) | |
| Gain from sale of business | | — | | | — | | | 1 | |
| Depreciation | | 33 | | | 13 | | | 25 | |
| Amortization | | 6 | | | 1 | | | 78 | |
| Other non-operating expense | | (3) | | | (2) | | | (2) | |
| EBITDA | | $ | 322 | | | $ | 209 | | | $ | 85 | |
| Share-based compensation | | 1 | | | 4 | | | 5 | |
| Restructuring & realignment | | 7 | | | 4 | | | 7 | |
| Special charges | | — | | | — | | | 13 | |
| Gain from sale of business | | — | | | — | | | (1) | |
| Adjusted EBITDA | | $ | 330 | | | $ | 217 | | | $ | 109 | |
| Adjusted EBITDA margin | | 19.5 | % | | 16.5 | % | | 10.8 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2021 |
| (in millions) | | Water Infrastructure | | Applied Water Systems | | Measurement & Control Solutions |
| Operating Income | | $ | 265 | | | $ | 190 | | | $ | 29 | |
| Gain from sale of business | | — | | | 2 | | | — | |
| Depreciation | | 33 | | | 15 | | | 30 | |
| Amortization | | 5 | | | 2 | | | 81 | |
| Other non-operating expense | | (3) | | | (1) | | | (2) | |
| EBITDA | | $ | 300 | | | $ | 208 | | | $ | 138 | |
| Share-based compensation | | 2 | | | 3 | | | 4 | |
| Restructuring & realignment | | 10 | | | 5 | | | 1 | |
| Special charges | | — | | | 1 | | | — | |
| Gain from sale of business | | — | | | (2) | | | — | |
| Adjusted EBITDA | | $ | 312 | | | $ | 215 | | | $ | 143 | |
| Adjusted EBITDA margin | | 19.2 | % | | 17.8 | % | | 13.8 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 versus 2021 |
| (in millions) | | Water Infrastructure | | Applied Water Systems | | Measurement & Control Solutions |
| Operating Income (Loss) | | $ | 21 | | | $ | 7 | | | $ | (46) | |
| Gain from sale of business | | — | | | (2) | | | 1 | |
| Depreciation | | — | | | (2) | | | (5) | |
| Amortization | | 1 | | | (1) | | | (3) | |
| Other non-operating expense | | — | | | (1) | | | — | |
| EBITDA | | $ | 22 | | | $ | 1 | | | $ | (53) | |
| Share-based compensation | | (1) | | | 1 | | | 1 | |
| Restructuring & realignment | | (3) | | | (1) | | | 6 | |
| Special charges | | — | | | (1) | | | 13 | |
| Gain from sale of business | | — | | | 2 | | | (1) | |
| Adjusted EBITDA | | $ | 18 | | | $ | 2 | | | $ | (34) | |
| Adjusted EBITDA margin | | 0.3 | % | | (1.3) | % | | (3.0) | % |
Water Infrastructure
Operating income for our Water Infrastructure segment increased $12was $104 million (operating margin of 18.1%) during the third quarter of 2022, an increase of $3 million, or 13.5%2.9%, when compared to operating income of $101 million (operating margin of 18.5%) during the prior year, or a total decrease of 40 basis points. Operating margin declines included unfavorable impacts of 40 basis points from increases in restructuring and realignment costs as compared to the prior year, as well as negative operating impacts of 1,080 basis points driven by 560 basis points of inflation, 250 basis points of increased spending on strategic investments and 190 basis points of unfavorable mix. Margin declines were offset by 1,080 basis points from favorable operating impacts consisting a 680 basis points of price realization, 300 basis points of productivity savings and 100 basis points of favorable volume. Excluding special charges and restructuring and realignment costs, adjusted operating income was $107 million (adjusted operating margin of 18.6%) for the third quarter of 20212022 as compared to adjusted operating income of $102 million (adjusted operating margin of 18.6%) or the third quarter of 2021.
Operating income was $286 million for our Water Infrastructure segment (operating margin of 16.9%) for the nine months ended September 30, 2022, an increase of $21 million, or 7.9%, when compared to operating income of $265 million (operating margin of 16.3%) during the prior year, with operating margin also increasing from 17.0% to 18.5%.or a total increase of 60 basis points. Operating margin benefitedexpansion included favorable impacts of 20 basis points from a decrease in restructuring and realignment costs as compared to the prior year, as well as 940 basis points from favorable operating impacts, driven by 510 basis points of $7 million during the quarter.price realization, 280 basis points from productivity savings and 90 basis points of favorable volume. Margin expansion was offset by 900 basis points of unfavorable impacts driven by 570 basis points of inflation, 220 basis points due to increased spending on strategic investments and 80 basis points of unfavorable mix. Excluding thesespecial charges and restructuring and realignment costs, adjusted operating income increased $5was $293 million or 5.2%, with adjusted(adjusted operating margin increasing from 18.5% to 18.6%. The increase in adjusted operating marginof 17.3%) for the quarter was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives, decreased inventory management cost, and other lesser impacts. These items were partially offset by cost inflation and increased spending on strategic investments.
For the nine months ended September 30, 2021, operating income for our Water Infrastructure segment increased $64 million, or 31.8%,2022 as compared to the prior year, with operating margin also increasing from 13.7% to 16.3%. Operating margin benefited from a decrease in restructuring and realignment costs of $11 million in 2021. Excluding these restructuring and realignment costs, adjusted operating income increased $53of $275 million (adjusted operating margin of 16.9%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $119 million (adjusted EBITDA margin of 20.7%) for the third quarter of 2022, an increase of $3 million, or 23.9%2.6%, withwhen compared to adjusted EBITDA of $116 million (adjusted EBITDA margin of 21.2%) during the prior year. The adjusted EBITDA margin was impacted by the same offsetting factors impacting the adjusted operating margin; however, adjusted EBITDA margin increasingdid not benefit from 15.2%a year over year reduction in share based compensation expense and other non-operating expense.
Adjusted EBITDA was $330 million (adjusted EBITDA margin of 19.5%) for the nine months ended September 30, 2022, an increase of $18 million, or 5.8%, when compared to 16.9%.adjusted EBITDA of $312 million (adjusted EBITDA margin of 19.2%) during 2021. The increase in adjusted operatingEBITDA margin during the period was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume. These impacts were partially offset by cost inflation, increased spending on strategic investments, unfavorable mix, and increased logistics costs.the same factors impacting the increase in adjusted operating margin.
Applied Water
Operating income for our Applied Water segment increased $4was $77 million or 7.1%, for(operating margin of 16.8%) during the third quarter of 20212022, an increase of $17 million, or 28.3%, when compared to operating income of $60 million (operating margin of 15.0%) during the prior year, with operating margin decreasing from 15.4% to 15.0%.or a total increase of 180 basis points. Operating margin was impacted by restructuring and realignment costsexpansion included favorable impacts of $2 million in both years. Excluding these restructuring and realignment costs, adjusted operating income increased $4 million, or 6.9%, with adjusted operating margin decreasing from 15.9% to 15.5%. The decrease in adjusted operating margin for the quarter was primarily due to cost inflation, increased spending on strategic investments, increased logistics costs, and inventory management costs. These impacts were partially offset by increased cost reduction from our productivity, restructuring and other cost saving initiatives, favorable volume, and price realization.
For the nine months ended September 30 2021, operating income for our Applied Water segment increased $46 million, or 31.9%, as compared to the prior year, with operating margin also increasing from 13.9% to 15.7%. Operating margin benefitedbasis points from a decrease in restructuring and realignment costs of $3 million duringas compared to the prior year, whichas well as 1,510 basis points from favorable operating impacts, driven by 1,150 basis points from price realization and 320 basis points from productivity savings. Margin expansion was partially offset by $1 millionnegative operating impacts of special charges incurred in 2021. Excluding these items, adjusted operating income increased $44 million, or 28.9%, with adjusted operating margin increasing from 14.6% to 16.2%. The increase in adjusted operating margin during the period was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted1,360 basis points driven by COVID-19 recovery. These impacts were partially offset by cost860 basis points of inflation, increased logistics cost,130 basis points of increased spending on strategic investments, and increased130 basis points of inventory management costs.
Measurement & Control Solutions
Operatingcosts and 60 basis points of unfavorable mix. Excluding special charges and restructuring and realignment costs, adjusted operating income for our Measurement & Control Solutions segment increased $69was $78 million or 111.3%,(adjusted operating margin of 17.0%) for the third quarter of 20212022 as compared to the prior year, with operating margin increasing from (18.7)% to 2.2%. Operating margin benefited from decreased restructuring and realignment costs of $6 million, and $69 million of special charges that were incurred during 2020 that did not recur during the quarter. Excluding these items, adjusted operating income decreased $6of $62 million or 50.0%, with adjusted(adjusted operating margin decreasing from 3.6% to 1.9%. The decrease in adjusted operating marginof 15.5%) for the third quarter of 2021.
Operating income was primarily due to cost inflation, unfavorable volume, and unfavorable mix. These impacts were partially offset by increased cost reductions from$197 million for our restructuring, productivity and other cost saving initiatives, decreased quality management costs, and price realization.
ForApplied Water segment (operating margin of 15.0%) for the nine months ended September 30, 2021,2022, an increase of $7 million, or 3.7%, when compared to operating income for our Measurement & Control Solutions segment increased $149of $190 million or 124.2%, as compared to(operating margin of 15.7%) during the prior year, with operating margin increasing from (12.0)% to 2.8%.or a total decrease of 70 basis points. Operating margin benefiteddeclines included favorable impacts of 20 basis points from a decrease in restructuring and realignment costs of $37 million during the year and $79 million of special charges incurred in 2020 that did not recur.as compared to the prior year, as well as 1,300 basis points of unfavorable operating impacts, driven by 950 basis points of inflation, 100 basis points of increased spending on strategic investments, and 70 basis points of increased inventory management costs. Margin declines were offset by 1,210 basis points from favorable operating impacts, which were driven by 880 basis points of price realization and 320 basis points from productivity savings. Excluding these items,special charges and restructuring and realignment costs, adjusted operating income increased $33was $201 million with(adjusted operating margin of 15.3%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $196 million (adjusted operating margin increasing from (0.3)%of 16.2%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $83 million (adjusted EBITDA margin of 18.1%) for the third quarter of 2022, an increase of $15 million, or 22.1%, when compared to 2.9%.adjusted EBITDA of $68 million (adjusted EBITDA margin of 17.0%) during the prior year. The increase in adjusted operatingEBITDA margin during the period was primarily due to cost reductionsthe same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from our restructuring, productivitya year over year reduction in depreciation and other cost saving initiatives and decreased quality management costs,amortization expense.
Adjusted EBITDA was $217 million (adjusted EBITDA margin of 16.5%) for the nine months ended September 30, 2022, an increase of $2 million, or 0.9%, when compared to adjusted EBITDA of $215 million (adjusted EBITDA margin of 17.8%) during the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a specific warranty charge recordedyear over year reduction in depreciation and amortization expense.
Measurement & Control Solutions
Operating loss for our Measurement & Control Solutions segment was $2 million (operating margin of (0.6%)) during the third quarter of 2022, a decrease of $9 million, or (128.6)%, when compared to operating income of $7 million (operating margin of 2.2%) during the prior year, thator a total decrease of 280 basis points. Operating margin declines included unfavorable impacts of 430 basis points from increases in special charges (asset impairment) and restructuring and realignment costs as compared to the prior year. Operating margin declines also included negative operating impacts of 530 basis points driven by 490 basis points of inflation. Margin declines were offset by 680 basis points from favorable operating impacts consisting of 440 basis points of price realization and 240 basis points of favorable volume. Excluding special charges and restructuring and realignment costs, adjusted operating income was $12 million (adjusted operating margin of 3.4%) for the third quarter of 2022 as compared to adjusted operating income of $6 million (adjusted operating margin of 1.9%) for the third quarter of 2021.
Operating loss was $17 million for our Measurement & Control Solutions (operating margin of (1.7%)) for the nine months ended September 30, 2022, a decrease of $46 million, or (158.9)%, when compared to operating income of $29 million (operating margin of 2.8%) during the prior year, or a total decrease of 450 basis points. Operating margin declines included unfavorable impacts of 190 basis points an increase in special charges (asset impairment) and restructuring and realignment costs as compared to the prior year. Operating margin declines also had negative operating impacts of 890 basis points of unfavorable impacts driven by 530 basis points of inflation, 160 basis points of unfavorable volume and 90 basis points of unfavorable mix. Margin declines were offset by 630 basis points from favorable operating impacts consisting of 410 basis points of price realization and 220 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was $3 million (adjusted operating margin of 0.3%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $30 million (adjusted operating margin of 2.9%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $48 million (adjusted EBITDA margin of 13.8%) for the third quarter of 2022, an increase of $3 million, or 6.7%, when compared to adjusted EBITDA of $45 million (adjusted EBITDA margin of 14.2%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not recur relatedbenefit from a year over year reduction in depreciation and amortization expense.
Adjusted EBITDA was $109 million (adjusted EBITDA margin of 10.8%) for the nine months ended September 30, 2022, a decrease of $34 million, or 23.8%, when compared to adjusted EBITDA of $143 million (adjusted EBITDA margin of 13.8%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the decrease in adjusted operating margin; however, adjusted EBITDA margin decline was greater as it did not benefit from a firmware issue that was identifiedyear over year reduction in depreciation and addressed timely. These impacts were partially offset by cost inflation.amortization expense.
Corporate and otherOther
Operating loss for corporate and other increased $6decreased $5 million, or 60.0%31.2%, during the third quarter of 20212022 compared to the prior year period primarily due to increased spending on strategic initiatives and timing of employee related costs across quarters.period. For the nine months ended September 30, 2021,2022, operating loss for corporate and other increased $2 million, or 5.4%5.1%, compared to the same prior year period. The increasedecrease in cost is primarily driven by increased spending on strategic initiatives partially offset by reduced costs related to COVID-19 initiatives.
Interest Expense
Interest expense was $21 millionoperating loss for the three months ended September 30, 2021, essentially flat with2022 was due to the comparativetiming of employee-related expenses as compared to prior year. The increase in operating loss for the year period. was primarily due to higher performance related incentive costs.
Interest Expense
Interest expense was $63$12 million and $56$37 million for the three and nine months ended September 30, 2022 and $21 million and $63 million for the three and nine months ended September 30, 2021, and 2020, respectively. The increasedecrease in interest expense is primarily driven by the issuance of our Green Bond during the second quarter of 2020, partially offset by reduced interest expense inincurred during 2021 duerelated to our senior note that was paid off in October 2021 and interest income related to additional net investment hedges and interest expense on 2020 short term borrowings.executed in during 2022. See Note 10,9., “Derivative Financial Instruments” and Note 11, "Credit Facilities and Debt",Debt," of our condensed consolidated financial statements for a description of our net investment hedges and credit facilities and long-term debt, and related interest.respectively.
Income Tax Expense
The income tax provision for the three months ended September 30, 20212022 was $19$5 million resulting in an effective tax rate of 13.9%27.8%, compared to a $13$19 million expense resulting in an effective tax rate of 26.2%13.9% for the same period in 2020.2021. The income tax provision for the nine months ended September 30, 20212022 was $71$45 million resulting in an effective tax rate of 18.3%17.8%, compared to a $21$71 million expense resulting in an effective tax rate of 16.6%18.3% for the same period in 2020.2021. The effective tax rate for the three month periodmonths ended September 30, 20212022 differs from the same period in 20202021 due to unfavorablethe impact of earnings mix as compared to the prior year and favorable equity compensation deductions and goodwill impairment charge in the prior year.current period. The effective tax rate for the nine month period ended September 30, 20212022 differs from the same period in 20202021 due to the impact of tax settlementssettlement benefits in the current period.period which was partially offset by permanent differences.
Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash: | | | Nine Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| (In millions) | 2021 | | 2020 | | Change | |
| (in millions) | | (in millions) | 2022 | | 2021 | | Change |
| Operating activities | Operating activities | $ | 318 | | | $ | 454 | | | $ | (136) | | Operating activities | $ | 234 | | | $ | 318 | | | $ | (84) | |
| Investing activities | Investing activities | (113) | | | (326) | | | 213 | | Investing activities | (123) | | | (113) | | | (10) | |
| Financing activities | Financing activities | (806) | | | 550 | | | (1,356) | | Financing activities | (210) | | | (806) | | | 596 | |
| Foreign exchange (a) | Foreign exchange (a) | (19) | | | — | | | (19) | | Foreign exchange (a) | (64) | | | (19) | | | (45) | |
| Total | Total | $ | (620) | | | $ | 678 | | | $ | (1,298) | | Total | $ | (163) | | | $ | (620) | | | $ | 457 | |
(a)The impact is primarily due to weakening of the Euro and Chinese Yuan partially offset by the strengthening of the Canadian Dollar.Russian Ruble.
Sources and Uses of Liquidity
Operating Activities
Net cash providedCash generated by operating activities was $318$234 million for the nine months ended September 30, 20212022 as compared to $454$318 million in the comparable prior year period. This decreaseThe reduction in cash generated was primarily driven byhigher working capital levels, reflecting increased safety stock and higher accounts receivable driven by increased sales. Lower interest and income tax payments and increased cash used for income taxes and payroll and other taxes, partially from delayed timing of payments in the prior year related to COVID-19 related concessions. Partially offsettingoffset these items was increased net cash earnings and lower prepayments.items.
Investing Activities
Cash used in investing activities was $113$123 million for the nine months ended September 30, 20212022 as compared to $326$113 million in the comparable prior year period. This decreaseThe increase in cash used of $213 millionspending was mainly driven by spending on time deposithigher capital expenditures driven primarily by investments in 2020 that did not reoccur in 2021.equipment and rental fleet. Cash received from cross-currency swaps partially offset the outflow.
Financing Activities
Cash used by financing activities was $806$210 million for the nine months ended September 30, 20212022 as compared to cash generatedused of $550$806 million in the comparable prior year period. This net decreaseThe reduction in cash generated by financing activities during the periodused was primarily driven by the issuance of our Green Bond and short term debt in 2020, and the repayment of Senior Notes due 2021. Partially offsetting these items was2021 in the repayment of short term debt in 2020.
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. As a result of uncertainties caused both directly and indirectly by the COVID-19 pandemic and macroeconomic conditions, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends. We will continue to evaluate aspects of our spending and anticipate our capital expenditures will gradually begin to increase to normal levels as the markets we operate in recover.
Historically, we have generated operating cash flow sufficient to fund our primary cash needs. We will continue to monitor the economic effects of the COVID-19 pandemic and its impact on the Company's future operating cash flows going forward. If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. Our securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note 10,11, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.
We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis. As of September 30, 2021, the COVID-19 pandemic has not materially impacted our borrowing costs or other costs of capital, however 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 capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other obligations in both the U.S. and outside of the U.S. during the year. In addition, we believe our existing committed credit facilities and access to the public debt markets would provide further liquidity if required. Currently, we have available liquidity of approximately $2.1$2.0 billion, consisting of $1.3$1.2 billion of cash and $800 million of available credit facilities as disclosed in Note 10,11, "Credit Facilities and Debt", of our condensed consolidated financial statements. On October 1st,1, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of $600 million. Our next long-term debt maturity is March 2023.We intend to repay the Senior Notes due 2023 in December 2022 at par using cash on hand.
Risks related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our 20202021 Annual Report.
Credit Facilities & Long-Term Contractual Commitments
See Note 10,11, "Credit Facilities and Debt",Debt," of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.
Non-U.S. Operations
We generated approximately 56%53% and 54% of our revenue from non-U.S. operations for the three and nine months ended September 30, 2022, respectively, and 56% for both the three and nine months ended September 30, 2021 and approximately 54% and 52% for the three and nine months ended September 30, 2020, respectively.2021. As we continue to grow our operations in the emerging markets and elsewhere outside of the U.S., we expect to continue to generate significant revenue from non-U.S. operations and expect that a substantial portion of our cash will be 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. and other international subsidiaries when we believe it is cost-effective to do so. We continually review our domestic and foreign cash profile and our, expected future cash generation and investment opportunities, and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. As of September 30, 2021,2022, we have provided a deferred tax liability of $6$1 million for net foreign withholding taxes and state income taxes on $116$475 million of earnings expected to be repatriated to the U.S. parent as deemed necessary in the future.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We believe the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain, particularly at this time and moving forward given the uncertainty around the magnitude and duration of the COVID-19 pandemic.pandemic and related macro economic conditions. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 20202021 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. Other than as discussed below, thereThere have been no significant changes in the information concerning our critical accounting estimates as stated in our 20202021 Annual Report.
Post-retirement Benefit Plans. As described in our 2021 Annual Report, the thirdCompany initiated the process for a full buy-out of its largest defined benefit plan in the U.K. in 2019. During the first quarter of 2020, management updated forecaststhe Company purchased a bulk annuity policy as a plan asset to facilitate the termination and buy-out of future cash flows for the Advanced Infrastructure Analytics ("AIA") businesses,plan. The buyout was completed in September 2022, at which reflected significant negative volume impacts frompoint the COVID-19 pandemic,remaining benefit obligations were transferred to the insurer and we were relieved of any further obligation. As a result, we recorded a pension settlement charge of £123 million (approximately $140 million), primarily on our assessment services business. Our ongoing investmentconsisting of unrecognized actuarial losses. The settlement also resulted in the AIA businesses also continues to impact near-term profitability. Based on these factors, we determined that there were indicators that the AIA reporting unit’s goodwill may be impaired, and accordingly, we performed an interim goodwill impairment test asrecognition of July 1, 2020.$23 million in net tax benefits. The resultssettlement of the impairment test showed that the fair value of the AIA reporting unit was lower than the carrying value, resulting in a $58 million goodwill impairment charge. As of September 30, 2021, the remaining goodwill balance inplan did not impact our AIA reporting unit after recording the goodwill impairment charge was $112 million.
The uncertainty of the future impact of the COVID-19 pandemic may also contribute to further deterioration of our future cash flows. If we do not achieve our forecasts, it is possible that the goodwill of the AIA reporting unit could be deemed to be impaired again in a future period. The risks and potential impacts of COVID-19 on the fair value of our assets are included in our risk factor disclosures referenced under “Item 1A. Risk Factors" in the Company's 2020 Annual Report.position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the information concerning market risk as stated in our 20202021 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations of previously-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes. See Note 16,17, "Commitments and Contingencies",Contingencies," to the condensed consolidated financial statements for further information and any updates.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in "Item 1A. Risk Factors" of our 20202021 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended September 30, 2021:2022: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PERIOD | | TOTAL NUMBER OF SHARES PURCHASED | | AVERAGE PRICE PAID PER SHARE (a) | | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b) | | APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b) |
7/1/2122 - 7/31/2122 | | — | | — | | — | | $228182 |
8/1/2122 - 8/31/2122 | | — | | — | | — | | $228182 |
9/1/2122 - 9/30/2122 | | — | | — | | — | | $228182 |
This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.
(a)Average price paid per share is calculated on a settlement basis.
(b)On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our stockholders and maintains our focus on growth. There were no shares repurchased under this program duringfor the three months ended September 30, 2021.2022. There are up to $228$182 million in shares that may still be purchased under this plan as of September 30, 2021.2022.
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). |
| | | |
| | | |
| | | |
| | 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 | | The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021,2022, formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Income Statements, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements
| The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
|
| | | |
| 104.0 | | The cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 20212022 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) |
| |
| | /s/ Geri McShane |
| | Geri McShane |
| | Vice President, Controller and Chief Accounting Officer |
| | |
November 2, 20211, 2022