Xylem Inc 10-Q for FY2021 Q1
Xylem Inc. (XYL)
10-Q
2021-05-04
For: 2021-03-31
View Original
Added on
April 11, 2026
About this 10-Q
Xylem Inc filed this 10-Q on May 4, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.26B
- up 11.8% from $1.12B a year earlier
- Net income
- $87M
- up 128.9% from net income of $38M a year earlier
- Diluted EPS
- $0.48
- up 128.6% from $0.21 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number: 1-35229
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip code)
(914 ) 323-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange of which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 30, 2021, there were 180,041,590 outstanding shares of the registrant’s common stock, par value $0.01 per share.
Xylem Inc.
Table of Contents
| ITEM | PAGE | ||||||||||
| PART I – Financial Information | |||||||||||
| Item 1 | - | ||||||||||
| Item 2 | - | ||||||||||
| Item 3 | - | ||||||||||
| Item 4 | - | ||||||||||
| PART II – Other Information | |||||||||||
| Item 1 | - | ||||||||||
| Item 1A | - | ||||||||||
| Item 2 | - | ||||||||||
| Item 3 | - | ||||||||||
| Item 4 | - | ||||||||||
| Item 5 | - | ||||||||||
| Item 6 | - | ||||||||||
2
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(in millions, except per share data)
| For the three months ended March 31, | 2021 | 2020 | |||||||||||||||||||||
| Revenue | $ | $ | |||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Research and development expenses | |||||||||||||||||||||||
| Restructuring and asset impairment charges | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Other non-operating income (expense), net | ( | ||||||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | |||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
| Weighted average number of shares: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
| For the three months ended March 31, | 2021 | 2020 | |||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Other comprehensive income (loss), before tax: | |||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ||||||||||||||||||||||
| Net change in derivative hedge agreements: | |||||||||||||||||||||||
| Unrealized loss | ( | ( | |||||||||||||||||||||
| Amount of (gain) loss reclassified into net income | ( | ||||||||||||||||||||||
| Net change in post-retirement benefit plans: | |||||||||||||||||||||||
| Amortization of prior service credit | ( | ( | |||||||||||||||||||||
| Amortization of net actuarial loss into net income | |||||||||||||||||||||||
| Other comprehensive income (loss), before tax | ( | ||||||||||||||||||||||
| Income tax expense related to items of other comprehensive income (loss) | |||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | ||||||||||||||||||||
| Less: comprehensive loss attributable to noncontrolling interests | ( | ||||||||||||||||||||||
| Comprehensive income (loss) attributable to Xylem | $ | $ | ( | ||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowances for discounts, returns and credit losses of $ | |||||||||||
| Inventories | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued and other current liabilities | |||||||||||
| Short-term borrowings and current maturities of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Accrued post-retirement benefits | |||||||||||
| Deferred income tax liabilities | |||||||||||
| Other non-current accrued liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common Stock – par value $ | |||||||||||
Authorized | |||||||||||
| Capital in excess of par value | |||||||||||
| Retained earnings | |||||||||||
Treasury stock – at cost | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Non-controlling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
5
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
| For the three months ended March 31, | 2021 | 2020 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Share-based compensation | |||||||||||
| Restructuring and asset impairment charges | |||||||||||
| Other, net | |||||||||||
| Payments for restructuring | ( | ( | |||||||||
| Changes in assets and liabilities (net of acquisitions): | |||||||||||
| Changes in receivables | ( | ||||||||||
| Changes in inventories | ( | ( | |||||||||
| Changes in accounts payable | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Net Cash – Operating activities | ( | ( | |||||||||
| Investing Activities | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from the sale of property, plant and equipment | |||||||||||
| Other, net | |||||||||||
| Net Cash – Investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Short-term debt issued, net | |||||||||||
| Short-term debt repaid | ( | ||||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Proceeds from exercise of employee stock options | |||||||||||
| Dividends paid | ( | ( | |||||||||
| Net Cash – Financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of year | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes (net of refunds received) | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
6
XYLEM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Background and Basis of Presentation
Background
Xylem Inc. (“Xylem” or the “Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment.
Xylem operates in three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note 17, "Segment Information", to the condensed consolidated financial statements for further segment background information.
Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries.
Basis of Presentation
The interim condensed consolidated financial statements reflect our financial position and results of operations in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions between our businesses have been eliminated.
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair 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, 2020 ("2020 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 2020 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 economic disruption. The COVID-19 pandemic 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.
7
Note 2. Revenue
Disaggregation of Revenue
The following table illustrates the sources of revenue:
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| Revenue from contracts with customers | $ | $ | |||||||||||||||||||||
| Lease Revenue | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
The following table reflects revenue from contracts with customers by application. The table below also reflects updates to the aggregation of applications to simplify and focus presentation.
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| Water Infrastructure | |||||||||||||||||||||||
| Transport | $ | $ | |||||||||||||||||||||
| Treatment | |||||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||
| Commercial Building Services | |||||||||||||||||||||||
| Residential Building Services | |||||||||||||||||||||||
| Industrial Water | |||||||||||||||||||||||
| Measurement & Control Solutions | |||||||||||||||||||||||
| Water | |||||||||||||||||||||||
| Energy | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
8
The following table reflects revenue from contracts with customers by geographical region. The presentation of geographic regions below has been updated to better align to how management currently focuses on revenue and growth platforms by geographic region. There has been no change to the Company's reportable segments.
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| Water Infrastructure | |||||||||||||||||||||||
| United States | $ | $ | |||||||||||||||||||||
| Western Europe | |||||||||||||||||||||||
| Emerging Markets (a) | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Western Europe | |||||||||||||||||||||||
| Emerging Markets (a) | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Measurement & Control Solutions | |||||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Western Europe | |||||||||||||||||||||||
| Emerging Markets (a) | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
(a)Emerging Markets revenue includes results from the following regions: Eastern Europe, the Middle East and Africa, Latin America and Asia Pacific (excluding Japan, Australia and New Zealand, which are presented in "Other")
Contract Balances
We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Changes in contract assets and liabilities are due to our performance under the contract.
9
The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:
| (in millions) | Contract Assets (a) | Contract Liabilities | ||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | ||||||||||||||||||
| Additions, net | ||||||||||||||||||||
| Revenue recognized from opening balance | — | ( | ||||||||||||||||||
| Billings transferred to accounts receivable | ( | — | ||||||||||||||||||
| Other | ( | ( | ||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | ||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | ||||||||||||||||||
| Additions, net | ||||||||||||||||||||
| Revenue recognized from opening balance | — | ( | ||||||||||||||||||
| Billings transferred to accounts receivable | ( | — | ||||||||||||||||||
| Other | ( | |||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | ||||||||||||||||||
(a)Excludes receivable balances which are disclosed on the balance sheet
Performance obligations
Note 3. Restructuring and Asset Impairment Charges
From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position ourselves. During the three months ended March 31, 2021, we recognized restructuring charges of $5 million, of which $4 million relates to actions previously announced in 2020. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment. During the three months ended March 31, 2020, we recognized restructuring charges of $2 million.
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 and simplify our operations, strengthen our competitive positioning and better serve our customers.
10
The following table presents the components of restructuring expense and asset impairment charges:
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| By component: | |||||||||||||||||||||||
| Severance and other charges | $ | $ | |||||||||||||||||||||
| Asset impairment | |||||||||||||||||||||||
| Total restructuring charges | $ | $ | |||||||||||||||||||||
| Asset impairment charges | |||||||||||||||||||||||
| Total restructuring and asset impairment charges | $ | $ | |||||||||||||||||||||
| By segment: | |||||||||||||||||||||||
| Water Infrastructure | $ | $ | |||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||
| Measurement & Control Solutions | |||||||||||||||||||||||
The following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within "Accrued and other current liabilities" and "Other non-current accrued liabilities", for the three months ended March 31, 2021 and 2020:
| (in millions) | 2021 | 2020 | ||||||||||||
| Restructuring accruals - January 1 | $ | $ | ||||||||||||
| Restructuring charges | ||||||||||||||
| Cash payments | ( | ( | ||||||||||||
| Asset impairment | ( | |||||||||||||
| Foreign currency and other | ( | |||||||||||||
| Restructuring accruals - March 31 | $ | $ | ||||||||||||
| By segment: | ||||||||||||||
| Water Infrastructure | $ | $ | ||||||||||||
| Applied Water | ||||||||||||||
| Measurement & Control Solutions | ||||||||||||||
| Regional selling locations (a) | ||||||||||||||
(a)Regional selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.
11
The following table presents expected restructuring spend in 2021 and thereafter:
| (in millions) | Water Infrastructure | Applied Water | Measurement & Control Solutions | Corporate | Total | |||||||||||||||||||||||||||
| Actions Commenced in 2021: | ||||||||||||||||||||||||||||||||
| Total expected costs | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Costs incurred during Q1 2021 | ||||||||||||||||||||||||||||||||
| Total expected costs remaining | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Actions Commenced in 2020: | ||||||||||||||||||||||||||||||||
| Total expected costs | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Costs incurred during 2020 | ||||||||||||||||||||||||||||||||
| Costs incurred during Q1 2021 | ||||||||||||||||||||||||||||||||
| Total expected costs remaining | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2020 consist primarily of severance charges across segments and asset impairment charges in our Measurement & Control Solutions segment. These actions are expected to continue through 2021.
The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. These actions are expected to continue through the third quarter of 2021.
Note 4. Income Taxes
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
The income tax provision for the three months ended March 31, 2021 was $27 million resulting in an effective tax rate of 23.3 %, compared to a $4 million expense resulting in an effective tax rate of 10.0 % for the same period in 2020. The effective tax rate for the three month period ended March 31, 2021 was higher than the U.S. federal statutory rate primarily due to tax settlements and the Global Intangible Low Taxed Income ("GILTI") inclusion, partially offset by favorable earnings mix. Additionally, the effective tax rate for the three month period ended March 31, 2021 differs from the same period in 2020 due to the impact of the tax settlements in the current period, partially offset by the benefit from favorable equity compensation deductions in the prior year.
Unrecognized Tax Benefits
We recognize tax benefits from uncertain tax positions only if it is more likely than not that a tax position will be sustained on examination by taxing authorities or upon completion of the litigation process, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits at March 31, 2021 was $113 million, as compared to $114 million at December 31, 2020, which if ultimately recognized will reduce our effective tax rate. We do not believe it is reasonably possible that the unrecognized tax benefits will significantly change within the next twelve months. We classify interest expense relating to unrecognized tax benefits as a component of "Other non-operating (expense) income, net" and tax penalties as a component of "Income tax expense" in our Condensed Consolidated Income Statements. As of March 31, 2021, we had $8 million of interest accrued for unrecognized tax benefits.
12
Note 5. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net income (in millions) | $ | $ | |||||||||||||||||||||
| Shares (in thousands): | |||||||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Add: Participating securities (a) | |||||||||||||||||||||||
| Weighted average common shares outstanding — Basic | |||||||||||||||||||||||
| Plus incremental shares from assumed conversions: (b) | |||||||||||||||||||||||
| Dilutive effect of stock options | |||||||||||||||||||||||
| Dilutive effect of restricted stock units and performance share units | |||||||||||||||||||||||
| Weighted average common shares outstanding — Diluted | |||||||||||||||||||||||
| Basic earnings per share | $ | $ | |||||||||||||||||||||
| Diluted earnings per share | $ | $ | |||||||||||||||||||||
(a)Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share.
(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 13, "Share-Based Compensation Plans", to the condensed consolidated financial statements for further detail on the performance share units.
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | |||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
| Performance share units | |||||||||||||||||||||||
Note 6. Inventories
The components of total inventories are summarized as follows:
| (in millions) | March 31, 2021 | December 31, 2020 | |||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
| Total inventories | $ | $ | |||||||||
13
Note 7. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying value of goodwill by reportable segment for the three months ended March 31, 2021 are as follows:
| (in millions) | Water Infrastructure | Applied Water | Measurement & Control Solutions | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Activity in 2021 | |||||||||||||||||||||||||||||
| Foreign currency and other | ( | ( | ( | ( | |||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
As of March 31, 2021, goodwill included accumulated impairment loss of $206 million within the Measurement & Control Solutions segment.
Other Intangible Assets
Information regarding our other intangible assets is as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in millions) | Carrying Amount | Accumulated Amortization | Net Intangibles | Carrying Amount | Accumulated Amortization | Net Intangibles | |||||||||||||||||||||||||||||
| Customer and distributor relationships | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Proprietary technology and patents | ( | ( | |||||||||||||||||||||||||||||||||
| Trademarks | ( | ( | |||||||||||||||||||||||||||||||||
| Software | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||
| Indefinite-lived intangibles | |||||||||||||||||||||||||||||||||||
| Other Intangibles | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
Amortization expense related to finite-lived intangible assets was $32 million and $35 million for the three month periods ended March 31, 2021 and 2020, respectively.
Note 8. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions, and we principally manage our exposures to these risks through management of our core business activities. Certain of our foreign operations expose us to fluctuations of foreign interest rates and exchange rates that may impact revenue, expenses, cash receipts, cash payments, and the value of our stockholders' equity. We enter into derivative financial instruments to protect the value or fix the amount of certain cash flows in terms of the functional currency of the business unit with that exposure and reduce the volatility in stockholders' equity.
Cash Flow Hedges of Foreign Exchange Risk
We are exposed to fluctuations in various foreign currencies against our functional currencies. We use foreign currency derivatives, including currency forward agreements, to manage our exposure to fluctuations in the various exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.
Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling $400 million and
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$0 million as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, 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. The purchased notional amounts associated with these currency derivatives are $144 million, $131 million, $54 million, $21 million, $19 million and $17 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 we entered into additional cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was $1,196 million and $1,249 million as of March 31, 2021 and December 31, 2020, respectively.
Foreign Currency Denominated Debt
On March 11, 2016, we issued 2.250 % Senior Notes of €500 million aggregate principal amount due March 2023. We designated the entirety of the outstanding balance, or $585 million and $610 million as of March 31, 2021 and December 31, 2020, respectively, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.
The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income:
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| Cash Flow Hedges | |||||||||||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||||||||||
| Amount of (loss) recognized in OCI | $ | ( | $ | ( | |||||||||||||||||||
| Amount of (gain) loss reclassified from OCI into revenue | ( | ||||||||||||||||||||||
| Amount of (gain) loss reclassified from OCI into cost of revenue | ( | ||||||||||||||||||||||
| Net Investment Hedges | |||||||||||||||||||||||
| Cross Currency Swaps | |||||||||||||||||||||||
| Amount of gain recognized in OCI | $ | $ | |||||||||||||||||||||
| Amount of income recognized in Interest Expense | |||||||||||||||||||||||
| Foreign Currency Denominated Debt | |||||||||||||||||||||||
| Amount of gain recognized in OCI | $ | $ | |||||||||||||||||||||
As of March 31, 2021, $11 million of net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.
As of March 31, 2021, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration.
The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and are determined through the use of models that consider various assumptions including yield curves, time value and other measurements.
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The fair values of our derivative contracts currently included in our hedging program were as follows:
| (in millions) | March 31, 2021 | December 31, 2020 | |||||||||
| Derivatives designated as hedging instruments | |||||||||||
| Liabilities | |||||||||||
| Cash Flow Hedges | |||||||||||
| Other current liabilities | $ | ( | $ | ||||||||
| Net Investment Hedges | |||||||||||
| Other non-current accrued liabilities | $ | ( | $ | ( | |||||||
The fair value of our long-term debt, due in 2023, designated as a net investment hedge was $610 million and $640 million as of March 31, 2021 and December 31, 2020, respectively.
Note 9. Accrued and Other Current Liabilities
The components of total accrued and other current liabilities are as follows:
| (in millions) | March 31, 2021 | December 31, 2020 | |||||||||
| Compensation and other employee-benefits | $ | $ | |||||||||
| Customer-related liabilities | |||||||||||
| Accrued taxes | |||||||||||
| Lease liabilities | |||||||||||
| Accrued warranty costs | |||||||||||
| Other accrued liabilities | |||||||||||
| Total accrued and other current liabilities | $ | $ | |||||||||
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Note 10. Credit Facilities and Debt
Total debt outstanding is summarized as follows:
| (in millions) | March 31, 2021 | December 31, 2020 | |||||||||
| 4.875% Senior Notes due 2021 (a) | $ | $ | |||||||||
| 2.250% Senior Notes due 2023 (a) | |||||||||||
| 3.250% Senior Notes due 2026 (a) | |||||||||||
| 1.950% Senior Notes due 2028 (b) | |||||||||||
| 2.250% Senior Notes due 2031 (b) | |||||||||||
| 4.375% Senior Notes due 2046 (a) | |||||||||||
| Debt issuance costs and unamortized discount (c) | ( | ( | |||||||||
| Total debt | |||||||||||
| Less: short-term borrowings and current maturities of long-term debt | |||||||||||
| Total long-term debt | $ | $ | |||||||||
(a)The fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due 2021 was $613 million and $620 million as of March 31, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2023 was $610 million and $640 million as of March 31, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2026 was $542 million and $563 million as of March 31, 2021 and December 31, 2020 respectively. The fair value of our Senior Notes due 2046 was $455 million and $496 million as of March 31, 2021 and December 31, 2020, respectively.
(c)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 March 31, 2021, 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
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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 is payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable on March 11 of each year. Interest on the Senior Notes due 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of March 31, 2021, we are in compliance with all covenants for the Senior Notes.
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 restricts 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 March 31, 2021, 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 March 31, 2021 and December 31, 2020, none of the Company's $600 million U.S. Dollar commercial paper
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program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.
Euro Commercial Paper Program
Note 11. Post-retirement Benefit Plans
The components of net periodic benefit cost for our defined benefit pension plans are as follows:
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| Domestic defined benefit pension plans: | |||||||||||||||||||||||
| Service cost | $ | $ | |||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | |||||||||||||||||||||
| Amortization of net actuarial loss | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | |||||||||||||||||||||
| International defined benefit pension plans: | |||||||||||||||||||||||
| Service cost | $ | $ | |||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | |||||||||||||||||||||
| Amortization of net actuarial loss | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | |||||||||||||||||||||
| Total net periodic benefit cost | $ | $ | |||||||||||||||||||||
The components of net periodic benefit cost other than the service cost component are included in the line item "Other non-operating expense, 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 the three months ended March 31, 2021 and 2020.
We contributed $6 million and $12 million to our defined benefit plans during the three months ended March 31, 2021 and 2020, respectively. Additional contributions ranging between approximately $13 million and $21 million are expected during the remainder of 2021.
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 insures the benefits payable to the participants of the plan until a full buy-out of the plan can be executed, which is expected to occur in late 2021 or early 2022. Included in the Company's first quarter 2020 contributions is $5 million paid to meet the shortfall between the cost of the bulk annuity policy and the plan assets.
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Note 12. Equity
The following table shows the changes in stockholders' equity for the three months ended March 31, 2021:
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Non-Controlling Interest | Total | |||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
The following table shows the changes in stockholders' equity for the three months ended March 31, 2020:
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Non-Controlling Interest | Total | |||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
Note 13. Share-Based Compensation Plans
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Stock Option Grants
The following is a summary of the changes in outstanding stock options for the three months ended March 31, 2021:
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 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited and expired | ( | ||||||||||||||||||||||
| Outstanding at March 31, 2021 | $ | $ | |||||||||||||||||||||
| Options exercisable at March 31, 2021 | $ | $ | |||||||||||||||||||||
| Vested and expected to vest as of March 31, 2021 | $ | $ | |||||||||||||||||||||
The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the three months ended March 31, 2021 was $2.3 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 2021 grants:
| Volatility | % | |||||||
| Risk-free interest rate | % | |||||||
| Dividend yield | % | |||||||
| Expected term (in years) | ||||||||
| Weighted-average fair value / share | $ | |||||||
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 three months ended March 31, 2021. 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 | ||||||||||
| Outstanding at January 1, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at March 31, 2021 | $ | ||||||||||
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ROIC Performance Share Unit Grants
The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the three months ended March 31, 2021. 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 | ||||||||||||||||||||||
| Outstanding at January 1, 2021 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
| Outstanding at March 31, 2021 | $ | ||||||||||||||||||||||
TSR Performance Share Unit Grants
The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the three months ended March 31, 2021:
Share units (in thousands) | Weighted Average Grant Date Fair Value /Share | ||||||||||||||||||||||
| Outstanding at January 1, 2021 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Adjustment for Market Condition Achieved (a) | |||||||||||||||||||||||
| Vested | ( | ||||||||||||||||||||||
| Outstanding at March 31, 2021 | $ | ||||||||||||||||||||||
(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 2021 grants:
| Volatility | % | |||||||
| Risk-free interest rate | % | |||||||
ESG Performance Share Unit Grants
Note 14. Capital Stock
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On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. There were approximately 0.6 million shares repurchased for $60 million under the program for the three months ended March 31, 2021. For the three months ended March 31, 2020, we repurchased approximately 0.7 million shares for $50 million. There are up to $228 million in shares that may still be purchased under this plan as of March 31, 2021.
Aside from the aforementioned repurchase program, we repurchased approximately 0.1 million shares and approximately 0.1 million shares for $7 million and $10 million for the three months ended March 31, 2021 and 2020, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units.
Note 15. Accumulated Other Comprehensive Loss
The following table provides the components of accumulated other comprehensive loss for the three months ended March 31, 2021:
| (in millions) | Foreign Currency Translation | Post-retirement Benefit Plans | Derivative Instruments | Total | |||||||||||||||||||
| Balance at January 1, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Foreign currency translation adjustment | — | — | |||||||||||||||||||||
| Tax on foreign currency translation adjustment | ( | — | — | ( | |||||||||||||||||||
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | — | |||||||||||||||||||||
| Income tax impact on amortization of postretirement benefit plan items | — | ( | — | ( | |||||||||||||||||||
| Unrealized loss on derivative hedge agreements | — | — | ( | ( | |||||||||||||||||||
| Income tax benefit on unrealized loss on derivative hedge agreements | — | — | |||||||||||||||||||||
| Reclassification of unrealized gain on foreign exchange agreements into revenue | — | — | ( | ( | |||||||||||||||||||
| Reclassification of unrealized gain on foreign exchange agreements into cost of revenue | — | — | ( | ( | |||||||||||||||||||
| Balance at March 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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The following table provides the components of accumulated other comprehensive loss for the three months ended March 31, 2020:
| (in millions) | Foreign Currency Translation | Post-retirement Benefit Plans | Derivative Instruments | Total | |||||||||||||||||||
| Balance at January 1, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Foreign currency translation adjustment | ( | — | — | ( | |||||||||||||||||||
| Tax on foreign currency translation adjustment | ( | — | — | ( | |||||||||||||||||||
| Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net | — | — | |||||||||||||||||||||
| Income tax impact on amortization of post-retirement benefit plan items | — | ( | — | ( | |||||||||||||||||||
| Unrealized loss on derivative hedge agreements | — | — | ( | ( | |||||||||||||||||||
| Reclassification of unrealized loss on foreign exchange agreements into revenue | — | — | |||||||||||||||||||||
| Reclassification of unrealized loss on foreign exchange agreements into cost of revenue | — | — | |||||||||||||||||||||
| Balance at March 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Note 16. 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), Exelis (acquired by Harris Corporation, now L3Harris Technologies, Inc.) and Xylem, ITT Corporation (now ITT LLC) has an obligation to indemnify, defend and hold Xylem harmless for asbestos product liability matters, including settlements, judgments, and legal defense costs associated with all pending and future claims that may arise from past sales of ITT’s legacy products. We believe ITT Corporation (now ITT LLC) remains a substantial entity with sufficient financial resources to honor its obligations to us.
See Note 4, "Income Taxes", of our condensed consolidated financial statements for a description of a pending tax litigation matter.
Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claims, we do not believe it is reasonably possible that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of operations, or financial condition. We have estimated and accrued $5 million and $6 million as of March 31, 2021 and December 31, 2020, respectively, for these general legal matters.
Indemnifications
As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC), 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
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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 March 31, 2021 and December 31, 2020, the amount of surety bonds, bank guarantees, insurance letters of credit and stand-by letters of credit was $392 million and $378 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 million as of March 31, 2021 and December 31, 2020 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) | 2021 | 2020 | |||||||||
| Warranty accrual – January 1 | $ | $ | |||||||||
| Net charges for product warranties in the period | |||||||||||
| Settlement of warranty claims | ( | ( | |||||||||
| Foreign currency and other | ( | ( | |||||||||
| Warranty accrual - March 31 | $ | $ | |||||||||
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Note 17. Segment Information
Our business has three 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.
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The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1 in the 2020 Annual Report). The following table contains financial information for each reportable segment:
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Water Infrastructure | $ | $ | |||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||
| Measurement & Control Solutions | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Operating Income: | |||||||||||||||||||||||
| Water Infrastructure | $ | $ | |||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||
| Measurement & Control Solutions | ( | ||||||||||||||||||||||
| Corporate and other | ( | ( | |||||||||||||||||||||
| Total operating income | $ | $ | |||||||||||||||||||||
| Interest expense | $ | $ | |||||||||||||||||||||
| Other non-operating income (expense), net | ( | ||||||||||||||||||||||
| Income before taxes | $ | $ | |||||||||||||||||||||
| Depreciation and Amortization: | |||||||||||||||||||||||
| Water Infrastructure | $ | $ | |||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||
| Measurement & Control Solutions | |||||||||||||||||||||||
| Regional selling locations (a) | |||||||||||||||||||||||
| Corporate and other | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Capital Expenditures: | |||||||||||||||||||||||
| Water Infrastructure | $ | $ | |||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||
| Measurement & Control Solutions | |||||||||||||||||||||||
| Regional selling locations (b) | |||||||||||||||||||||||
| Corporate and other | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
(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.
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| 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," “project,” “forecast,” “likely,” “believe,” “target,” “will,” “could,” “would,” “should,” "potential," "may" and similar expressions or their negative, may, but are not necessary to, identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements that: are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals; 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 the coronavirus (“COVID-19”) pandemic. 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: overall industry and economic conditions, including industrial, governmental and private sector spending and the strength of the residential and commercial real estate markets; geopolitical, regulatory, economic and other risks associated with international operations; continued uncertainty around the COVID-19 pandemic’s magnitude, duration 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; actual or potential other epidemics, pandemics or global health crises; manufacturing and operating cost increases due to inflation, prevailing price changes, tariffs and other factors; fluctuations in foreign currency exchange rates; disruption, competition and 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 of products, parts, electronic components and raw materials from our supply chain; availability, regulation and interference with radio spectrum used by some of our products; our ability to retain and attract senior management and other key talent; uncertainty related to restructuring and realignment actions and related charges 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 results due to weather conditions; our ability to borrow or refinance our existing indebtedness and the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or change in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, 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, 2020 ("2020 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).
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.
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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
Depending on the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences, we anticipate that it will become more difficult to distinguish specific aspects of our operational and financial performance that are most directly related to 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 market dynamics have adversely affected, and are expected to continue to adversely affect, our supply chains. We have experienced shortages in the supply of components, parts and raw materials, as well as unpredictable interruptions with our external suppliers in 2021 that have led to increased logistics costs. We continue to enhance our supplier pulsing and redundancy to help mitigate these challenges. Additionally, we have in the past and may continue to take measures with respect to buffer stock or use of alternative suppliers to mitigate the impacts of freight and logistics delays and bolster our access to raw materials and components. If these shortages and interruptions are sustained, or if additional interruptions occur, they could have a negative impact on our results of operations. Our current overall operating capacity approximates normal levels globally.
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Xylem Watermark, our corporate social responsibility program, continues to support our communities in addressing the challenges posed by this global pandemic 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 remains in place and is evaluated for continuation, as necessary.
Many of our offices globally remain in a substantially remote work from home status 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 effort to mitigate adverse consequences.
Risk related to the impact of COVID-19 as well as our supply chain are described in further detail under "Item 1A. Risk Factors" in the Company's 2020 Annual Report.
Executive Summary
Xylem reported revenue for the first quarter of 2021 of $1,256 million, an increase of 11.8% compared to $1,123 million reported in the first quarter of 2020. On a constant currency basis, revenue increased by $89 million, or 7.9%, driven by organic revenue growth in all end markets.
We generated operating income of $133 million (margin of 10.6%) during the first quarter of 2021, as compared to $61 million (margin of 5.4%) in 2020. Operating income in the first quarter of 2021 included an unfavorable impact from special charges incurred during the quarter of $2 million, partially offset by a decrease in restructuring and realignment costs of $1 million as compared to the first quarter of 2020. Excluding the impact of these items, adjusted operating income was $143 million (adjusted margin of 11.4%) during the first quarter of 2021 as compared to $70 million (adjusted margin of 6.2%) in 2020. The increase in adjusted operating margin was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives, favorable volume, impacted by COVID-19 recovery, and decreased quality management costs. These impacts were partially offset by cost inflation, increased spending on strategic investments, unfavorable mix and other lesser impacts.
Additional financial highlights for the quarter ended March 31, 2021 include the following:
•Orders of $1,538 million, up 22.0% from $1,261 million in the prior year, and up 18.6% on an organic basis across all segments.
•Earnings per share of $0.48, up 128.6% when compared to the prior year ($0.56, up 143.5% on an adjusted basis).
•EBITDA margin of 17.1%, up 480 basis points compared to 12.3% in the prior year (Net Income as a percent of revenue of 6.9%, up 350 basis points compared to 3.4% in the prior year)
•Net cash flow used by operating activities of $26 million for the three months ended March 31, 2021, an increase of $24 million from cash used in the prior year. Negative free cash flow of $65 million, down $12 million from the prior year.
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Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and to provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following items to represent 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 | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except for per share data) | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| Net income & Earnings per share | $ | 87 | $ | 0.48 | $ | 38 | $ | 0.21 | |||||||||||||||||||||||||||||||||||||||
| Restructuring and realignment, net of tax of $2 and $2 | 6 | 0.03 | 7 | 0.04 | |||||||||||||||||||||||||||||||||||||||||||
| Special charges, net of tax of $0 and $0 | 3 | 0.02 | 1 | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax-related special items | 6 | 0.03 | (4) | (0.02) | |||||||||||||||||||||||||||||||||||||||||||
| Adjusted net income & Adjusted earnings per share | $ | 102 | $ | 0.56 | $ | 42 | $ | 0.23 | |||||||||||||||||||||||||||||||||||||||
•"adjusted operating expenses" defined as operating expenses adjusted to exclude restructuring and realignment costs and special charges.
•"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue.
•“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.
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| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (in millions) | 2021 | 2020 | |||||||||||||||||||||
| Net Income | $ | 87 | $ | 38 | |||||||||||||||||||
| Income tax expense | 27 | 4 | |||||||||||||||||||||
| Interest expense, net | 19 | 14 | |||||||||||||||||||||
| Depreciation | 30 | 29 | |||||||||||||||||||||
| Amortization | 32 | 35 | |||||||||||||||||||||
| EBITDA | $ | 195 | $ | 120 | |||||||||||||||||||
| EBITDA Margin | 15.5 | % | 10.7 | % | |||||||||||||||||||
| Share-based compensation | $ | 9 | $ | 8 | |||||||||||||||||||
| Restructuring and realignment | 8 | 9 | |||||||||||||||||||||
| Special charges | 3 | 1 | |||||||||||||||||||||
| Adjusted EBITDA | $ | 215 | $ | 138 | |||||||||||||||||||
| Adjusted EBITDA Margin | 17.1 | % | 12.3 | % | |||||||||||||||||||
•“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 pension costs.
•"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 Statement of Cash Flows, less capital expenditures. Our definition of "free cash flow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Net cash used by operating activities | $ | (26) | $ | (2) | |||||||
| Capital expenditures | (39) | (51) | |||||||||
| Free cash flow | $ | (65) | $ | (53) | |||||||
| Net cash used by investing activities | $ | (31) | $ | (48) | |||||||
| Net cash (used) provided by financing activities | $ | (115) | $ | 87 | |||||||
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2021 Outlook
We anticipate total revenue growth in the range of 8% to 10% in 2021, with organic revenue growth anticipated to be in the range of 5% to 7%. The following is a summary of our organic revenue outlook by end markets:
•Utilities revenue increased by approximately 3% organically in the first quarter driven by strength in Asia Pacific, western Europe and the Middle East, partially offset by weakness in North America. For 2021, we expect organic revenue growth in the mid to high-single-digit range with continued resilience on the wastewater side, as utilities remain focused on mission-critical applications and anticipate modest growth on a global basis through the year. Additionally, we expect that large clean water utility project deployments will be ramping up beginning in the second quarter and increasing throughout the end of the year. We expect to gain momentum behind key multi-year wins setting up healthy longer term growth and will be monitoring the global shortage of electronic components as the year progresses.
•Industrial revenue increased by approximately 14% organically in the first quarter driven by strength across all major geographic regions. For 2021, we expect organic revenue growth in the mid-single-digit range as activity across all segments rebound globally and our dewatering business in North America begins to recover as demand increases and site access restrictions continue to ease. We anticipate strong growth in the emerging markets and Europe during the first half of the year with North America lagging and tougher compares in the second half of the year.
•In the commercial markets, organic revenue growth was approximately 5% in the first quarter driven by strength in western Europe, Asia Pacific and the Middle East, partially offset by weakness in the U.S. and Latin America. For 2021, we expect organic revenue growth in the low-single-digit range. We expect replacement business in the U.S. to be relatively stable during the year and anticipate continued healthy activity in Europe. We expect new construction activity in North America to be soft, however we are optimistic that conditions will begin to recover late in the year.
•In the residential markets, organic revenue growth was approximately 31% in the first quarter driven by strength in Asia Pacific, North America and western Europe. This market is primarily driven by replacement revenue serviced through our distribution network. For 2021, we expect organic revenue growth in the high-single-digit to low-double-digit range, driven by healthy demand activity from increased residential users in the U.S. and Europe. Additionally, we anticipate strong demand in China for secondary water supply product applications.
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, we expect to incur between $50 million and $60 million in restructuring and realignment costs. We expect to realize approximately $40 million of net savings in 2021, consisting of approximately $35 million of incremental net savings from restructuring and realignment actions initiated in 2020, and approximately $5 million of net savings from the restructuring, realignment and other structural cost actions initiated during this year.
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Results of Operations
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 1,256 | $ | 1,123 | 11.8 | % | |||||||||||||||||||||||||||||||||||
| Gross profit | 490 | 409 | 19.8 | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 39.0 | % | 36.4 | % | 260 | bp | |||||||||||||||||||||||||||||||||||
| Total operating expenses | 357 | 348 | 2.6 | % | |||||||||||||||||||||||||||||||||||||
| Expense to revenue ratio | 28.4 | % | 31.0 | % | (260) | bp | |||||||||||||||||||||||||||||||||||
| Restructuring and realignment costs | 8 | 9 | (11.1) | % | |||||||||||||||||||||||||||||||||||||
| Special charges | 2 | — | NM | ||||||||||||||||||||||||||||||||||||||
| Adjusted operating expenses | 347 | 339 | 2.4 | % | |||||||||||||||||||||||||||||||||||||
| Adjusted operating expenses to revenue ratio | 27.6 | % | 30.2 | % | (260) | bp | |||||||||||||||||||||||||||||||||||
| Operating income | 133 | 61 | 118.0 | % | |||||||||||||||||||||||||||||||||||||
| Operating margin | 10.6 | % | 5.4 | % | 520 | bp | |||||||||||||||||||||||||||||||||||
| Interest and other non-operating expense, net | 19 | 19 | — | % | |||||||||||||||||||||||||||||||||||||
| Income tax expense | 27 | 4 | 575.0 | % | |||||||||||||||||||||||||||||||||||||
| Tax rate | 23.3 | % | 10.0 | % | 1,330 | bp | |||||||||||||||||||||||||||||||||||
| Net income | $ | 87 | $ | 38 | 128.9 | % | |||||||||||||||||||||||||||||||||||
NM - Not meaningful change
Revenue
Revenue generated during the three months ended March 31, 2021 was $1,256 million, reflecting an increase of $133 million, or 11.8%, compared to the same prior year period. On a constant currency basis, revenue grew 7.9% for the three months ended March 31, 2021. The increase on a constant currency basis was driven by an increase in organic revenue of $91 million during the quarter, reflecting strong organic growth across the emerging markets, particularly in China where we saw significant recovery from the impact of the COVID-19 pandemic in the prior year, and in western Europe. Strong organic growth in these regions was marginally offset by organic declines in the U.S. during the quarter.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to revenue during the three months ended March 31, 2021:
| Water Infrastructure | Applied Water | Measurement & Control Solutions | Total Xylem | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | $ Change | % Change | $ Change | % Change | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||
| 2020 Revenue | $ | 438 | $ | 338 | $ | 347 | $ | 1,123 | |||||||||||||||||||||||||||||||||||||||
| Organic Growth | 47 | 10.7 | % | 44 | 13.0 | % | — | — | % | 91 | 8.1 | % | |||||||||||||||||||||||||||||||||||
| Divestitures | — | — | % | — | — | % | (2) | (0.6) | % | (2) | (0.2) | % | |||||||||||||||||||||||||||||||||||
| Constant Currency | 47 | 10.7 | % | 44 | 13.0 | % | (2) | (0.6) | % | 89 | 7.9 | % | |||||||||||||||||||||||||||||||||||
| Foreign currency translation (a) | 24 | 5.5 | % | 11 | 3.3 | % | 9 | 2.6 | % | 44 | 3.9 | % | |||||||||||||||||||||||||||||||||||
| Total change in revenue | 71 | 16.2 | % | 55 | 16.3 | % | 7 | 2.0 | % | 133 | 11.8 | % | |||||||||||||||||||||||||||||||||||
| 2021 Revenue | $ | 509 | $ | 393 | $ | 354 | $ | 1,256 | |||||||||||||||||||||||||||||||||||||||
(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 Euro, the Chinese Yuan and the Australian Dollar.
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Water Infrastructure
Water Infrastructure revenue increased $71 million, or 16.2%, for the first quarter of 2021 (10.7% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $24 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $47 million. Organic growth for the quarter was driven by strength in the utility end market, particularly in Asia Pacific, where China benefited from healthy order intake coming into the year as they recovered from prior year negative COVID-19 impacts, and in western Europe. Organic growth for the quarter was also driven by strength in the industrial end market, particularly across the emerging markets, which included strong growth from China COVID-19 recovery, and in western Europe. Organic growth in the industrial end market was partially offset by declines in the U.S. due to continued soft market conditions in oil and gas and mining.
From an application perspective, organic revenue growth for the first quarter was primarily driven by our transport application. The transport application had strong revenue growth across the emerging markets, where we benefited from a favorable prior year comparison in China and strong mining activities in Africa during the quarter, as well strong growth from healthy order intake in western Europe. Organic revenue from our treatment application also contributed to the segment's growth driven by recovery from COVID-19 volume impacts and project delays in the prior year in China, as well as strength in Europe and the United States during the quarter.
Applied Water
Applied Water revenue increased $55 million, or 16.3%, for the first quarter of 2021 (13.0% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $11 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $44 million. Organic growth for the quarter was driven by strength in every end market and across all major geographic regions, with particular strength in emerging markets and western Europe.
From an application perspective, organic revenue growth in the first quarter was led by strength in the industrial water application which was primarily driven by market growth in the emerging markets, particularly in Asia Pacific where the industry was more significantly impacted by the COVID-19 pandemic in the prior year, and strong order intake in North America and strong backlog execution in western Europe. The residential building services application revenue also had strong organic growth, primarily driven by strong second water supply business and a favorable prior year comparison in China, as markets conditions recover from the COVID-19 pandemic. Strength in North America, where we benefited from healthy backlog execution coming into the year, and market growth in western Europe, also contributed organic revenue growth during the quarter. The commercial building services application contributed more modest organic growth during the quarter, primarily driven by strength in western Europe and China, which was partially offset by a decline in the U.S. where the construction industry is taking longer to recover from the COVID-19 pandemic.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $7 million, or 2.0%, for the first quarter of 2021 (0.6% decrease on a constant currency basis) as compared to the prior year. Revenue benefited from $9 million of foreign currency translation, with the change at constant currency driven by $2 million of reduced revenue related to divestiture impacts. Organic revenue remained essentially flat during the quarter as weakness in the utility end market, primarily driven by the U.S., was offset by strength in the industrial end market.
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 in the energy application declined during the quarter driven by slower project deployments in the gas business, where large project deployments in the U.S. during the prior year did not repeat and we experienced project delays driven by the COVID-19 pandemic during the quarter. This decline was offset by organic revenue growth during the quarter in the water application, primarily driven by the test business which experienced strong backlog execution in western Europe and China, coupled with COVID-19 recovery in China.
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Orders / Backlog
An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the first quarter of 2021 were $1,538 million, an increase of $277 million, or 22.0%, over the prior year (18.1% increase on a constant currency basis). Order intake benefited from $49 million of foreign currency translation during the quarter. The order increase on a constant currency basis primarily consisted of organic order growth of $235 million, or 18.6%.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three months ended March 31, 2021:
| Water Infrastructure | Applied Water | Measurement & Control Solutions | Total Xylem | ||||||||||||||||||||||||||||||||
| (in millions) | $ Change | % Change | $ Change | % Change | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||
| 2020 Orders | $ | 514 | $ | 372 | $ | 375 | $ | 1,261 | |||||||||||||||||||||||||||
| Organic Growth | 70 | 13.6 | % | 92 | 24.7 | % | 73 | 19.5 | % | 235 | 18.6 | % | |||||||||||||||||||||||
| Divestitures | — | — | % | — | — | % | (7) | (1.9) | % | (7) | (0.5) | % | |||||||||||||||||||||||
| Constant Currency | 70 | 13.6 | % | 92 | 24.7 | % | 66 | 17.6 | % | 228 | 18.1 | % | |||||||||||||||||||||||
| Foreign currency translation (a) | 27 | 5.3 | % | 13 | 3.5 | % | 9 | 2.4 | % | 49 | 3.9 | % | |||||||||||||||||||||||
| Total change in orders | 97 | 18.9 | % | 105 | 28.2 | % | 75 | 20.0 | % | 277 | 22.0 | % | |||||||||||||||||||||||
| 2021 Orders | $ | 611 | $ | 477 | $ | 450 | $ | 1,538 | |||||||||||||||||||||||||||
(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 Euro, the Chinese Yuan and the Australian Dollar.
(a)
Water Infrastructure
Water Infrastructure segment orders increased $97 million, or 18.9%, to $611 million (13.6% increase on a constant currency basis) for the first quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $27 million of foreign currency translation. The order increase on a constant currency basis consisted primarily of organic order growth in the transport application. Organic growth in the transport application was driven by strength in the emerging markets, particularly strong order expansion in India during the quarter, as well as healthy market conditions in Europe and North America, which were impacted by recovery from the COVID-19 pandemic impact in the prior year. Organic orders for the treatment application also increased during the quarter, primarily driven by strength in Asia Pacific, North America and Europe, which partially offset the order decline in Latin America from lapping of a large prior year order.
Applied Water
Applied Water segment orders increased $105 million, or 28.2%, to $477 million (24.7% increase on a constant currency basis) for the first quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $13 million of foreign currency translation. The order increase on a constant currency basis was driven by organic order growth across all end markets, primarily in the U.S., where we benefited from strong demand, amplified by early ordering being done to mitigate longer lead times, and to a lesser extent, in western Europe and the emerging markets, particularly in China whose order intake was weakened by COVID-19 impacts in the prior year.
Measurement & Control Solutions
Measurement & Control Solutions segment orders increased $75 million, or 20.0%, to $450 million (17.6% increase on a constant currency basis) for the first quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $9 million of foreign currency translation. The order increase on a constant currency basis included organic order growth of $73 million, or 19.5%, which was partially offset by a $7 million reduction in orders related to divestiture impacts during the quarter. Organic order growth was led by the water application, which experienced strong order intake in the U.S. and western Europe and benefited from a favorable comparison
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in the emerging markets, driven by COVID-19 recovery. Order intake in the energy application also grew organically during the quarter, primarily driven by large project deployments in North America.
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 $2,403 million at March 31, 2021, an increase of $516 million or 27.3%, as compared to March 31, 2020 backlog of $1,887 million, and an increase of $279 million or 13.1%, as compared to December 31, 2020 backlog of $2,124 million driven by the significant increase in orders in the quarter. We anticipate that approximately 54% of the backlog at March 31, 2021 will be recognized as revenue in the remainder of 2021. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue increased 260 basis points to 39.0% for the three months ended March 31, 2021, as compared to 36.4% for the comparative 2020 period. The gross margin increase for the quarter was primarily driven by cost reductions from our global procurement and productivity improvement initiatives, decreased quality management costs and favorable volume, impacted by COVID-19 recovery, which were partially offset by cost inflation and other lesser impacts.
Operating Expenses
The following table presents operating expenses for the three months ended March 31, 2021 and 2020:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses ("SG&A") | $ | 301 | $ | 297 | 1.3 | % | |||||||||||||||||||||||||||||||||||
| SG&A as a % of revenue | 24.0 | % | 26.4 | % | (240) | bp | |||||||||||||||||||||||||||||||||||
| Research and development expenses ("R&D") | 50 | 49 | 2.0 | % | |||||||||||||||||||||||||||||||||||||
| R&D as a % of revenue | 4.0 | % | 4.4 | % | (40) | bp | |||||||||||||||||||||||||||||||||||
| Restructuring and asset impairment charges | 6 | 2 | 200.0 | % | |||||||||||||||||||||||||||||||||||||
| Operating expenses | $ | 357 | $ | 348 | 2.6 | % | |||||||||||||||||||||||||||||||||||
| Expense to revenue ratio | 28.4 | % | 31.0 | % | (260) | bp | |||||||||||||||||||||||||||||||||||
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased by $4 million to $301 million, or 24.0% of revenue, in the first quarter of 2021, as compared to $297 million, or 26.4% of revenue, in the comparable 2020 period. The improvement in SG&A as a percent of revenue for the quarter was primarily driven by cost reductions from our productivity, restructuring and other cost saving initiatives, which were partially offset by cost inflation and additional investments in strategic growth initiatives.
Research and Development ("R&D") Expenses
R&D expense was $50 million, or 4.0% of revenue, in the first quarter of 2021, as compared to $49 million, or 4.4% of revenue, in the comparable period of 2020. The decrease in R&D as a percent of revenue for the quarter was primarily driven by the increase in revenue in the first quarter.
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Restructuring and Asset Impairment Charges
During the three months ended March 31, 2021, we recognized restructuring charges of $5 million, of which $4 million relates to actions previously announced in 2020. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment. During the three months ended March 31, 2020, we recognized restructuring charges of $2 million.
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 and simplify our operations, strengthen our competitive positioning and better serve our customers.
The following is a roll-forward for the three months ended March 31, 2021 and 2020 of employee position eliminations associated with restructuring activities:
| 2021 | 2020 | |||||||||||||
| Planned reductions - January 1 | 319 | 196 | ||||||||||||
| Additional planned reductions | 57 | 50 | ||||||||||||
| Actual reductions and reversals | (148) | (60) | ||||||||||||
| Planned reductions - March 31 | 228 | 186 | ||||||||||||
The following table presents expected restructuring spend in 2021 and thereafter:
| (in millions) | Water Infrastructure | Applied Water | Measurement & Control Solutions | Corporate | Total | |||||||||||||||||||||||||||
| Actions Commenced in 2021: | ||||||||||||||||||||||||||||||||
| Total expected costs | $ | 3 | $ | — | $ | — | $ | — | $ | 3 | ||||||||||||||||||||||
| Costs incurred during Q1 2021 | 1 | — | — | — | 1 | |||||||||||||||||||||||||||
| Total expected costs remaining | $ | 2 | $ | — | $ | — | $ | — | $ | 2 | ||||||||||||||||||||||
| Actions Commenced in 2020: | ||||||||||||||||||||||||||||||||
| Total expected costs | $ | 25 | $ | 8 | $ | 33 | $ | 2 | $ | 68 | ||||||||||||||||||||||
| Costs incurred during 2020 | 19 | 4 | 30 | — | 53 | |||||||||||||||||||||||||||
| Costs incurred during Q1 2021 | 2 | 1 | 1 | — | 4 | |||||||||||||||||||||||||||
| Total expected costs remaining | $ | 4 | $ | 3 | $ | 2 | $ | 2 | $ | 11 | ||||||||||||||||||||||
The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2020 consist primarily of severance charges across segments and asset impairment charges in our Measurement & Control Solutions segment. These actions are expected to continue through 2021.
The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. These actions are expected to continue through the third quarter of 2021.
We currently expect to incur between $35 million and $45 million in restructuring costs for the full year. These restructuring charges 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 $35 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 $4 million of total net savings to be realized during 2021.
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Operating Income
Operating income during the first quarter of 2021 was $133 million, reflecting an increase of 118.0% compared to $61 million in the first quarter of 2020. Operating margin was 10.6% for the first quarter of 2021 versus 5.4% for the comparable period in 2020, an increase of 520 basis points. Operating margin included an unfavorable impact from special charges incurred during the quarter of $2 million, partially offset by a decrease in restructuring and realignment costs of $1 million as compared to the first quarter of 2020. Excluding the impact of these items, adjusted operating income was $143 million with an adjusted operating margin of 11.4% in the first quarter of 2021 as compared to adjusted operating income of $70 million with an adjusted operating margin of 6.2% in the first quarter of 2020. The increase in adjusted operating margin was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives, favorable volume, impacted by COVID-19 recovery, and decreased quality management costs. These impacts were partially offset by cost inflation, increased spending on strategic investments, unfavorable mix and other lesser impacts.
The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||
| Water Infrastructure | |||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 71 | $ | 39 | 82.1 | % | |||||||||||||||||||||||||||||||||||
| Operating margin | 13.9 | % | 8.9 | % | 500 | bp | |||||||||||||||||||||||||||||||||||
| Restructuring and realignment costs | 5 | 5 | — | % | |||||||||||||||||||||||||||||||||||||
| Adjusted operating income | $ | 76 | $ | 44 | 72.7 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating margin | 14.9 | % | 10.0 | % | 490 | bp | |||||||||||||||||||||||||||||||||||
| Applied Water | |||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 66 | $ | 47 | 40.4 | % | |||||||||||||||||||||||||||||||||||
| Operating margin | 16.8 | % | 13.9 | % | 290 | bp | |||||||||||||||||||||||||||||||||||
| Restructuring and realignment costs | 1 | 2 | (50.0) | % | |||||||||||||||||||||||||||||||||||||
| Special charges | 1 | — | NM | ||||||||||||||||||||||||||||||||||||||
| Adjusted operating income | $ | 68 | $ | 49 | 38.8 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating margin | 17.3 | % | 14.5 | % | 280 | bp | |||||||||||||||||||||||||||||||||||
| Measurement & Control Solutions | |||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 9 | $ | (12) | 175.0 | % | |||||||||||||||||||||||||||||||||||
| Operating margin | 2.5 | % | (3.5) | % | 600 | bp | |||||||||||||||||||||||||||||||||||
| Restructuring and realignment costs | 2 | 2 | — | % | |||||||||||||||||||||||||||||||||||||
| Adjusted operating income (loss) | $ | 11 | $ | (10) | 210.0 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating margin | 3.1 | % | (2.9) | % | 600 | bp | |||||||||||||||||||||||||||||||||||
| Corporate and other | |||||||||||||||||||||||||||||||||||||||||
| Operating loss | $ | (13) | $ | (13) | — | % | |||||||||||||||||||||||||||||||||||
| Special charges | 1 | — | NM | ||||||||||||||||||||||||||||||||||||||
| Adjusted operating loss | $ | (12) | $ | (13) | (7.7) | % | |||||||||||||||||||||||||||||||||||
| Total Xylem | |||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 133 | $ | 61 | 118.0 | % | |||||||||||||||||||||||||||||||||||
| Operating margin | 10.6 | % | 5.4 | % | 520 | bp | |||||||||||||||||||||||||||||||||||
| Restructuring and realignment costs | 8 | 9 | (11.1) | % | |||||||||||||||||||||||||||||||||||||
| Special charges | 2 | — | NM | ||||||||||||||||||||||||||||||||||||||
| Adjusted operating income | $ | 143 | $ | 70 | 104.3 | % | |||||||||||||||||||||||||||||||||||
| Adjusted operating margin | 11.4 | % | 6.2 | % | 520 | bp | |||||||||||||||||||||||||||||||||||
NM - Not meaningful percentage change
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Water Infrastructure
Operating income for our Water Infrastructure segment increased $32 million, or 82.1%, for the first quarter of 2021 compared to the prior year, with operating margin also increasing from 8.9% to 13.9%. Operating margin was impacted by $5 million in restructuring and realignment costs in both years. Excluding these restructuring and realignment costs, adjusted operating income increased $32 million, or 72.7%, with adjusted operating margin increasing from 10.0% to 14.9%. The increase in adjusted operating margin for the quarter was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation, increased spending on strategic investments, unfavorable mix, increased customer-related reserves, increased inventory management costs and other lesser impacts.
Applied Water
Operating income for our Applied Water segment increased $19 million, or 40.4%, for the first quarter of 2021 compared to the prior year, with operating margin also increasing from 13.9% to 16.8%. Operating margin benefited from a decrease in restructuring and realignment costs of $1 million during the quarter which was offset by $1 million of special charges incurred in 2021. Excluding these items, adjusted operating income increased $19 million, or 38.8%, with adjusted operating margin increasing from 14.5% to 17.3%. The increase in adjusted operating margin for the quarter was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation, increased logistics costs, increased spending on strategic investments, unfavorable mix and other lesser impacts.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment increased $21 million, or 175.0%, for the first quarter of 2021 compared to the prior year, with operating margin increasing from (3.5)% to 2.5%. Operating margin was impacted by $2 million in restructuring and realignment costs in both years. Excluding these restructuring and realignment costs, adjusted operating income increased $21 million, or 210.0%, with adjusted operating margin increasing from (2.9)% to 3.1%. The increase in adjusted operating margin for the quarter was primarily due to cost reductions from our restructuring, productivity and other cost saving initiatives, and decreased quality management costs, primarily due to a specific warranty charge recorded during the prior year that did not recur related to a firmware issue that was identified and addressed timely. These impacts were partially offset by cost inflation and other lesser impacts.
Corporate and other
Operating loss for corporate and other of $13 million during the first quarter of 2021 remained constant as compared to the prior year, negatively impacted by $1 million of special charges incurred in 2021.
Interest Expense
Interest expense was $21 million for the three months ended March 31, 2021 and $16 million for the three months ended March 31, 2020. The increase in interest expense for the period is primarily driven by the issuance of our Green Bond during the second quarter of 2020. See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt and related interest.
Income Tax Expense
The income tax provision for the three months ended March 31, 2021 was $27 million resulting in an effective tax rate of 23.3%, compared to a $4 million expense resulting in an effective tax rate of 10.0% for the same period in 2020. The effective tax rate for the three month period ended March 31, 2021 was higher than the U.S. federal statutory rate primarily due to tax settlements and the Global Intangible Low Taxed Income ("GILTI") inclusion, partially offset by favorable earnings mix. Additionally, the effective tax rate for the three month period ended March 31, 2021 differs from the same period in 2020 due to the impact of the tax settlements in the current period, partially offset by the benefit from favorable equity compensation deductions in the prior year.
Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
| Three Months Ended | |||||||||||||||||
| March 31, | |||||||||||||||||
| (In millions) | 2021 | 2020 | Change | ||||||||||||||
| Operating activities | $ | (26) | $ | (2) | $ | (24) | |||||||||||
| Investing activities | (31) | (48) | 17 | ||||||||||||||
| Financing activities | (115) | 87 | (202) | ||||||||||||||
| Foreign exchange (a) | (15) | (22) | 7 | ||||||||||||||
| Total | $ | (187) | $ | 15 | $ | (202) | |||||||||||
(a)The impact is primarily due to the strengthening of the Canadian Dollar, the Russian Ruble and various other currencies against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
Net cash used by operating activities was $26 million for the three months ended March 31, 2021 as compared to $2 million in the comparable prior year period. This increase in cash used was primarily driven by increased working capital levels to support year-over-year growth, as well as higher interest and tax payments and timing of compensation related payments, partially offset by increased cash earnings.
Investing Activities
Cash used in investing activities was $31 million for the three months ended March 31, 2021 as compared to $48 million in the comparable prior year period. This decrease in cash used of $17 million was mainly driven by lower spending on capital expenditures compared to the prior year.
Financing Activities
Cash used by financing activities was $115 million for the three months ended March 31, 2021 as compared to cash generated of $87 million in the comparable prior year period. This net increase in cash used for financing activities during the period was primarily due to higher levels of short-term debt during the first quarter of 2020 and an increase in share repurchase activity and dividend payments in the first quarter of 2021.
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. As a result of uncertainties caused by the COVID-19 pandemic, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends. We will continue to evaluate aspects of our spending as the year progresses and anticipate our capital expenditures will gradually begin to increase to normal levels during the year 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, "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 March 31, 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
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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 $2.5 billion, consisting of $1.7 billion of cash and $800 million of available credit facilities as disclosed in Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements. Our debt repayment obligations in 2021 consist of $600 million in Senior Notes, which we expect to pay out of cash. Our next long-term debt maturity is March 2023.
Risk related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our 2020 Annual Report.
Credit Facilities & Long-Term Contractual Commitments
See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.
Non-U.S. Operations
We generated approximately 56% and 50% of our revenue from non-U.S. operations for the three months ended March 31, 2021 and 2020. 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, expected future cash generation and investment opportunities, and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. As of March 31, 2021, we have provided a deferred tax liability of $6 million for net foreign withholding taxes and state income taxes on $356 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 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, there have been no significant changes in the information concerning our critical accounting estimates as stated in our 2020 Annual Report.
In the third quarter of 2020, management updated forecasts of future cash flows for the Advanced Infrastructure Analytics ("AIA") businesses, which reflected significant negative volume impacts from the COVID-19 pandemic, primarily on our assessment services business. Our ongoing investment 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 as of July 1, 2020. The results 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 March 31, 2021 the remaining goodwill balance in our AIA reporting unit after recording the goodwill impairment charge was $112 million.
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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.
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 2020 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations of previously-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes. See Note 16, "Commitments and Contingencies", to the condensed consolidated financial statements for further information and any updates.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in "Item 1A. Risk Factors" of our 2020 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended March 31, 2021:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PERIOD | TOTAL NUMBER OF SHARES PURCHASED | AVERAGE PRICE PAID PER SHARE (a) | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b) | APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b) | ||||||||||||||||||||||
| 1/1/21 - 1/31/21 | — | — | — | $288 | ||||||||||||||||||||||
| 2/1/21 - 2/28/21 | 0.3 | 100.07 | 0.3 | $258 | ||||||||||||||||||||||
| 3/1/21 - 3/31/21 | 0.3 | 101.07 | 0.3 | $228 | ||||||||||||||||||||||
This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.
(a)Average price paid per share is calculated on a settlement basis.
(b)On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. For the three months ended March 31, 2021, we repurchased 0.6 million shares for $60 million. There are up to $228 million in shares that may still be purchased under this plan as of March 31, 2021.
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.
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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). | ||||||||||
| # | Letter Agreement between Xylem Inc. and Matthew Pine. | Filed herewith. | |||||||||
| # | Individual Employment Contract between Xylem Europe GmbH and Hayati Yarkadas. | Filed herewith. | |||||||||
| # | Form of Xylem 2011 Omnibus Incentive Plan Non-Qualified Stock Option Award Agreement (2021). | Filed herewith. | |||||||||
| # | Form of 2011 Omnibus Incentive Plan Performance Share Unit Agreement (2021). | Filed herewith. | |||||||||
| # | Form of 2011 Omnibus Incentive Plan Restricted Stock Unit Agreement (2021). | Filed herewith. | |||||||||
| # | Form of 2011 Omnibus Incentive Plan ESG Performance Share Unit Agreement (2021). | Filed herewith. | |||||||||
| Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||||||||||
| Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||||||||||
| Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | ||||||||||
| Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | ||||||||||
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Exhibit Number | Description | Location | |||||||||
| 101.0 | The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Income Statements, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||||
| 104.0 | The cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2021 formatted in Inline XBRL and contained in Exhibit 101.0. | ||||||||||
#Management contract or compensatory plan or arrangement
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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 | ||||||||
May 4, 2021
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