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 June 30, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number: 1-35229

Xylem Inc.

(Exact name of registrant as specified in its charter)

Indiana	45-2080495
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1 International Drive, Rye Brook, NY 10573

(Address of principal executive offices) (Zip code)

(914) 323-5700

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange of which registered
Common Stock, par value $0.01 per share	XYL	New York Stock Exchange
2.250% Senior Notes due 2023	XYL23	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ☑   No  ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
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 July 24, 2020, there were 179,959,293 outstanding shares of the registrant’s common stock, par value $0.01 per share.

Xylem Inc.

Table of Contents

ITEM			PAGE
PART I – Financial Information
Item 1	-	Condensed Consolidated Financial Statements:
		Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)	4
		Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited)	6
		Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
Item 2	-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4	-	Controls and Procedures	50
PART II – Other Information
Item 1	-	Legal Proceedings	51
Item 1A	-	Risk Factors	51
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3	-	Defaults Upon Senior Securities	51
Item 4	-	Mine Safety Disclosures	51
Item 5	-	Other Information	51
Item 6	-	Exhibits	51
		Signatures	54

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PART I

ITEM 1.             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)

	Three Months				Six Months
For the period ended June 30,	2020		2019		2020		2019
Revenue	$	1,160	$	1,345	$	2,283	$	2,582
Cost of revenue	726		819		1,440		1,582
Gross profit	434		526		843		1,000
Selling, general and administrative expenses	288		294		585		597
Research and development expenses	44		47		93		98
Restructuring and asset impairment charges	48		14		50		25
Operating income	54		171		115		280
Interest expense	18		18		34		36
Other non-operating (expense) income, net	(1)		3		(4)		5
Gain from sale of business	—		—		—		1
Income before taxes	35		156		77		250
Income tax expense	4		17		8		32
Net income	$	31	$	139	$	69	$	218
Earnings per share:
Basic	$	0.17	$	0.77	$	0.38	$	1.21
Diluted	$	0.17	$	0.77	$	0.38	$	1.20
Weighted average number of shares:
Basic	180.0		180.0		180.1		179.9
Diluted	180.6		181.2		181.0		181.1

See accompanying notes to condensed consolidated financial statements.

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XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

	Three Months				Six Months
For the period ended June 30,	2020		2019		2020		2019
Net income	$	31	$	139	$	69	$	218
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment	35		(18)		(43)		11
Net change in derivative hedge agreements:
Unrealized gain (loss)	6		—		4		(9)
Amount of loss reclassified into net income	—		2		3		4
Net change in postretirement benefit plans:
Amortization of prior service credit	(1)		(1)		(2)		(2)
Amortization of net actuarial loss into net income	5		3		10		6
Other comprehensive income (loss), before tax	45		(14)		(28)		10
Income tax (benefit) expense related to items of other comprehensive income (loss)	(7)		(3)		7		1
Other comprehensive income (loss), net of tax	52		(11)		(35)		9
Comprehensive income	$	83	$	128	$	34	$	227
Less: comprehensive loss attributable to noncontrolling interests	—		—		(1)		—
Comprehensive income attributable to Xylem	$	83	$	128	$	35	$	227

See accompanying notes to condensed consolidated financial statements.

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XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

	June 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	1,577	$	724
Receivables, less allowances for discounts, returns and doubtful accounts of $35 and $35 in 2020 and 2019, respectively	956		1,036
Inventories	595		539
Prepaid and other current assets	173		151
Total current assets	3,301		2,450
Property, plant and equipment, net	635		658
Goodwill	2,820		2,839
Other intangible assets, net	1,108		1,174
Other non-current assets	580		589
Total assets	$	8,444	$	7,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	498	$	597
Accrued and other current liabilities	663		628
Short-term borrowings and current maturities of long-term debt	212		276
Total current liabilities	1,373		1,501
Long-term debt	3,031		2,040
Accrued postretirement benefits	446		445
Deferred income tax liabilities	304		310
Other non-current accrued liabilities	425		447
Total liabilities	5,579		4,743
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 194.5 shares and 193.9 shares in 2020 and 2019, respectively	2		2
Capital in excess of par value	2,012		1,991
Retained earnings	1,838		1,866
Treasury stock – at cost 14.5 shares and 13.7 shares in 2020 and 2019, respectively	(587)		(527)
Accumulated other comprehensive loss	(409)		(375)
Total stockholders’ equity	2,856		2,957
Non-controlling interests	9		10
Total equity	2,865		2,967
Total liabilities and stockholders’ equity	$	8,444	$	7,710

See accompanying notes to condensed consolidated financial statements.

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XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

For the six months ended June 30,	2020		2019
Operating Activities
Net income	$	69	$	218
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	58		58
Amortization	68		69
Share-based compensation	16		16
Restructuring and asset impairment charges	50		25
Gain from sale of business	—		(1)
Other, net	18		4
Payments for restructuring	(12)		(12)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	48		(68)
Changes in inventories	(63)		(10)
Changes in accounts payable	(86)		(23)
Other, net	13		(70)
Net Cash – Operating activities	179		206
Investing Activities
Capital expenditures	(95)		(129)
Acquisitions of businesses, net of cash acquired	—		(18)
Proceeds from sale of business	—		(2)
Other, net	7		3
Net Cash – Investing activities	(88)		(146)
Financing Activities
Short-term debt issued, net	359		257
Short-term debt repaid	(422)		(113)
Long-term debt issued, net	987		—
Repurchase of common stock	(60)		(39)
Proceeds from exercise of employee stock options	5		8
Dividends paid	(95)		(87)
Other, net	—		(1)
Net Cash – Financing activities	774		25
Effect of exchange rate changes on cash	(12)		2
Net change in cash and cash equivalents	853		87
Cash and cash equivalents at beginning of year	724		296
Cash and cash equivalents at end of period	$	1,577	$	383
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	45	$	45
Income taxes (net of refunds received)	$	11	$	74

See accompanying notes to condensed consolidated financial statements.

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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 19, "Segment Information", to the condensed consolidated financial statements for further segment background information.

Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries.

Basis of Presentation

The interim condensed consolidated financial statements reflect our financial position and results of operations in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions between our businesses have been eliminated.

The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair 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, 2019 ("2019 Annual Report") in preparing these unaudited condensed consolidated financial statements, with the exception of accounting standard updates described in Note 2. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 2019 Annual Report.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, postretirement obligations and assets, revenue recognition, income tax contingency accruals and valuation allowances, goodwill and indefinite lived intangible impairment testing, contingent liabilities and lease accounting. The global outbreak of the novel coronavirus (COVID-19) disease was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has created significant global volatility, uncertainty and economic disruption. The 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.

Note 2. Recently Issued Accounting Pronouncements

Recently Adopted Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions. The amended current guidance eliminates the “probable” threshold and requires an entity to use a broader range of

7

information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. We adopted this guidance as of January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition and results of operations.

Note 3. Acquisitions and Divestitures

Acquisitions

During the three and six months ended June 30, 2020 we spent approximately $0 million, net of cash received on acquisition activity.

During the three and six months ended June 30, 2019 we spent approximately $13 million and $18 million, net of cash received on acquisition activity, respectively.

Note 4. Revenue

Disaggregation of Revenue

The following table illustrates the sources of revenue:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2020		2019		2020		2019
Revenue from contracts with customers	$	1,114	$	1,281	$	2,188	$	2,459
Lease Revenue	46		64		95		123
Total	$	1,160	$	1,345	$	2,283	$	2,582

The following table reflects revenue from contracts with customers by application:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2020		2019		2020		2019
Water Infrastructure
Transport	$	350	$	396	$	668	$	742
Treatment	105		101		176		178
Applied Water
Building Services	187		216		374		429
Industrial Water	150		178		301		344
Measurement & Control Solutions
Water	161		195		344		394
Energy	70		85		142		158
Software as a Service	23		25		44		49
Test	68		85		139		165
Total	$	1,114	$	1,281	$	2,188	$	2,459

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The following table reflects revenue from contracts with customers by geographical region:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2020		2019		2020		2019
Water Infrastructure
United States	$	144	$	160	$	265	$	293
Europe	177		179		334		339
Asia Pacific	81		94		140		168
Other	53		64		105		120
Applied Water
United States	183		212		374		413
Europe	81		92		163		186
Asia Pacific	36		41		60		80
Other	38		49		79		94
Measurement & Control Solutions
United States	212		252		433		488
Europe	58		64		132		136
Asia Pacific	25		27		47		59
Other	26		47		56		83
Total	$	1,114	$	1,281	$	2,188	$	2,459

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.

The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:

(in millions)	Contract Assets (a)		Contract Liabilities
Balance at January 1, 2019	$	96	$	113
Additions, net	55		84
Revenue recognized from opening balance	—		(66)
Billings	(50)		—
Other	10		—
Balance at June 30, 2019	$	111	$	131
Balance at January 1, 2020	$	106	$	135
Additions, net	63		85
Revenue recognized from opening balance	—		(70)
Billings	(60)		—
Other	(2)		(4)
Balance at June 30, 2020	$	107	$	146

(a)Excludes receivable balances which are disclosed on the balance sheet

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Performance obligations

Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of June 30, 2020, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $467 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

Note 5. Restructuring and Asset Impairment Charges

Restructuring

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, on June 2, 2020 management committed to restructuring activities 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.

As a result of this action, during the three and six months ended June 30, 2020, we recognized restructuring charges of $38 million and $40 million, respectively. These charges included reduction of headcount across segments and asset impairments within our Measurement & Control Solutions segment. Immaterial restructuring charges incurred during the first quarter are included in the plan information presented below.

During the three and six months ended June 30, 2019, we recognized restructuring charges of $14 million and $22 million, respectively. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Measurement & Control Solutions and Water Infrastructure segments, as well as headcount reductions within our Applied Water segment.

The following table presents the components of restructuring expense and asset impairment charges:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2020		2019		2020		2019
By component:
Severance and other charges	$	21	$	13	$	23	$	20
Lease related charges	—		—		—		1
Asset impairment	17		1		17		1
Total restructuring charges	$	38	$	14	$	40	$	22
Asset impairment	10		—		10		3
Total restructuring and asset impairment charges	$	48	$	14	$	50	$	25
By segment:
Water Infrastructure	$	6	$	7	$	8	$	11
Applied Water	2		2		2		2
Measurement & Control Solutions	40		5		40		12

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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 six months ended June 30, 2020 and 2019:

(in millions)	2020		2019
Restructuring accruals - January 1	$	27	$	5
Restructuring charges	40		22
Cash payments	(12)		(12)
Asset impairment	(17)		(1)
Foreign currency and other	(1)		—
Restructuring accruals - June 30	$	37	$	14
By segment:
Water Infrastructure	$	4	$	4
Applied Water	1		2
Measurement & Control Solutions	27		5
Regional selling locations (a)	4		3
Corporate and other	1		—

(a)Regional selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.

The following table presents expected restructuring spend for actions commenced as of June 30, 2020:

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