XYLEM INC. 
The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes, included elsewhere in this report on Form 10-Q (this "Report"). Except as otherwise indicated or unless the context otherwise requires, "Xylem ," "we," "us," "our" and the "Company" refer toXylem Inc. and its subsidiaries. This Report contains information that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Generally, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "contemplate," "predict," "forecast," "believe," "target," "will," "could," "would," "should," "potential," "may" and similar expressions identify forward-looking statements. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements include any statements that are not historical in nature, including any statements about the capitalization ofXylem Inc. (the "Company"), the Company's restructuring and realignment plans, future strategic plans and other statements that describe the Company's business strategy, outlook, objectives, plans, intentions or goals. All statements that address operating or financial performance, events or developments that we expect or anticipate will occur in the future - including statements relating to orders, revenues, operating margins and earnings per share growth, and statements expressing general views about future operating results - are forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements. Many of these risks and uncertainties are currently amplified by and may continue to be amplified by, or in the future may be amplified by, the novel coronavirus ("COVID-19") pandemic. Factors that could cause results to differ materially from those anticipated include: overall economic and business conditions; uncertainty of the magnitude, duration, geographic reach and impact on the global economy of the COVID-19 pandemic; the current, and uncertain future, impact of the COVID-19 pandemic on our business, growth, projections, financial condition, operations, cash flows, and liquidity, including the impact of adverse economic conditions caused by the COVID-19 pandemic on our performance or customer markets; actual or potential other epidemics, pandemics or global health crises; geopolitical and other risks associated with our international operations, including military actions, protectionism, economic sanctions or trade barriers including tariffs and embargoes that could affect customer markets and our business, and non-compliance with laws, including foreign corrupt practice laws, data privacy, export and import laws and competition laws; potential for unexpected cancellations or delays of customer orders in our reported backlog; our exposure to fluctuations in foreign currency exchange rates; disruption, competition and pricing pressures in the markets we serve; industrial, governmental and private sector spending; the strength of housing and related markets; weather conditions; ability to retain and attract talent and key members of management; our relationship with and the performance of our supply chain including channel partners; our ability to successfully identify, complete and integrate acquisitions; our ability to borrow or to refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; changes in the value of goodwill or intangible assets; the preliminary nature of our cost and savings estimates related to restructuring, realignment and related charges, including the timing of such charges and savings, which are subject to change as the Company makes decisions and refines estimates over time; timing delays in implementing restructuring, realignment and strategic initiatives; our ability to realize all of the cost savings anticipated in connection with restructuring and realignment; management and employee distraction resulting from restructuring actions; our ability to continue making strategic investments for growth; risks relating to product defects, product security, product liability and recalls; claims or investigations by governmental or regulatory bodies; cybersecurity attacks, breaches or other disruptions of information technology systems on which we rely; our sustainability initiatives; the anticipated use of proceeds from our green bond offering, including any failure to allocate the net proceeds to eligible green projects, or to meet or continue to meet the investment requirements of certain environmentally focused investors; litigation and contingent liabilities; and other factors set forth under "Item 1A. Risk Factors" in our 2019 Annual Report, "Item 1A. Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 and in subsequent filings we have made or may make with theSEC . 30 -------------------------------------------------------------------------------- All forward-looking statements made herein are based on information currently available to the Company as of the date of this Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends onDecember 31 . For ease of presentation, the reporting periods included herein are described as ending on the last day of the calendar quarter. OverviewXylem 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. We also offer smart lighting solutions that improve efficiency and public safety efforts across communities. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners as well as direct sales depending on the regional availability of distribution channels and the type of product. COVID-19 Pandemic The global spread of the COVID-19 pandemic has curtailed the movement of people, goods and services worldwide, including in many of the regions where we sell our products and services and conduct operations. This section summarizes the most significant impacts related to the COVID-19 pandemic that we have experienced to date, and we have included additional details as applicable throughout other sections of this Report. Many of these impacts did not begin to be felt broadly across our businesses until the latter part of the first quarter of 2020 and continued into the second quarter. In response to the COVID-19 pandemic,Xylem deployed aCOVID-19 Response Team , responsible forXylem 's Pandemic Plan, which is designed to aid in prevention, preparedness, response and recovery at our sites. 31 -------------------------------------------------------------------------------- Depending on the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences, we anticipate that it will become more difficult to distinguish specific aspects of our operational and financial performance that are most directly related to COVID-19 from those that are more broadly influenced by ongoing macroeconomic, market and industry dynamics that may also be, to varying degrees, related to the COVID-19 pandemic and its consequences. Public health officials have recommended, or governments have mandated, precautions to mitigate the spread of COVID-19, including stay at home or similar measures in many of the areas in which we operate. Operationally, our production facilities located inLatin America ,Europe andAsia Pacific experienced reduced production levels due to such measures. Currently our overall operating capacity remains just over 90% globally, with all of our production facilities operational. Our production facilities continue to spread out operations over multiple shifts and implement other protective measures such as temperature screening and social distancing while maintaining operational capabilities in order to maintain a safe work environment. The COVID-19 pandemic is also adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and businesses. While we expect, from time to time, to experience unpredictable interruptions with our external suppliers, we have enhanced our supplier pulsing and redundancy to minimize those impacts. To date, the most significant impacts were experienced in volume reductions ranging across all segments and major geographic regions. Future demand for our products and services is uncertain as the COVID-19 pandemic has also had an adverse impact on many of the customers we serve. As such, we have and may continue to experience decreased or delayed demand for our products and services, as well as changes in the payment patterns of our customers. At the end of the second quarter, total backlog increased 11.8% as compared toDecember 31, 2019 and there has not been a notable increase in contract cancellations to date. In many cases,Xylem 's products and services are considered "essential services" under various governmental mandates, and as a result we did not experience significant issues in our ability to distribute products or services, aside from customer-driven project delays and shipping delays due to stay at home measures. However, because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain and rapidly changing, the pandemic's ongoing and future impacts on our business, financial condition, results of operations, and stock price remains uncertain and difficult to predict, but we expect our results to continue to be adversely impacted beyond the quarter endingJune 30, 2020 . In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, management committed to restructuring activities across our businesses and functions globally. These initiatives are designed to support our long-term financial resilience and simplify our operations, strengthen our competitive positioning and better serve our customers. In light of the uncertainty created by the COVID-19 pandemic, we have also proactively taken further cost reduction actions which include a temporary 20% reduction in the base salary of the Company's Chief Executive Officer ("CEO") and all direct reports to the CEO and a temporary 20% reduction in annual cash retainer fees payable to our Board of Directors. These temporary reductions are effective fromJune 1, 2020 throughDecember 31, 2020 . Additionally, we have committed to reduced capital expenditure and discretionary operating spending during the year.Xylem has taken measures to protect the health and safety of our employees and work with our customers to minimize potential disruptions. In the first quarter, we implemented a support pay program for employees impacted by COVID-19, and an essential services premium pay program for the benefit of employees whose roles are classified as an "essential service" and, as such, are required to work either onsite at aXylem facility or in the field supporting customers during periods of mandated stay at home or similar measures. These programs will remain in place through the third quarter of 2020 and continue to be evaluated for continuation as necessary going forward.Xylem Watermark, our corporate social responsibility program, is also supporting our communities in addressing the challenges posed by this global pandemic through its partnership with Americares andUNICEF , as well as the expansion of the Partner Community Grants program and other philanthropic commitments. Many of our offices globally have transitioned to a fully remote work from home status, with no material disruption to operations, financial reporting systems, internal control over financial reporting or disclosure controls and procedures. As public health officials and governments ease recommendations and regulations regarding stay at home measures, ourCOVID-19 Response Team is applying a set ofXylem "Return to Workplace" health and safety guidelines for remote workers to return to our facilities. These guidelines require government officials to first declare an easing of their restrictions, upon which we do a full review of our site to determine its readiness and follow a phased return to work approach, all in service to help ensure the safety of our people. 32 -------------------------------------------------------------------------------- We will continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19. We continue to assess possible implications to our business, supply chain and customers, and to take necessary actions in an effort to mitigate adverse consequences. Risk related to these items are described in further detail under "Item 1A. Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Executive SummaryXylem reported revenue for the second quarter of 2020 of$1,160 million , a decrease of 13.8% compared to$1,345 million reported in the second quarter of 2019. On a constant currency basis, revenue decreased by$160 million , or 11.9%, driven entirely by organic declines across all segments and all end markets. Organic revenue decline during the quarter was anticipated as our business continues to be impacted by the COVID-19 pandemic. We generated operating income of$54 million (margin of 4.7%) during the second quarter of 2020, as compared to$171 million (margin of 12.7%) in 2019. Operating income in the second quarter of 2020 included unfavorable impacts from increased restructuring and realignment costs of$22 million and special charges of$11 million incurred during the period. Excluding the impact of these items, adjusted operating income was$108 million (adjusted margin of 9.3%) during the second quarter of 2020 as compared to$192 million (adjusted margin of 14.3%) in 2019. The decrease in adjusted operating margin was primarily due to unfavorable volume, impacted significantly by COVID-19; cost inflation; increased inventory management costs; incremental COVID-19 related costs; increased spending on strategic investments and unfavorable mix. These impacts were partially offset by cost reductions from our productivity and other cost saving initiatives and price realization. Additional financial highlights for the quarter endedJune 30, 2020 include the following: •Orders of$1,232 million , down 11.5% from$1,392 million in the prior year, and down 8.9% on an organic basis, impacted by the COVID-19 pandemic. •Earnings per share of$0.17 , down 77.9% when compared to the prior year ($0.40 , down 49.4% on an adjusted basis). •Net cash flow provided by operating activities of$179 million for the six months endedJune 30, 2020 , down$27 million from the prior year. Free cash flow of$84 million , up$7 million from the prior year. Key Performance Indicators and Non-GAAP Measures Management reviews key performance indicators including revenue, gross margins, segment operating income and 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 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 33 -------------------------------------------------------------------------------- approach is used for countries whose functional currency is not theU.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 Six Months Ended June 30, June 30, (In millions, except for per share data) 2020 2019 2020 2019 Net income & Earnings per share$ 31 $ 0.17 $ 139 $ 0.77 $ 69 $ 0.38 $ 218 $ 1.20 Restructuring and realignment, net of tax of$10 and$12 for 2020 and$4 and$8 for 2019 33 0.18 17 0.09 40 0.22 33
0.18
Special charges, net of tax of$3 and$3 for 2020 and$0 for 2019 10 0.06 - - 11 0.06 4 0.02 Tax-related special items (1) (0.01) (13) (0.07) (5) (0.03) (17) (0.09) Gain from sale of business, net of tax of$0 for 2019 - - - - - - (1)
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Adjusted net income & Adjusted earnings per share$ 73 $ 0.40 $ 143 $ 0.79 $ 115 $ 0.63 $ 237 $ 1.31 •"adjusted operating expenses" defined as operating expenses adjusted to exclude restructuring and realignment costs and special charges. •"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue. •"realignment costs" defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs. •"special charges" defined as costs incurred by the Company, such as acquisition and integration related costs, non-cash impairment charges and other special non-operating items, such as pension adjustments. •"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, 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. Six Months Ended June 30, (In millions) 2020 2019 Net cash provided by operating activities$ 179 $ 206 Capital expenditures (95) (129) Free cash flow$ 84 $ 77 Net cash used by investing activities$ (88) $ (146) Net cash provided by financing activities$ 774 $ 25 34
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•"EBITDA" defined as earnings before interest, taxes, depreciation and
amortization expense and "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.
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Net Income $ 31 $ 139 $ 69 $ 218
Income tax expense 4 17 8 32
Interest expense (income), net 16 18 30 35
Depreciation 29 29 58 58
Amortization 33 34 68 69
EBITDA $ 113 $ 237 $ 233 $ 412
Share-based compensation $ 8 $ 7 16 16
Restructuring and realignment 43 21 52 41
Special charges 13 - 14 4
Gain from sale of business - - - (1)
Adjusted EBITDA $ 177 $ 265 $ 315 $ 472
2020 Outlook
We withdrew 2020 guidance on March 31, 2020 due to uncertainties caused by
COVID-19. Given the continued uncertainties around the potential impact on the
second half of the year, we are not reinstating full-year guidance, but we are
providing the revenue outlook for the third quarter. We expect revenue to be
down 10% to 14% in the third quarter, 8% to 12% organically, driven primarily by
the impact of COVID-19.
The following is a summary of our revenue outlook by each of our end markets:
•Utilities revenue decreased by approximately 7% organically through the first
half of the year driven by weakness in the United States , the Middle East and
Asia Pacific , partially offset by strength in Europe . During 2020 we expect
continued resilience on the wastewater side as essential operational spending
continues and capital project funding for the year has been secured. However,
the clean water utilities will continue facing workforce challenges from impacts
of COVID-19 on the way in which they need to operate. We are seeing delays in
project deployments, but expect to start to see modest recovery as physical
distancing requirements ease. We continue to gain momentum behind key multi-year
wins setting up healthy longer term growth.
•Industrial revenue decreased by approximately 13% organically through the first
half of the year driven by weakness in North America , the emerging markets and
western Europe . As 2020 progresses we expect industrial facilities to continue
limiting access to sales teams and channel partners, causing slower orders and
activity while non-essential work is deferred. Exposure to the impacts of a soft
oil and gas market will continue to have an effect on both our dewatering and
applied water businesses potentially leading to demand declines. We anticipate
modest recovery in growth trajectory as countries and regions begin to re-open
and activity resumes.
•In the commercial markets, organic revenue decline was approximately 11%
through the first half of the year driven by weakness in the United States and
the emerging markets. During 2020 we expect replacement business in the United
States to continue to be impacted by COVID-19. We anticipate mixed performance
in the institutional building sector depending on the "essential" nature of end
customer. Backlog remains robust as we work to restock distributors that delayed
orders early on in the pandemic.
•In the residential markets, organic revenue decline was approximately 14%
through the first half of the year driven by weakness in western Europe , the
United States and Asia Pacific . This market is primarily driven by replacement
revenue serviced through our distribution network. As such, we anticipate
primarily emergency replacement activity as a result of social distancing
requirements.
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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
structural cost actions across our businesses and functions globally. These
plans are designed to support our long-term financial resilience and simplify
our operations, strengthen our competitive positioning and better serve our
customers. Additionally, we will continue to strategically execute previously
announced restructuring and realignment actions, primarily to reposition our
European and North American businesses in an effort to optimize our cost
structure and improve our operational efficiency and effectiveness. During 2020,
we expect to incur between $80 million and $100 million in restructuring and
realignment costs, with approximately $25 million of these costs being non-cash
charges. We expect to realize approximately $67 million of net savings in 2020,
consisting of $25 million of incremental net savings from restructuring and
realignment actions initiated in 2019, and approximately $42 million of net
savings from the restructuring, realignment and other structural cost actions
initiated during this year.
Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2020 2019 Change 2020 2019 Change
Revenue $ 1,160 $ 1,345 (13.8) % $ 2,283 $ 2,582 (11.6) %
Gross profit 434 526 (17.5) % 843 1,000 (15.7) %
Gross margin 37.4 % 39.1 % (170) bp 36.9 % 38.7 % (180) bp
Total operating expenses 380 355 7.0 % 728 720 1.1 %
Expense to revenue ratio 32.8 % 26.4 % 640 bp 31.9 % 27.9 % 400 bp
Restructuring and realignment
costs 43 21 104.8 % 52 41 26.8 %
Special charges 11 - NM 11 4 175.0 %
Adjusted operating expenses 326 334 (2.4) % 665 675 (1.5) %
Adjusted operating expenses to
revenue ratio 28.1 % 24.8 % 330 bp 29.1 % 26.1 % 300 bp
Operating income 54 171 (68.4) % 115 280 (58.9) %
Operating margin 4.7 % 12.7 % (800) bp 5.0 % 10.8 % (580) bp
Interest and other
non-operating expense, net 19 15 26.7 % 38 31 22.6 %
Gain from sale of business - - - % - 1 NM
Income tax expense 4 17 (76.5) % 8 32 (75.0) %
Tax rate 10.9 % 10.5 % 40 bp 10.4 % 12.8 % (240) bp
Net income $ 31 $ 139 (77.7) % $ 69 $ 218 (68.3) %
NM - Not meaningful change
Revenue
Revenue generated during the three and six months ended June 30, 2020 was $1,160
million and $2,283 million , reflecting decreases of $185 million , or 13.8%, and
$299 million , or 11.6%, respectively, compared to the same prior year periods.
On a constant currency basis, revenue declined 11.9% and 9.9% for the three and
six months ended June 30, 2020 . The decreases at constant currency consisted
entirely of declines in organic revenue of $160 million and $255 million ,
respectively, reflecting significantly lower demand across all major geographic
regions and segments largely due to COVID-19 related impacts.
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The following table illustrates the impact from organic declines, recent
acquisitions and divestitures, and foreign currency translation in relation to
revenue during the three and six months ended
Measurement &
Water Infrastructure Applied Water Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Revenue $ 561 $ 394 $ 390 $ 1,345
Organic Impact (44) (7.8) % (51) (12.9) % (65) (16.7) % (160) (11.9) %
Acquisitions/(Divestitures) - - % - - % - - % - - %
Constant Currency (44) (7.8) % (51) (12.9) % (65) (16.7) % (160) (11.9) %
Foreign currency translation (a) (16) (2.9) % (6) (1.5) % (3) (0.8) % (25) (1.9) %
Total change in revenue (60) (10.7) % (57) (14.5) % (68) (17.4) % (185) (13.8) %
2020 Revenue $ 501 $ 337 $ 322 $ 1,160
(a)Foreign currency translation impact for the quarter due to the weakening in
value of various currencies against the U.S. Dollar, the largest being the Euro,
the Norwegian Krone, the Chinese Yuan, the Australian Dollar, the South African
Rand and the British Pound.
Measurement &
Water Infrastructure Applied Water Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Revenue $ 1,043 $ 773 $ 766 $ 2,582
Organic Impact (76) (7.3) % (89) (11.5) % (90) (11.7) % (255) (9.9) %
Acquisitions/(Divestitures) - - % - - % - - % - - %
Constant Currency (76) (7.3) % (89) (11.5) % (90) (11.7) % (255) (9.9) %
Foreign currency translation (a) (28) (2.7) % (9) (1.2) % (7) (0.9) % (44) (1.7) %
Total change in revenue (104) (10.0) % (98) (12.7) % (97) (12.7) % (299) (11.6) %
2020 Revenue $ 939 $ 675 $ 669 $ 2,283
(a)Foreign currency translation impact for the year due to the weakening in
value of various currencies against the U.S. Dollar, the largest being the Euro,
the Norwegian Krone, the Australian Dollar, the Chinese Yuan, the South African
Rand and the British Pound.
Water Infrastructure
Water Infrastructure revenue decreased $60 million , or 10.7%, for the second
quarter of 2020 (7.8% decrease at constant currency) as compared to the prior
year. Revenue was negatively impacted by $16 million of foreign currency
translation, with the change at constant currency coming entirely from an
organic decline of $44 million . Organic weakness for the quarter was primarily
driven by the industrial end market, particularly in North America , due to
continued soft market conditions in oil and gas and mining, as well as in the
emerging markets. Organic revenue decline for the quarter was also driven by
weakness in the utility end market, particularly in the United States , due to
softness in the construction market as compared to the prior year, as well as in
India due the market slow down as well as the lapping of a large project
delivery in the prior year. Declines in the utility end market were marginally
offset by organic growth in Europe during the period primarily driven by
spending for operational needs in eastern Europe . Market conditions in both end
markets for the segment were negatively impacted by the COVID-19 pandemic during
the quarter, heavily impacting the organic revenue decline.
From an application perspective, the organic revenue decline during the second
quarter was primarily driven by our transport application, where market
conditions continued to soften in the United States in the dewatering
applications, with construction, mining and oil and gas all down in the quarter,
heavily impacted by the COVID-19 pandemic. Organic revenue decline within the
transport application was also driven by softness in Asia Pacific and Latin
America which were also impacted by the COVID-19 pandemic during the quarter.
Organic revenue decline in the transport application was partially offset by
modest growth from our treatment application, driven by project deliveries in
the United States during the quarter.
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For the six months ended June 30, 2020 , revenue decreased $104 million , or 10.0%
(7.3% decrease at constant currency) as compared to prior year. Revenue was
negatively impacted by $28 million of foreign currency translation, with the
change at constant currency coming entirely from an organic decline of $76
million . Organic weakness for the six month period was primarily driven by the
industrial end market, particularly in North America , due to continued soft
market conditions in oil and gas and mining, and in the emerging markets, where
organic growth was heavily impacted by the COVID-19 pandemic during the year.
Organic revenue decline during the six month period was also driven by weakness
in the utility end market, particularly in the United States , due to softness in
construction and the lapping of projects in the prior year, as well as in India
due to the timing of project deployments in the prior year. Declines in the
utility end market in these regions were partially offset by organic growth in
Europe during the period. The COVID-19 pandemic negatively impacted organic
growth during the period throughout the entire segment and both end markets.
From an application perspective, the organic revenue decline during the six
months ended June 30, 2020 was driven by our transport application where market
conditions continued to soften in United States in the dewatering applications,
with construction, oil and gas and mining all down during the first half of the
year. We also saw organic revenue decline within the emerging markets in the
transport application, primarily driven softness in Latin America and India ,
with India experiencing the lapping of some large projects executed in the prior
year. Organic revenue declines in the transport application for all regions were
impacted by the COVID-19 pandemic during the period. Organic revenue declines
within the transport application were partially offset by modest organic growth
in the treatment application during the year, primarily driven by projects in
the middle east.
Applied Water
Applied Water revenue decreased $57 million , or 14.5%, for the second quarter of
2020 (12.9% decrease at constant currency) as compared to the prior year.
Revenue was negatively impacted by $6 million of foreign currency translation
for the quarter, with the change at constant currency coming entirely from an
organic decline of $51 million . Organic weakness for the quarter was driven by
declines across all end markets and in all major geographic regions. Organic
revenue declines in the segment were impacted by weakening market conditions
during the quarter which have been accelerated by the COVID-19 pandemic,
particularly in the United States , western Europe and in the emerging markets
where restricted activities impacted the markets served.
From an application perspective, the organic revenue decline in the second
quarter was led by weakness in the industrial water application driven by the
United States , western Europe and the emerging markets, where we experienced
industry softening, which has been amplified by the COVID-19 pandemic with
restricted activities. The building services application in the commercial
markets also experienced a decline in organic revenue during the quarter which
was driven by the impact of the COVID-19 pandemic in the United States where the
timing of shipments was impacted by the economic slowdown and restricted
activity. Weakness in the building services application in the residential
market also contributed to the organic revenue decline during the quarter,
primarily in the United States and western Europe .
For the six months ended June 30, 2020 , revenue decreased $98 million , or 12.7%
(11.5% decrease at constant currency) as compared to the prior year. Revenue was
negatively impacted by $9 million of foreign currency translation for the
period, with the change at constant currency coming entirely from an organic
decline of $89 million . Organic weakness during the first half of the year was
driven by declines across all end markets and in all major geographic regions.
Organic revenue declines in the segment were significantly driven by impacts
from the COVID-19 pandemic, particularly in the United States , the emerging
markets and western Europe where lockdown activities caused a slow down in the
markets served and the general softening of market conditions.
From an application perspective, the organic revenue decline for the six month
period was led by weakness in the building services application. The building
services application in the commercial markets experienced a decline in organic
revenue during the period driven by the impact of the COVID-19 pandemic in the
United States , where construction was impacted by the economic slowdown, as well
as in the emerging markets, particularly China and the Middle East . Weakness in
the building services application in the residential market also contributed to
the organic revenue decline during the first half of the year, primarily in the
United States and western Europe . The segment also had organic revenue declines
in the industrial water application driven by continued industry softening,
which has been amplified by the COVID-19 pandemic, in the United States , western
Europe and the emerging markets.
38
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Measurement & Control Solutions
Measurement & Control Solutions revenue decreased $68 million , or 17.4%, for the
second quarter of 2020 (16.7% at constant currency) as compared to the prior
year. Revenue was negatively impacted by $3 million of foreign currency
translation for the quarter, with the change at constant currency coming
entirely from an organic decline of $65 million . Organic weakness for the
quarter was driven by a decline in the utility end market, primarily in North
America and the Middle East and, to a lesser extent, weakness in the industrial
end market across all major geographic regions. Organic revenue declines in the
segment were significantly impacted by the COVID-19 pandemic during the quarter,
particularly in the United States .
From an application perspective, the organic revenue decline for the segment was
driven by the water application, where the COVID-19 pandemic drove market
softness in the United States , and we lapped strong project deployments in the
Middle East during the second quarter of the prior year. The test application
also experienced organic revenue decline during the quarter, primarily driven by
the negative impacts of the COVID-19 pandemic experienced in North America and
western Europe , as well as the lapping of large ocean and coastal projects in
the Middle East in the prior year. Organic revenue declined in the energy
application driven by large gas project deployments in the United States during
the prior year that did not repeat, coupled with softening market conditions,
which were negatively impacted by the COVID-19 pandemic. The software as a
service ("SaaS") application had a modest decline in revenue as compared to the
prior year, primarily in the United States .
For the six months ended June 30, 2020 , revenue decreased $97 million , or 12.7%
(11.7% at constant currency) as compared to the prior year. Revenue was
negatively impacted by $7 million of foreign currency translation during the six
month period, with the change at constant currency coming entirely from an
organic decline of $90 million . Organic weakness for the period was driven by a
decline in the utility end market, primarily in the United States , the Middle
East and Asia Pacific , marginally offset by modest organic growth in western
Europe during the first half of the year. Organic revenue declines in the
segment were impacted by the COVID-19 pandemic during the period, particularly
in the United States and the emerging markets.
From an application perspective, the organic revenue decline for the segment was
driven by the water application, where the COVID-19 pandemic drove market
softness in the United States and we lapped strong project deployments in the
Middle East during the prior year. The test application also experienced organic
revenue decline during the period across all major regions, where we experienced
negative impacts from the COVID-19 pandemic, and large prior year project
executions in the Middle East . The energy application and, to a lesser extent,
the SaaS application also had declines in organic revenue as compared to the
prior year, primarily in the United States as we lapped a few large project
deployments and continue to be negatively impacted by the COVID-19 pandemic.
Orders / Backlog
An order represents a legally enforceable, written document that includes the
scope of work or services to be performed or equipment to be supplied to a
customer, the corresponding price and the expected delivery date for the
applicable products or services to be provided. An order often takes the form of
a customer purchase order or a signed quote from a Xylem business. Orders
received during the second quarter of 2020 were $1,232 million , a decrease of
$160 million , or 11.5%, over the prior year (8.9% decrease at constant
currency). Orders received during the six months ended June 30, 2020 were $2,493
million , a decrease of $214 million , or 7.9%, over the prior year (5.7% decrease
at constant currency). Order intake was negatively impacted by $36 million and
$59 million of foreign currency translation for the three and six months ended
June 30, 2020 , respectively. The change at constant currency was driven entirely
by organic declines of $124 million and $155 million for the three and six
months ended June 30, 2020 , respectively.
39
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The following table illustrates the impact from organic declines, recent
acquisitions and divestitures, and foreign currency translation in relation to
orders during the three and six months ended
Measurement &
Water Infrastructure Applied Water Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Orders $ 586 $ 399 $ 407 $ 1,392
Organic Impact 39 6.7 % (67) (16.8) % (96) (23.6) % (124) (8.9) %
Acquisitions/(Divestitures) - - % - - % - - % - - %
Constant Currency 39 6.7 % (67) (16.8) % (96) (23.6) % (124) (8.9) %
Foreign currency translation (a) (27) (4.6) % (6) (1.5) % (3) (0.7) % (36) (2.6) %
Total change in orders 12 2.0 % (73) (18.3) % (99) (24.3) % (160) (11.5) %
2020 Orders $ 598 $ 326 $ 308 $ 1,232
(a)Foreign currency translation impact for the quarter due to the weakening in
value of various currencies against the U.S. Dollar, the largest being the Euro,
the Norwegian Krone, the Chinese Yuan, the Australian Dollar, the South African
Rand and the British Pound.
Measurement &
Water Infrastructure Applied Water Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Orders $ 1,118 $ 793 $ 796 $ 2,707
Organic Impact 36 3.2 % (85) (10.7) % (106) (13.3) % (155) (5.7) %Acquisitions/(Divestitures) - - % - - % - - % - - % Constant Currency 36 3.2 % (85) (10.7) % (106) (13.3) % (155) (5.7) % Foreign currency translation (a) (42) (3.8) % (10) (1.3) % (7) (0.9) % (59) (2.2) % Total change in orders (6) (0.5) % (95) (12.0) % (113) (14.2) % (214) (7.9) % 2020 Orders $ 1,112$ 698 $ 683 $ 2,493 (a)Foreign currency translation impact for the year due to the weakening in value of various currencies against theU.S. Dollar, the largest being the Euro, the Norwegian Krone, the Australian Dollar, the Chinese Yuan, the South African Rand and the British Pound. Water Infrastructure Water Infrastructure segment orders increased$12 million , or 2.0%, to$598 million (6.7% increase at constant currency) for the second quarter of 2020 as compared to the prior year. Order intake during the quarter was negatively impacted by$27 million of foreign currency translation, with the change at constant currency coming from organic order growth in the transport application, which was partially offset by an organic decline in orders in the treatment application. Organic growth in the transport application was driven by strong order intake inIndia , where we had a significant project order of greater than$100 million during the quarter, partially offset by market weakness in the dewatering transport application, primarily inthe United States . The treatment application saw a reduction in organic orders during the quarter, primarily in the emerging markets andNorth America where we had several large project orders during the prior year, and inEurope where market conditions softened. We believe the COVID-19 pandemic also negatively impacted organic order growth during the quarter. For the six months endedJune 30, 2020 , orders decreased$6 million , or 0.5%, to$1,112 million (3.2% increase at constant currency) as compared to the same prior year period. Order intake during the period was negatively impacted by$42 million of foreign currency translation, with the change at constant currency coming from organic growth in orders in the transport application, which was partially offset by a modest decline in organic orders in the treatment application. Organic growth in the transport application was driven by strong order intake inIndia , where we had a significant project order during the second quarter of greater than$100 million , partially offset by market weakness in the transport applications, primarily driven by the dewatering application inNorth America . The treatment application experienced a modest organic order decline during the first half of the year, primarily driven 40 -------------------------------------------------------------------------------- by large project orders in the emerging markets placed during the prior year, which was partially offset by strong order intake inEurope andLatin America during the period. e believe the COVID-19 pandemic also negatively impacted organic order growth for the segment during the first half of the year. Applied Water Applied Water segment orders decreased$73 million , or 18.3%, to$326 million (16.8% decrease at constant currency) for the second quarter of 2020 as compared to the prior year. Order intake during the quarter was negatively impacted by$6 million of foreign currency translation. The order decrease on a constant currency basis was primarily driven by organic weakness across all end markets inthe United States and reduced order intake in westernEurope and the emerging markets during the quarter with continued negative impact on orders from the COVID-19 pandemic. For the six months endedJune 30, 2020 , orders decreased$95 million , or 12.0%, to$698 million (10.7% decrease at constant currency) as compared to the same prior year period. Order intake during the period was negatively impacted by$10 million of foreign currency translation. The order decrease on a constant currency basis was primarily driven by organic weakness across all end markets inthe United States and, to a lesser extent, reduced order intake in the emerging markets and westernEurope during the period. We believe that the COVID-19 pandemic negatively impacted the organic order growth during the period. Measurement & Control Solutions Measurement & Control Solutions segment orders decreased$99 million , or 24.3%, to$308 million (23.6% decrease at constant currency) for the second quarter of 2020 as compared to the prior year. Order intake during the quarter was negatively impacted by$3 million of foreign currency translation. The order decrease on a constant currency basis was driven by an organic decline in the water application which was negatively impacted by the COVID-19 pandemic and the lapping of strong prior year orders. Order intake in the test application also declined organically during the quarter, driven by negative COVID-19 impacts inNorth America andEurope . The energy application experienced reduced order intake during the quarter as the impact from large prior year gas project deployments, coupled with the negative impact of the COVID-19 pandemic, more than offset electric order growth during the quarter. The SaaS application also saw modest organic order decline in the quarter as several of our large prior year orders did not repeat. For the six months endedJune 30, 2020 , orders decreased$113 million , or 14.2%, to$683 million (13.3% decrease at constant currency) as compared to the same prior year period. Order intake during the period was negatively impacted by$7 million of foreign currency translation. The order decrease on a constant currency basis was driven by an organic decline in the water application and, to a lesser extent, the energy application, specifically driven by prior year gas project deployments, both of which were negatively impacted by the COVID-19 pandemic and the lapping of prior year orders. The SaaS application also contributed to the organic decline driven by the lapping of large project deployment orders inNorth America during the prior year. The test application, primarily inNorth America , also experienced a reduction in order intake during the period. We believe that the COVID-19 pandemic negatively impacted the organic order growth during the period. Backlog Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays can occur from time to time. Total backlog was$2,013 million atJune 30, 2020 , an increase of$148 million or 7.9%, as compared toJune 30, 2019 backlog of$1,865 million , and an increase of$212 million or 11.8%, as compared toDecember 31, 2019 backlog of$1,801 million . We anticipate that approximately 46% of the backlog atJune 30, 2020 will be recognized as revenue in the remainder of 2020. Cancellations in the quarter were materially consistent with the prior year. Gross Margin Gross margin as a percentage of revenue decreased 170 and 180 basis points to 37.4% and 36.9% for the three and six months endedJune 30, 2020 , as compared to 39.1% and 38.7% for comparative 2019 periods. The gross margin decrease for both periods was primarily driven by cost inflation, increased inventory management costs, unfavorable volume, impacted by COVID-19, unfavorable mix and other lesser impacts, which were partially offset 41 -------------------------------------------------------------------------------- by cost reductions from our global procurement and productivity improvement initiatives and price realization. Operating Expenses The following table presents operating expenses for the three and six months endedJune 30, 2020 and 2019: Three Months Ended Six Months Ended June 30, June 30, (In millions) 2020 2019 Change 2020 2019 Change Selling, general and administrative expenses ("SG&A")$ 288 $ 294 (2.0) %$ 585 $ 597 (2.0) % SG&A as a % of revenue 24.8 % 21.9 % 290 bp 25.6 % 23.1 % 250 bp Research and development expenses ("R&D") 44 47 (6.4) % 93 98 (5.1) % R&D as a % of revenue 3.8 % 3.5 % 30 bp 4.1 % 3.8 % 30 bp Restructuring and asset impairment charges 48 14 242.9 % 50 25 100.0 % Operating expenses$ 380 $ 355 7.0 %$ 728 $ 720 1.1 % Expense to revenue ratio 32.8 % 26.4 % 640 bp 31.9 % 27.9 % 400 bp Selling, General and Administrative ("SG&A") Expenses SG&A expenses decreased by$6 million to$288 million , or 24.8% of revenue, in the second quarter of 2020, as compared to$294 million , or 21.9% of revenue, in the comparable 2019 period; and decreased$12 million to$585 million , or 25.6% of revenue, in the six months endedJune 30, 2020 , as compared to$597 million , or 23.1% of revenue, for the six months ended in 2019. The increase in SG&A as a percent of revenue for both periods was primarily driven by the drop in revenue, which was significantly driven by impacts of the COVID-19 pandemic, as well as in cost inflation and additional investment in strategic growth initiatives, which were partially offset by cost reductions from global procurement and productivity improvement initiatives, including restructuring savings. Research and Development ("R&D") Expenses R&D expense was$44 million , or 3.8% of revenue, in the second quarter of 2020, as compared to$47 million , or 3.5% of revenue, in the comparable period of 2019; and was$93 million , or 4.1% of revenue, in the six months endedJune 30, 2020 , as compared to$98 million , or 3.8% of revenue, in the comparable period of 2019. The increase in R&D as a percent of revenue for both periods was primarily driven by the drop in revenue, which was significantly driven by impacts of the COVID-19 pandemic. 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, onJune 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 endedJune 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 endedJune 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. 42 --------------------------------------------------------------------------------
The following is a roll-forward for the six months ended
2020 2019
Planned reductions -
660 121
The following table presents expected restructuring spend for actions commenced
as of June 30, 2020 :
Measurement &
(in millions) Water Infrastructure Applied Water Control Solutions Corporate Total
Actions Commenced in 2020:
Total expected costs $ 28 $ 13 $ 34 $ 3 $ 78
Costs incurred during Q1 2020 1 - - - 1
Costs incurred during Q2 2020 5 2 30 37
Total expected costs remaining $ 22 $ 11 $ 4 $ 3 $ 40
Actions Commenced in 2019:
Total expected costs $ 20 $ 5 $ 27 $ - $ 52
Costs incurred during 2019 18 5 27 - 50
Costs incurred during Q1 2020 1 - - - 1
Costs incurred during Q2 2020 1 - - - 1
Total expected costs remaining $ - $ - $ - $ - $ -
Actions Commenced in 2017:
Total expected costs $ 8 $ 5 $ 4 $ - $ 17
Costs incurred during 2017 5 4 2 - 11
Costs incurred during 2018 2 1 1 - 4
Costs incurred during 2019 1 - 1 - 2
Costs incurred during Q1 2020 - - - - -
Costs incurred during Q2 2020 - - - -
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,
Applied Water, and Measurement & Control Solutions actions commenced in 2019
consist primarily of severance charges. The actions commenced in 2019 are
complete. The Water Infrastructure, Applied Water and Measurement & Control
Solutions actions commenced in 2017 consist primarily of severance charges and
are complete.
The discontinuance of a product line resulted $17 million of asset impairments,
primarily related to customer relationships, trademarks and fixed assets within
our Measurement & Control Solutions segment.
We currently expect to incur between $60 million and $80 million in
restructuring costs for the full year, with approximately $20 million of these
costs being non-cash charges. 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
43
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COVID-19 pandemic. We expect to realize approximately $25 million of incremental
net savings in 2020 from restructuring actions initiated in 2019, and
approximately $22 million of net savings in 2020 from the restructuring actions
initiated during this year.
Asset Impairment
During the second quarter of 2020 we determined that internally developed
in-process software within our Measurement & Control Solutions segment was
impaired as a result of actions taken to prioritize strategic investments.
Accordingly we recognized an impairment charge of $10 million . Refer to Note 9,
"Goodwill and Other Intangible Assets," for additional information.
During the first quarter of 2019 we determined that certain assets within our
Measurement & Control Solutions segment, including customer relationships, were
impaired. Accordingly we recognized an impairment charge of $3 million . Refer to
Note 9, "Goodwill and Other Intangible Assets," for additional information.
Operating Income
Operating income during the second quarter of 2020 was $54 million , reflecting a
decrease of 68.4% compared to $171 million in the second quarter of 2019.
Operating margin was 4.7% for the second quarter of 2020 versus 12.7% for the
comparable period in 2019, a decrease of 800 basis points. Operating margin was
negatively impacted by increased restructuring and realignment costs of $22
million and special charges of $11 million incurred in during the quarter.
Excluding these restructuring and realignment costs and special charges,
adjusted operating income was $108 million with an adjusted operating margin of
9.3% in the second quarter of 2020 as compared to adjusted operating income of
$192 million with an adjusted operating margin of 14.3% in the second quarter of
2019. The decrease in adjusted operating margin was primarily due to unfavorable
volume, impacted significantly by COVID-19; cost inflation; increased inventory
management costs; incremental COVID-19 related costs; increased spending on
strategic investments and unfavorable mix. These impacts were partially offset
by cost reductions from our productivity and other cost saving initiatives and
price realization.
Operating income for the six months ended June 30, 2020 was $115 million ,
reflecting a decrease of 58.9% compared to $280 million in 2019. Operating
margin was 5.0% for the six months ended June 30, 2020 versus 10.8% for the
comparable period in 2019, a decrease of 580 basis points. Operating margin was
negatively impacted by increased restructuring and realignment costs of $11
million and increased special charges of $7 million as compared to the prior
year. Excluding these restructuring and realignment costs and special charges,
adjusted operating income was $178 million with an adjusted operating margin of
7.8% for the six months ended June 30, 2020 as compared to adjusted operating
income of $325 million with an adjusted operating margin of 12.6% in 2019. The
decrease in adjusted operating margin was primarily due to unfavorable volume,
impacted significantly by COVID-19; cost inflation; increased inventory
management costs; unfavorable mix; increased spending on strategic investments
and other lesser impacts. These impacts were partially offset by our
productivity and other cost saving initiatives and price realization.
44
--------------------------------------------------------------------------------The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2020 2019 Change 2020 2019 Change
Water Infrastructure
Operating income $ 73 $ 98 (25.5) % $ 112 $ 149 (24.8) %
Operating margin 14.6 % 17.5 % (290) bp 11.9 % 14.3 % (240) bp
Restructuring and realignment costs 8 9 (11.1) % 13 18 (27.8) %
Adjusted operating income $ 81 $ 107 (24.3) % $ 125 $ 167 (25.1) %
Adjusted operating margin 16.2 % 19.1 % (290) bp 13.3 % 16.0 % (270) bp
Applied Water
Operating income $ 41 $ 62 (33.9) % $ 88 $ 118 (25.4) %
Operating margin 12.2 % 15.7 % (350) bp 13.0 % 15.3 % (230) bp
Restructuring and realignment costs 4 4 - % 6 7 (14.3) %
Adjusted operating income $ 45 $ 66 (31.8) % $ 94 $ 125 (24.8) %
Adjusted operating margin 13.4 % 16.8 % (340) bp 13.9 % 16.2 % (230) bp
Measurement & Control Solutions
Operating (loss) income $ (46) $ 26 (276.9) % $ (58) $ 42 (238.1) %
Operating margin (14.3) % 6.7 % (2,100) bp (8.7) % 5.5 % (1,420) bp
Restructuring and realignment costs 31 8 287.5 % 33 16 106.3 %
Special charges 10 - NM 10 4 150.0 %
Adjusted operating (loss) income $ (5) $ 34 (114.7) % $ (15) $ 62 (124.2) %
Adjusted operating margin (1.6) % 8.7 % (1,030) bp (2.2) % 8.1 % (1,030) bp
Corporate and other
Operating loss $ (14) $ (15) (6.7) % $ (27) $ (29) (6.9) %
Special charges 1 - NM 1 - NM
Adjusted operating loss $ (13) $ (15) (13.3) % $ (26) $ (29) (10.3) %
Total Xylem
Operating income $ 54 $ 171 (68.4) % $ 115 $ 280 (58.9) %
Operating margin 4.7 % 12.7 % (800) bp 5.0 % 10.8 % (580) bp
Restructuring and realignment costs 43 21 104.8 % 52 41 26.8 %
Special charges 11 - NM 11 4 175.0 %
Adjusted operating income $ 108 $ 192 (43.8) % $ 178 $ 325 (45.2) %
Adjusted operating margin 9.3 % 14.3 % (500) bp 7.8 % 12.6 % (480) bp
NM - Not meaningful percentage change
Water Infrastructure
Operating income for our Water Infrastructure segment decreased $25 million , or
25.5%, for the second quarter of 2020 compared to the prior year, with operating
margin also decreasing from 17.5% to 14.6%. Operating margin benefited from a
slight decrease in restructuring and realignment costs of $1 million in 2020.
Excluding these restructuring and realignment costs, adjusted operating income
decreased $26 million , or 24.3%, with adjusted operating margin decreasing from
19.1% to 16.2%. The decrease in adjusted operating margin for the quarter was
primarily due to cost inflation; unfavorable volume, impacted significantly by
COVID-19; increased inventory management costs; unfavorable mix; increased
spending on strategic investments and other lesser impacts. These impacts were
partially offset by cost reductions from our productivity and other cost saving
initiatives and price realization.
45
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For the six months ended June 30, 2020 , operating income decreased $37 million ,
or 24.8%, as compared to the prior year, with operating margin also decreasing
from 14.3% to 11.9%. Operating margin benefited from a decrease in restructuring
and realignment costs of $5 million in 2020. Excluding these restructuring and
realignment costs, adjusted operating income decreased $42 million , or 25.1%,
with adjusted operating margin decreasing from 16.0% to 13.3%. The decrease in
adjusted operating margin during the period was primarily due by cost inflation,
unfavorable volume, impacted significantly by COVID-19; unfavorable mix;
increased inventory management costs; increased spending on strategic
investments, negative currency impacts and other lesser impacts. These impacts
were partially offset cost reductions from our productivity and other cost
saving initiatives and price realization.
Applied Water
Operating income for our Applied Water segment decreased $21 million , or 33.9%,
for the second quarter of 2020 compared to the prior year, with operating margin
also decreasing from 15.7% to 12.2%. Operating margin was impacted by $4 million
in restructuring and realignment costs in both years. Excluding these
restructuring and realignment costs, adjusted operating income decreased $21
million , or 31.8%, with adjusted operating margin decreasing from 16.8% to
13.4%. The decrease in adjusted operating margin for the quarter was primarily
due to unfavorable volume, impacted significantly by COVID-19; cost inflation;
increased inventory management costs; unfavorable mix and other various lesser
impacts. These impacts were partially offset by cost reductions from our
productivity and other cost saving initiatives and price realization.
For the six months ended June 30, 2020 , operating income decreased $30 million ,
or 25.4%, as compared to the prior year, with operating margin also decreasing
from 15.3% to 13.0%. Operating margin benefited from a slight decrease in
restructuring and realignment costs of $1 million in 2020. Excluding these
restructuring and realignment costs, adjusted operating income decreased $31
million , or 24.8%, with adjusted operating margin decreasing from 16.2% to
13.9%. The decrease in adjusted operating margin during the period was primarily
due to unfavorable volume, impacted significantly by COVID-19; cost inflation;
increased inventory management costs and other lesser impacts. These impacts
were partially offset by cost reductions from our productivity and other cost
saving initiatives and price realization.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment decreased $72
million , or 276.9%, for the second quarter of 2020 compared to the prior year,
resulting in an operating loss of $46 million , with operating margin also
decreasing from 6.7% to (14.3)%. Operating margin was negatively impacted by
increased restructuring and realignment costs of $23 million and $10 million of
special charges incurred in 2020. Excluding these items, adjusted operating
income decreased $39 million , or 114.7%, resulting in an adjusted operating loss
of $5 million , with adjusted operating margin decreasing from 8.7% to (1.6)%.
The decrease in adjusted operating margin for the quarter was primarily due to
unfavorable volume, impacted significantly by COVID-19; cost inflation;
increased quality management costs; increased spending on strategic investments
and incremental COVID-19 related costs. These impacts were partially offset by
cost reductions from our productivity and other cost saving initiatives and
price realization.
For the six months ended June 30, 2020 , operating income decreased $100 million ,
or 238.1%, as compared to the prior year, resulting in an operating loss of $58
million , with operating margin also decreasing from 5.5% to (8.7)%. Operating
margin was negatively impacted by increased restructuring and realignment costs
of $17 million and increased special charges of $6 million in 2020. Excluding
these items, adjusted operating income decreased $77 million , or 124.2%,
resulting in an adjusted operating loss of $15 million , with adjusted operating
margin decreasing from 8.1% to (2.2)%. The decrease in adjusted operating margin
during the period was driven by unfavorable volume, impacted significantly by
COVID-19; increased quality management costs, primarily due to a $15 million
warranty charge recorded during the first quarter for a firmware issue in some
of our meters; cost inflation; increased spending on strategic investments,
unfavorable mix and other lesser impacts. These impacts were partially offset by
cost reductions from our productivity and other cost saving initiatives and
price realization.
Corporate and other
Operating loss for corporate and other decreased $1 million , or 6.7%, for the
second quarter of 2020 compared to the prior year period. For the six months
ended June 30, 2020 , operating loss for corporate and other decreased $2
million , or 6.9%, compared to the same prior year period. The decreases in cost
are the result of cost saving actions taken during the year.
46
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Interest Expense
Interest expense was $18 million and $34 million for the three and six months
ended June 30, 2020 and $18 million and $36 million for the three and six months
ended June 30, 2019 . The decrease in interest expense for the six month period
ended June 30, 2020 is primarily driven by the impact of cross currency swaps.
See Note 10, "Derivative Financial Instruments", of our condensed consolidated
financial statements for a description of our cross currency swaps.
Income Tax Expense
The income tax provision for the three months ended June 30, 2020 was $4 million
resulting in an effective tax rate of 10.9%, compared to a $17 million expense
resulting in an effective tax rate of 10.5% for the same period in 2019. The
income tax provision for the six months ended June 30, 2020 was $8 million
resulting in an effective tax rate of 10.4%, compared to a $32 million expense
resulting in an effective tax rate of 12.8% for the same period in 2019. The
effective tax rate for the three and six month periods ended June 30, 2020
differs from the United States federal statutory rate primarily due to the mix
of earnings in jurisdictions, partially offset by the Global Intangible
Low-Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for
the three and six month periods ended June 30, 2020 differs from the same
periods in 2019 due to the relative impact of the benefit from favorable equity
compensation deductions on the effective tax rate as well as release of
unrecognized tax benefits in 2020, offset by changes in tax law in Switzerland
in 2019.
Other Comprehensive Income (Loss)
Other comprehensive income was $52 million for the three months ended June 30,
2020 compared to a loss of $11 million for the same period in 2019. Foreign
currency translation contributed favorable impacts during the quarter of $53
million , driven primarily by the strengthening of the British Pound, the
Australian Dollar and the Chinese Yuan as compared to the U.S. Dollar in 2020
versus the weakening of these currencies in the same prior year period.
Additionally, the strengthening of the Euro as compared to the U.S. Dollar was
greater in 2020 than the strengthening in the prior year. These favorable
currency translation impacts were partially offset by the movement in our Euro
net investment hedges during the quarter. In addition to net favorable foreign
currency translation impacts, there were also favorable impacts from gain in
derivative hedge agreements of $6 million and the movement of tax on the net
investment hedges as compared to the prior year of $5 million that contributed
to the increase in in other comprehensive income during the quarter.
For the six months ended June 30, 2020 , other comprehensive loss was $35 million
compared to income of $9 million for the same period in 2019. Foreign currency
translation contributed unfavorable impacts during the period of $54 million ,
driven primarily by the weakening of the British Pound, the South African Rand,
the Canadian Dollar, the Euro, the Mexican Peso, the Indian Rupee and the
Chilean Peso as compared to the U.S. Dollar in 2020 versus the strengthening of
these currencies in the same prior year period. These unfavorable currency
translation impacts were partially offset by the movement in our Euro net
investment hedges during the period. In addition to net unfavorable foreign
currency translation impacts, there was an unfavorable impact from the movement
of tax on the net investment hedges as compared to the prior year of $5 million
during the period that contributed to the loss. Partially offsetting these
unfavorable drivers was a gain in derivative hedge agreements during the year as
compared to a loss in the same prior year period.
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Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
Six Months Ended
June 30,
(In millions) 2020 2019 Change
Operating activities $ 179 $ 206 $ (27)
Investing activities (88) (146) 58
Financing activities 774 25 749
Foreign exchange (a) (12) 2 (14)
Total $ 853 $ 87 $ 766
(a)The impact is primarily due to the weakness of the Canadian Dollar, the
Russian Ruble, the Chilean Peso, the Indian Rupee, the Mexican Peso and various
other currencies against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
Net cash provided by operating activities was $179 million for the six months
ended June 30, 2020 as compared to $206 million in the comparable prior year
period. This decrease was primarily driven by a decrease in cash from earnings,
partially offset by a significant decrease cash paid for taxes during the first
half of the current year as compared to the prior year, partially from delayed
timing of payments.
Investing Activities
Cash used in investing activities was $88 million for the six months ended June
30, 2020 as compared to $146 million in the comparable prior year period. This
decrease in cash used of $58 million was mainly driven by lower spending on
capital expenditures compared to the prior year and a $18 million reduction in
spending on acquisitions.
Financing Activities
Cash generated by financing activities was $774 million for the six months ended
June 30, 2020 as compared to cash generated of $25 million in the comparable
prior year period. This increase in cash generated by financing activities
during the period was primarily driven by the issuance of our Green Bond and
higher levels of short-term debt during the year, partially offset by the
repayment of short-term debt during 2020 and an increase in share repurchase
activity of $21 million .
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate
cash from operations and access to bank financing and the capital markets. As a
result of uncertainties caused by the COVID-19 pandemic, we continue to evaluate
aspects of our spending, including capital expenditures, strategic investments
and dividends. Additionally, we have committed to reducing our annual capital
expenditures. We will continue to evaluate aspects of our spending as the year
progresses. We have elected to utilize certain federal, state and foreign tax
programs related to timing of tax payments and deductions to further manage our
liquidity, and the liabilities associated with these programs are appropriately
classified in the applicable accrued and other current liabilities or other
non-current accrued liabilities accounts in our Condensed Consolidated Balance
Sheets. We will continue to consider available federal, state and foreign tax
programs.
Historically, we have generated operating cash flow sufficient to fund our
primary cash needs. As the uncertainty and severity associated with the global
spread of the COVID-19 pandemic continued to grow during the year, Xylem issued
Senior Notes of $1 billion in aggregate principal on June 26, 2020 . The primary
long-term intention of incurring this debt is to fund green projects across our
business segments, as well as manage liquidity risk and increase flexibility, as
the duration of the economic effects of the pandemic are uncertain. See Note 12,
"Credit Facilities and Debt", of our condensed consolidated financial statements
for a description of our credit facilities and long-term debt. Xylem 's liquidity
position has evolved favorably from an operational perspective during the second
quarter of 2020, and we will continue to monitor the economic effects of the
COVID-19 pandemic and its impact on the Company's future operating cash flows.
If our cash flows from operations are less than we expect, we may need to incur
debt or issue equity. From time to time, we may need to access the long-term and
short-term capital markets to obtain financing. Our access to, and the
availability of, financing on acceptable terms and
48
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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 12, "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 June 30, 2020 , the COVID-19 pandemic has not
materially impacted our borrowing costs or other costs of capital, however the
future impact of the COVID-19 pandemic is uncertain and may increase our
borrowing costs and other costs of capital and otherwise adversely affect our
business, results of operations, financial condition and liquidity.
We have considered the impacts of the COVID-19 pandemic on our liquidity and
capital resources and do not currently expect it to impact our ability to meet
future liquidity needs or continue to comply with debt covenants. To ensure that
we will continue to have the full capacity of our credit facilities available
going forward, Xylem entered into Amendment No. 1 to the 2019 Credit Facility on
June 22, 2020 which modified the covenant calculation methodology through the
quarter ending September 30, 2021 and 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. See Note 12, "Credit Facilities and Debt", of our condensed
consolidated financial statements for a description of our credit facilities and
long-term debt.
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 addition,
our existing committed credit facilities and access to the public debt markets
would provide further liquidity if required. Currently, we have available
liquidity of approximately $2.4 billion , consisting of $1.6 billion of cash and
$800 million of available credit facilities as disclosed in Note 12, "Credit
Facilities and Debt", of our condensed consolidated financial statements. Our
debt repayment obligations in 2020 consist of $50 million in outstanding
commercial paper and $162 million of other borrowings. Our next long term debt
maturity is October 2021 .
Risk related to these items are described in our risk factor disclosures
referenced under "Item 1A. Risk Factors" in our 2019 Annual Report and "Item 1A.
Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2020 .
Credit Facilities & Long-Term Contractual Commitments
See Note 12, "Credit Facilities and Debt", of our condensed consolidated
financial statements for a description of our credit facilities and long-term
debt.
Non-United States Operations
We generated approximately 51% and 50% of our revenue from non-United States
operations for the three and six months ended June 30, 2020 , respectively, and
approximately 50% for both the three and six month periods ended June 30, 2019 .
As we continue to grow our operations in the emerging markets and elsewhere
outside of the United States , we expect to continue to generate significant
revenue from non-United States 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 United States and other international
subsidiaries when we believe it is cost effective to do so. We continually
review our domestic and foreign cash profile, expected future cash generation
and investment opportunities and reassess whether there is a need to repatriate
funds held internationally to support our United States operations. As of June
30, 2020 , we have provided a deferred tax liability of $8 million for net
foreign withholding taxes and state income taxes on $505 million of earnings
expected to be repatriated to the United States parent as deemed necessary in
the future.
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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 2019 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 2019 Annual Report.
The carrying value of our Advanced Infrastructure Analytics ("AIA") goodwill
reporting unit is $170 million as of June 30, 2020 . During the fourth quarter of
2019 we completed our annual goodwill assessment. Our 2019 impairment analysis
indicated that the fair value of the AIA reporting unit exceeded its carrying
value by less than 20%. We used the income approach to determine the fair value
of our goodwill reporting units. Under the income approach, the fair value of
the reporting units was based on the present value of the estimated cash flows
that the reporting unit is expected to generate over its remaining life. Cash
flow projections were based on management's estimates of revenue growth rates
and operating margins, taking into consideration industry and market conditions.
The discount rate was based on the weighted average cost of capital appropriate
for the reporting unit.
Given the uncertainty of the future impact of the COVID-19 pandemic, further
deterioration of our future cash flows may lead to a charge to earnings. We will
continue to evaluate goodwill on an annual basis as of the beginning of our
fourth quarter and whenever events and changes in circumstances indicate there
may be a potential impairment.
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 Quarterly Report on Form 10-Q for the quarter ended March 31,
2020
New Accounting Pronouncements
See Note 2, "Recently Issued Accounting Pronouncements", to the condensed
consolidated financial statements for a complete discussion of recent accounting
pronouncements.
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