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").
This Report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "contemplate," "predict," "forecast," "likely," "believe," "target," "will," "could," "would," "should," "potential," "may" and similar expressions or their negative, may, but are not necessary to, identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements that are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals (including those related to our social, environmental and other sustainability goals); or address possible or future results of operations or financial performance, including statements relating to orders, revenues, operating margins and earnings per share growth. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by impacts from the war betweenRussia andUkraine , as well as the ongoing coronavirus ("COVID-19") pandemic and related macroeconomic conditions (including inflation). Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector spending and the strength of the residential and commercial real estate markets, on economic activity and our operations; geopolitical events, including the war betweenRussia andUkraine , and regulatory, economic and other risks associated with our global sales and operations, including with respect to domestic content requirements applicable to projects with governmental funding; continued uncertainty around the ongoing COVID-19 pandemic's magnitude, duration and impacts on our business, operations, growth, and financial condition; actual or potential other epidemics, pandemics or global health crises; availability, shortage or delays in receiving electronic components (in particular, semiconductors), parts, and raw materials from our supply chain; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, supply chain shortages, logistics challenges, tight labor markets, prevailing price changes, tariffs and other factors; demand for our products; disruption, competition or pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; ability to retain and attract senior management and other diverse and key talent, as well as competition for overall talent and labor; difficulty predicting our financial results; defects, security, warranty and liability claims, and recalls with respect to products; availability, regulation or interference with radio spectrum used by certain of our products; uncertainty related to restructuring and realignment actions and related charges and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; volatility in served markets or impacts on business and operations due to weather conditions, including the effects of climate change; fluctuations in foreign currency exchange rates; our ability to borrow or refinance our existing indebtedness and uncertainty around the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, competition, and the environment and climate change; changes in our effective tax rates or tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Annual Report") and in subsequent filings we make with theSecurities and Exchange Commission ("SEC"). Forward-looking and other statements in this Report regarding our environmental and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or are required to be disclosed in our filings with theSEC . In addition, historical, current, and forward-looking social, environmental and sustainability related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. All forward-looking statements made herein are based on information currently available to us as of the date of this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 31 --------------------------------------------------------------------------------
Overview
Xylem is a leading global water technology company. We design, manufacture and service highly engineered products and solutions ranging across a wide variety of critical applications in utility, industrial, residential and commercial building services settings. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test, treatment and analysis of wastewater to the return of water to the environment. Our product and service offerings are organized into three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control Solutions. •Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater and storm water to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. Additionally, our offerings use monitoring and control, smart and connected technologies to allow for remote monitoring of performance and enable products to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for our customers. In the Water Infrastructure segment, we provide the majority of our sales directly to customers along with strong applications expertise, while the remaining amount is through distribution partners. •Applied Water serves the water usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning, and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers and controls provide cooling to power plants and manufacturing facilities, circulation for food and beverage processing, as well as boosting systems for agricultural irrigation. In the Applied Water segment, we provide the majority of our sales through long-standing relationships with many of the leading independent distributors in the markets we serve, with the remainder going directly to customers. •Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and critical infrastructure technologies that allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. We also provide analytical instrumentation used to measure and analyze water quality, flow and level in clean water, wastewater, surface water and coastal environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners, as well as direct sales depending on the regional availability of distribution channels and the type of product.
COVID-19 Pandemic Update and Related Macroeconomic Impacts
Given the magnitude and duration of the COVID-19 pandemic and its prolonged economic consequences, it has become more difficult to distinguish specific aspects of our operational and financial performance that are most directly related to the pandemic from those more broadly influenced by ongoing macroeconomic, market and industry dynamics that may be, to varying degrees, related to the pandemic and its consequences.
Our markets and operations have largely demonstrated resilience against the
effects of the pandemic. However, we have experienced, and may continue to
experience, shortages in the supply of components, including electronics,
particularly semiconductors ("chips"), parts and raw materials. For example,
China has adopted and continues to rely upon a "zero-COVID" policy pursuant to
which it has declared a number of total and partial lockdowns in cities
throughout China that has, and may continue to adversely affect the global
supply chain. As a result of these measures, our production facilities located
in China have experienced, and may continue to experience in the future, reduced
production levels.
32-------------------------------------------------------------------------------- To counteract the ongoing impacts on our supply chain, we are taking various actions, including building inventory to support backlog execution, qualifying alternative supply chains and redesigning our products. We expect chip supply to modestly improve in each successive quarter in 2022.
We have also experienced, and continue to experience, increased inflation, freight and logistics costs, and are engaging in various mitigation strategies, including enhanced price realization efforts.
We continue to assess the evolving nature of the pandemic and related macroeconomic impacts on our business, employees, supply chain, customers and communities, and take appropriate actions in an effort to mitigate adverse consequences.
Risk related to the pandemic, supply chain and macroeconomic issues, including inflation, are described in further detail under "Item 1A. Risk Factors" in the Company's 2021 Annual Report.
Executive Summary
Xylem reported revenue for the second quarter of 2022 of$1,364 million , an increase of 1.0% compared to$1,351 million reported in the second quarter of 2021. On a constant currency basis, revenue increased by$73 million , or 5.4%, driven by organic revenue growth in the Applied Water and Water Infrastructure segments, partially offset by organic declines in Measurement & Control Solutions. These results were driven by organic growth in the industrial, residential and utilities end markets, partially offset by organic declines in commercial. We generated operating income of$146 million (margin of 10.7%) during the second quarter of 2022, as compared to$160 million (margin of 11.8%) in 2021. Operating income in the second quarter of 2022 included an unfavorable impact from increased restructuring and realignment costs of$2 million as compared to the second quarter of 2021, as well as an increase in special charges of$1 million . Excluding the impact of these items, adjusted operating income was$155 million (adjusted margin of 11.4%) during the second quarter of 2022 as compared to$166 million (adjusted margin of 12.3%) in 2021. The decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments and some unfavorable mix. These impacts were partially offset by strong price realization and productivity savings.
Additional financial highlights for the quarter ended
•Orders of
•Earnings per share of
•Net income as a percent of revenue of 8.2%, down 20 basis points compared to 8.4% in the prior year. EBITDA margin of 15.1%, down 110 basis points when compared to 16.2% in the prior year (16.6% on an adjusted basis, down 70 basis points) •Net cash flow used in operating activities of$32 million for the six months endedJune 30, 2022 , a decrease of$174 million during the same period of the prior year. Negative free cash flow of$63 million , down$189 million from the prior year. 33
--------------------------------------------------------------------------------
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, free cash flow, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and to provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures, our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue,Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following non-GAAP measures to be key performance indicators, as well as the related reconciling items to the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures may not be comparable to similarly-titled measures reported by other companies. •"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales or discontinuance of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate. •"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This approach is used for countries whose functional currency is not 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) 2022 2021 2022 2021 Net income & Earnings per share$ 112 $ 0.62 $ 113 $ 0.62 $ 194 $ 1.07 $ 200 $ 1.10 Restructuring and realignment, net of tax of$2 and$3 for 2022 and$1 and$3 for 2021 6 0.03 5 0.03 9 0.06 11
0.06
Special charges, net of tax of$0 and$1 for 2022 and$1 and$1 for 2021 3 0.02 2 0.01 4 0.02 5 0.03 Tax-related special items (1) (0.01) 1 0.01 (2) (0.01) 7 0.04 Gain from sale of business, net of tax of$0 for 2022 - - (2) (0.01) (1) (0.01) (2)
-
Adjusted net income & Adjusted earnings per share$ 120 $ 0.66 $ 119 $ 0.66 $ 204 $ 1.13 $ 221 $ 1.23 •"adjusted operating expenses" and "adjusted gross profit" defined as operating expenses and gross profit, respectively, adjusted to exclude restructuring and realignment costs and special charges. •"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue. 34 -------------------------------------------------------------------------------- •"EBITDA" defined as earnings before interest, taxes, depreciation and amortization expense "EBITDA margin" defined as EBITDA divided by total revenue, "adjusted EBITDA" reflects the adjustment to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, special charges and gain or loss from sale of businesses, and "adjusted EBITDA margin" defined as adjusted EBITDA divided by total revenue. •"realignment costs" defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs. •"special charges" defined as costs incurred by the Company, such as acquisition and integration related costs, non-cash impairment charges and both operating and non-operating adjustments for costs related to theUK pension plan buy-out.
•"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, excess tax benefits/losses and other discrete tax adjustments.
•"free cash flow" defined as net cash from operating activities, as reported in
the Condensed Consolidated Statement of Cash Flows, less capital expenditures.
Our definition of "free cash flow" does not consider certain non-discretionary
cash payments, such as debt. The following table provides a reconciliation of
free cash flow.
Six Months Ended
June 30,
(In millions) 2022 2021
Net cash provided by operating activities
(95) (80)
Free cash flow $ (63) $ 126 Net cash used in investing activities
35
--------------------------------------------------------------------------------2022 Outlook
We are updating our total revenue growth to be in the range of 3% to 5% in 2022, with organic revenue growth anticipated to be in the range of 8% to 10%. The following is a summary of our organic revenue outlook by end markets: •Utilities revenue was flat through the first half of the year on an organic basis driven by strength in westernEurope and tempered growth inNorth America offset by weakness in the emerging markets. For 2022, we expect organic revenue growth in the mid-single-digit range, as utilities remain focused on mission-critical applications in wastewater and operational activity and demand continues to be healthy and resilient. We expect uneven growth fromChina andIndia as multi-year government funding programs are deployed. On the clean water side, the timing of large project deployments has been impacted by the global shortage of electronic components. We anticipate that with modest easing of chip shortages, these deployments will ramp up based on our strong backlog position and orders momentum. Additionally, we can expect continued momentum in the global test and treatment markets and rising demand, and focus on pipeline assessment services. •Industrial revenue increased by approximately 11% through the first half of the year on an organic basis driven by strength across all major geographic regions. For 2022, we expect organic revenue growth in the high-single-digit to low-double-digit range based on steady global demand. We continue to see robust growth in our dewatering business, especially in the emerging markets. In theU.S. and westernEurope , we expect sustained demand in light industrial activity reflecting our strong orders and backlog, and considerable traction from new product introductions and large account activity in westernEurope . •In the commercial markets, organic revenue for the first half of the year increased by approximately 4% driven by westernEurope and theU.S. For 2022, we expect organic revenue growth in the mid-single to high-single digit range. We expect solid replacement business and new product introductions in theU.S. andEurope . We also expect modest share gains, with demand for eco-friendly products supported by increase in funding for green buildings inEurope . •In the residential markets, organic revenue increased by approximately 14% through the first half of the year driven by strength in theU.S. growth and westernEurope , marginally offset by weakness in the emerging markets. This market is primarily driven by solid replacement revenue serviced through our distribution network. For 2022, we expect double-digit organic revenue growth. We anticipate activity to remain healthy from increased residential users in theU.S. and westernEurope . We will continue to strategically execute restructuring and realignment actions in an effort to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. During 2022, we expect to incur approximately$20 million and$25 million in restructuring and realignment costs. 36 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2022 2021 Change 2022 2021 Change
Revenue $ 1,364 $ 1,351 1.0 % $ 2,636 $ 2,607 1.1 %
Gross profit 520 520 - % 987 1,010 (2.3) %
Gross margin 38.1 % 38.5 % (40) bp 37.4 % 38.7 % (130) bp
Total operating expenses 374 360 3.9 % 730 717 1.8 %
Expense to revenue ratio 27.4 % 26.6 % 80 bp 27.7 % 27.5 % 20 bp
Restructuring and realignment
costs 8 6 33.3 % 12 14 (14.3) %
Special charges 1 - NM % 2 2 - %
Adjusted operating expenses 365 354 3.1 % 716 701 2.1 %
Adjusted operating expenses
to revenue ratio 26.8 % 26.2 % 60 bp 27.2 % 26.9 % 30 bp
Operating income 146 160 (8.8) % 257 293 (12.3) %
Operating margin 10.7 % 11.8 % (110) bp 9.7 % 11.2 % (150) bp
Interest and other
non-operating expense, net 10 24 (58.3) % 24 43 (44.2) %
Gain from sale of business - 2 - 1 2 (50.0)
Income tax expense 24 25 (4.0) % 40 52 (23.1) %
Tax rate 17.5 % 18.5 % (100) bp 17.0 % 20.7 % (370) bp
Net income $ 112 $ 113 (0.9) % $ 194 $ 200 (3.0) %
NM - Not meaningful change
Revenue
Revenue generated during the three and six months ended June 30, 2022 was $1,364
million and $2,636 million , reflecting increases of $13 million , or 1.0%, and
$29 million , or 1.1%, respectively, compared to the same prior year periods. On
a constant currency basis, revenue grew 5.4% and 4.7% for the three and six
months ended June 30, 2022 . The increases on a constant currency basis were
driven by organic revenue growth of $76 million and $127 million respectively,
reflecting strong organic growth in western Europe and the U.S. for both
periods, as the emerging markets were flat for the quarter and a decline for the
year-to-date, with the COVID lockdowns mandated by the government in China
offsetting organic growth in other parts of the region.
The following table illustrates the impact from organic growth, recent
divestitures, and foreign currency translation in relation to revenue during the
three and six months ended
Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2021 Revenue $ 569 $ 414 $ 368 $ 1,351
Organic Growth 54 9.5 % 30 7.2 % (8) (2.2) % 76 5.6 %
Divestitures - - % - - % (3) (0.8) % (3) (0.2) %
Constant Currency 54 9.5 % 30 7.2 % (11) (3.0) % 73 5.4 %
Foreign currency translation
(a) (34) (6.0) % (15) (3.6) % (11) (3.0) % (60) (4.4) %
Total change in revenue 20 3.5 % 15 3.6 % (22) (6.0) % 13 1.0 %
2022 Revenue $ 589 $ 429 $ 346 $ 1,364
(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 British Pound, the Swedish Krona and the Australian Dollar.
37
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Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2021 Revenue $ 1,078 $ 807 $ 722 $ 2,607
Organic Growth 97 9.0 % 70 8.7 % (40) (5.5) % 127 4.9 %
Divestitures - - % - - % (5) (0.7) % (5) (0.2) %
Constant Currency 97 9.0 % 70 8.7 % (45) (6.2) % 122 4.7 %
Foreign currency translation
(a) (53) (4.9) % (23) (2.9) % (17) (2.4) % (93) (3.6) %
Total change in revenue 44 4.1 % 47 5.8 % (62) (8.6) % 29 1.1 %
2022 Revenue $ 1,122 $ 854 $ 660 $ 2,636
(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 British Pound, the Swedish Krona and the Australian Dollar.
Water Infrastructure
Water Infrastructure revenue increased$20 million , or 3.5%, for the second quarter of 2022 (9.5% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by$34 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of$54 million . Organic growth for the quarter was driven by strength in both the industrial and utility end markets. The industrial end market had organic growth across all major geographic regions, with particular strength in westernEurope where we benefited from price realization and strong backlog execution, as well as strong dewatering demand in the emerging markets. The utilities end market also experienced organic growth led by strength in theU.S. driven by strong backlog and order intake execution, as well as good price realization, and in westernEurope where we saw strong demand in utilities' capital spending. Strength in the utilities end market was partially offset by weakness in the emerging markets, mostly due to the negative impact of continued COVID lockdowns inChina early on in the quarter. From an application perspective, organic revenue growth for the second quarter was primarily driven by our transport applications reflecting strong revenue growth across all major geographies, with particular strength in theU.S. , where we executed on a strong backlog, experienced solid price realization and healthy order intake, and in westernEurope from solid price realization and increased demand in utility capital projects. We also experienced solid growth in emerging markets whereAfrica andLatin America benefited from robust mining and rental demand in our dewatering business. Organic revenue for the treatment application was also up modestly for the quarter, driven by healthy market conditions and solid backlog execution in westernEurope and theU.S. , partially offset by the negative impact inChina as a result of the COVID lockdowns early in the quarter. For the six months endedJune 30, 2022 , revenue increased$44 million , or 4.1% (9.0% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by$53 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of$97 million . Organic growth for the period was driven by strength in both the industrial and utility end markets. The industrial end market had organic growth across all major geographies, with particular strength in westernEurope ,Latin America and theU.S. The utilities end market also experienced organic growth led by strength in theU.S. and westernEurope , bolstered by strong price realization, solid backlog execution and timing of projects as compared to prior year; which was partially offset by weakness in the emerging markets, primarily due to the negative impact of continued COVID lockdowns inChina . From an application perspective, organic revenue growth during the six-month period was driven almost entirely by our transport applications. Transport experienced strong revenue growth theU.S. , where we executed on a strong backlog and experienced solid price realization, and in westernEurope from solid price realization and strong utility project backlog execution. The emerging markets had strong growth in dewatering from mining demand inLatin America andAfrica , which was partially offset by declines inChina due to COVID lockdowns. Organic revenue for the treatment application was also up modestly for the period, as revenue growth from project deliveries and strong backlog execution in westernEurope and theU.S. more than offset the negative impact inChina as a result of the continued COVID lockdowns. 38 --------------------------------------------------------------------------------
Applied Water
Applied Water revenue increased$15 million , or 3.6%, for the second quarter of 2022 (7.2% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by$15 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of$30 million , driven by strength in the industrial and residential end markets, partially offset by modest declines in the commercial end market. Organic revenue growth in the second quarter was led by strength in the industrial water application in theU.S. where we benefited from price realization and strong backlog execution, and in westernEurope where we benefited from investments that drove strong growth in manufacturing output. Residential building services also grew organically during the quarter, primarily from price realization and strong backlog execution in theU.S. , partially offset by declines inChina impacted by COVID related project delays. Organic growth for the quarter was partially offset by the declines in the commercial building services application in theU.S. , impacted by supply constraints more than offsetting the growth in westernEurope due to healthy order intake and stocking by distributors. For the six months endedJune 30, 2022 , revenue increased$47 million , or 5.8% (8.7% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by$23 million of foreign currency translation during the six month period, with the change at constant currency coming entirely from organic growth of$70 million . Organic growth during the period was driven by strength in every end market and across all major geographic regions, with particular strength in theU.S. and westernEurope . Organic revenue growth during the six month period was led by strength in the industrial water application in theU.S. where we benefited from price realization and strong backlog execution, and in westernEurope , driven by healthy order intake. The residential building services application also grew organically during the period, primarily in theU.S. driven by price realization and strong backlog execution. Commercial building services also grew organically during the period, particularly in westernEurope due to distributors maintaining higher stock levels, and in theU.S. where we benefited from price realization and strong backlog execution.
Measurement & Control Solutions
Measurement & Control Solutions revenue decreased$22 million , or 6.0%, for the second quarter of 2022 (3.0% decrease on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by$11 million of foreign currency translation, with the change at constant currency coming from an organic decline of$8 million and reduced revenue related to divestiture impacts of$3 million . Organic weakness in the quarter was driven by declines in the utility end markets in theU.S. and westernEurope while the emerging markets remained relatively flat as compared to the prior year. The industrial end market experienced modest growth. From an application perspective, organic revenue decline during the quarter was driven by declines in the energy applications, in theU.S. as a result of continued electronic component shortages affecting our smart metering business. The water applications had modest growth in the emerging markets where we executed on strong backlog. For the six months endedJune 30, 2022 , revenue decreased$62 million , or 8.6% (6.2% decrease on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by$17 million of foreign currency translation, with the change at constant currency coming from an organic decline of$40 million and reduced revenue related to divestiture impacts of$5 million . Organic weakness in the period was driven by declines in the utility end market across all major geographic regions, primarily driven by electronic component shortages which more than offset modest growth in the industrial end market. From an application perspective, organic revenue declined during the six-month period driven by weakness in both the energy and water applications, primarily in theU.S. as a result of continued electronic component shortages affecting our smart metering business. Declines in the water applications were slightly offset by modest growth in the emerging markets from strong backlog execution in our test business. 39 --------------------------------------------------------------------------------
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 aXylem business. Orders received during the second quarter of 2022 were$1,684 million , an increase of$24 million , or 1.4%, over the prior year (5.5% increase on a constant currency basis). Orders received during the six months endedJune 30, 2022 were$3,399 million , an increase of$201 million , or 6.3%, over the prior year (9.6% increase on a constant currency basis). Order intake was negatively impacted by$67 million and$107 million of foreign currency translation for the three and six months endedJune 30, 2022 , respectively.
The following table illustrates the impact from organic growth, recent
divestitures, and foreign currency translation in relation to orders during the
three and six months ended
Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2021 Orders $ 639 $ 486 $ 535 $ 1,660
Organic Growth 134 21.0 % 9 1.9 % (47) (8.8) % 96 5.8 %
Divestitures - - % - - % (5) (0.9) % (5) (0.3) %
Constant Currency 134 21.0 % 9 1.9 % (52) (9.7) % 91 5.5 %
Foreign currency
translation (a) (42) (6.6) % (15) (3.1) % (10) (1.9) % (67) (4.0) %
Total change in orders 92 14.4 % (6) (1.2) % (62) (11.6) % 24 1.4 %
2022 Orders $ 731 $ 480 $ 473 $ 1,684
(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 British Pound, the Swedish Krona and the Australian Dollar.
Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2021 Orders $ 1,250 $ 963 $ 985 $ 3,198
Organic Growth 207 16.6 % 47 4.9 % 65 6.6 % 319 10.0 %
Divestitures - - % - - % (11) (1.1) % (11) (0.4) %
Constant Currency 207 16.6 % 47 4.9 % 54 5.5 % 308 9.6 %
Foreign currency translation
(a) (66) (5.3) % (25) (2.6) % (16) (1.6) % (107) (3.3) %
Total change in orders 141 11.3 % 22 2.3 % 38 3.9 % 201 6.3 %
2022 Orders $ 1,391 $ 985 $ 1,023 $ 3,399
(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 British Pound, the Swedish Krona and the Australian Dollar.
Water Infrastructure
Water Infrastructure segment orders increased$92 million , or 14.4%, to$731 million (21.0% on a constant currency basis) for the second quarter of 2022 as compared to the prior year. Order growth for the quarter was negatively impacted by$42 million of foreign currency translation. The order increase on a constant currency basis in the quarter was driven by organic order growth in our transport applications across all major geographic regions, primarily in theU.S. , where we benefited from strong market demand and large infrastructure projects. Transport also had organic order growth in westernEurope , where we saw healthy demand and capital spending from utility customers and in emerging markets, primarily from continued mining demand inAfrica . For the treatment application, organic orders declined in the quarter, primarily due to in weakness in the emerging markets from the impact of COVID lockdowns inChina . 40 -------------------------------------------------------------------------------- For the six months endedJune 30, 2022 , orders increased$141 million , or 11.3%, to$1,391 million (16.6% on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by$66 million of foreign currency translation. Organic orders increased during the period as strength in the transport applications came primarily from theU.S. where we benefited from strong market demand, large infrastructure projects and mining demand for the dewatering business. There was also order growth from water utility customers in westernEurope and dewatering demand in the emerging markets coming fromAfrica andLatin America , partially offset by order declines inIndia where there was a large project order in the prior year, andChina impacted by the COVID lockdowns. The treatment application saw a decrease in orders due to the prolonged COVID lockdowns inChina , which more than offset project order wins in westernEurope in the period.
Applied Water
Applied Water segment orders decreased$6 million , or 1.2%, to$480 million (1.9% increase on a constant currency basis) for the second quarter of 2022 as compared to the prior year. Order growth for the quarter was negatively impacted by$15 million of foreign currency translation. The order increase on a constant currency basis was driven by strength across all major geographic regions, primarily the emerging markets where we saw strong project orders inAfrica and distributor order strength inIndia . For the six months endedJune 30, 2022 , orders increased$22 million , or 2.3%, to$985 million (4.9% increase on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by$25 million of foreign currency translation. The order increase on a constant currency basis was driven by strength across all major geographic regions. This reflects demand and timing of orders to address longer lead times in theU.S and westernEurope , and strong project orders in the emerging markets.
Measurement & Control Solutions
Measurement & Control Solutions segment orders decreased$62 million , or 11.6%, to$473 million (9.7% decrease on a constant currency basis) for the second quarter of 2022 as compared to the prior year. Order weakness for the quarter was negatively impacted by$10 million of foreign currency translation and reduced orders related to divestiture impacts of$5 million . The order decrease on a constant currency basis consisted primarily of organic order declines of$47 million , or (8.8)%. Organic orders for the quarter decreased in water applications, primarily driven by moderation of the early increased demand and advanced ordering to address electronic component shortages that we benefited from in the prior year and lapping of large prior year orders for metrology projects in theU.S. and westernEurope . This decline was partially offset by strength in the energy applications driven by continued orders to mitigate electronic component shortages and longer lead times. For the six months endedJune 30, 2022 , orders increased$38 million or 3.9%, to$1,023 million (5.5% increase on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by$16 million of foreign currency translation and reduced orders related to divestiture impacts of$11 million . The order increase on a constant currency basis consisted primarily of organic order growth of$65 million , or 6.6%. Organic orders for the period increased in the energy application, primarily driven by demand and continued advanced ordering to address electronic component shortages. This increase was offset by weakness in the water application driven by the moderation of early orders to mitigate electronic component shortages and longer lead times that drove order growth in the prior year, as well as modest order growth in our test application.
Backlog
Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays occur from time to time. Total backlog was$3,757 million atJune 30, 2022 , an increase of$978 million or 35.2%, as compared toJune 30, 2021 backlog of$2,779 million , and an increase of$517 million or 16.0%, as compared toDecember 31, 2021 backlog of$3,240 million , driven by the significant increase in orders in the year. We anticipate that approximately 40% of the backlog atJune 30, 2022 will be recognized as revenue in the remainder of 2022. There were no significant order cancellations during the quarter. 41 --------------------------------------------------------------------------------
Gross Margin
Gross margin as a percentage of revenue decreased 40 and 130 basis points to 38.1% and 37.4% for the three and six months endedJune 30, 2022 , as compared to 38.5% and 38.7% for the comparative 2021 period. The gross margin decrease for the quarter was primarily driven by cost inflation, as well as increased spending on strategic investments and unfavorable mix. These impacts were partially offset by price realization, productivity savings and net favorable impacts from exchange rate movements. The gross margin decrease for the six month period was primarily driven by cost inflation, as well as increased spending on strategic investments and unfavorable mix. These impacts were partially offset by price realization, productivity savings and net favorable impacts from foreign exchange rate movements.
Operating Expenses
The following table presents operating expenses for the three and six months endedJune 30, 2022 and 2021: Three Months Ended Six Months Ended June 30, June 30, (In millions) 2022 2021 Change 2022 2021 Change Selling, general and administrative expenses ("SG&A")$ 314 $ 304 3.3 %$ 618 $ 605 2.1 % SG&A as a % of revenue 23.0 % 22.5 % 50 bp 23.4 % 23.2 % 20 bp Research and development expenses ("R&D") 53 53 - % 105 103 1.9 % R&D as a % of revenue 3.9 % 3.9 % - bp 4.0 % 4.0 % - bp Restructuring and asset impairment charges 7 3 133.3 % 7 9 (22.2) % Operating expenses$ 374 $ 360 3.9 %$ 730 $ 717 1.8 % Expense to revenue ratio 27.4 % 26.6 % 80 bp 27.7 % 27.5 % 20 bp
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased by$10 million to$314 million , or 23.0% of revenue, in the second quarter of 2022, as compared to$304 million , or 22.5% of revenue, in the comparable 2021 period; and increased by$13 million to$618 million , or 23.4% of revenue, in the six months endedJune 30, 2022 , as compared to$605 million , or 23.2% of revenue, in the comparable 2021 period. Revenue growth driven by favorable price realization was slightly higher than SG&A increases resulting in a slightly lower SG&A as a percentage of sales. Cost increases in the quarter were driven by increased spending on strategic investments and logistics costs, partially offset by cost reductions from our productivity, restructuring and other cost savings initiatives. Cost increases in the first half of the year were driven by increased spending on strategic investments partially offset by cost reductions from our productivity, restructuring and other cost savings initiatives.
Research and Development ("R&D") Expenses
R&D expense was$53 million , or 3.9% of revenue, in the second quarter of 2022, as compared to$53 million , or 4.0% of revenue in the second quarter of 2021; and was$105 million , or 4.0% of revenue, in the six months endedJune 30, 2022 , as compared to$103 million , or 4.0% of revenue, in the comparable 2021 period. The decrease in R&D as a percent of revenue for the quarter was primarily driven by timing of spending on strategic investments. 42 --------------------------------------------------------------------------------
Restructuring and Asset Impairment Charges
Restructuring
During the three and six months endedJune 30, 2022 , we incurred restructuring charges of$6 million . We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across all segments. During the three and six months endedJune 30, 2021 , we recognized restructuring charges of$3 million and$8 million , respectively, of which$2 million and$6 million relate to actions previously announced in 2020. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment.
The following is a roll-forward for the six months ended
2022 2021
Planned reductions -
81 189
The following table presents expected restructuring spend in 2022 and
thereafter:
Measurement &
Control
(in millions) Water Infrastructure Applied Water Solutions Corporate Total
Actions Commenced in 2022:
Total expected costs $ 2 $
1 $ 3 $ -
Costs incurred during Q1 2022 - - - - - Costs incurred during Q2 2022 2 1 2 - 5 Total expected costs remaining $ - $ - $ 1 $ -$ 1 Actions Commenced in 2021: Total expected costs $ 3 $ - $ 1 $ -$ 4 Costs incurred during 2021 3 - - - 3 Costs incurred during Q1 2022 - - - - - Costs incurred during Q2 2022 - - - - - Total expected costs remaining $ - $
- $ 1 $ -
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2022 consist primarily of severance charges. The Water Infrastructure and Applied Water actions are complete and the Measurement & Control Solutions actions are expected to continue through the end of 2022.
The Water Infrastructure and Measurement & Control Solutions actions commenced in 2021 consist primarily of severance charges. The Water Infrastructure actions are complete and the Measurement & Control Solutions actions are expected to continue through the end of 2022. During the second quarter of 2022, we also incurred charges of$1 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2021.
We currently expect to incur between
43
--------------------------------------------------------------------------------restructuring charges are primarily related to efforts to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers.
Operating Income and Adjusted EBITDA
Operating income during the second quarter of 2022 was$146 million , reflecting a decrease of 8.8% compared to$160 million in the second quarter of 2021. Operating margin was 10.7% for the second quarter of 2022 versus 11.8% for the comparable period in 2021, a decrease of 110 basis points. Operating margin was negatively impacted by increased restructuring and realignment costs of$2 million as compared to the second quarter of 2021, and an increase in special charges of$1 million . Excluding the impact of these items, adjusted operating income was$155 million with an adjusted operating margin of 11.4% in the second quarter of 2022 as compared to adjusted operating income of$166 million with an adjusted operating margin of 12.3% in the second quarter of 2021. The decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments and some unfavorable mix. These impacts were partially offset by strong price realization and productivity savings. Operating income for the six months endedJune 30, 2022 was$257 million , reflecting a decrease of 12.3% compared to$293 million in 2021. Operating margin was 9.7% for the six months endedJune 30, 2022 versus 11.2% for the comparable period in 2021, a decrease of 150 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of$2 million as compared to 2021. Excluding the impact of these items, adjusted operating income was$271 million with an adjusted operating margin of 10.3% for the six months endedJune 30, 2022 as compared to adjusted operating income of$309 million with an adjusted operating margin of 11.9% in 2021. The decrease in adjusted operating margin was impacted by the same dynamics impacting the decrease in adjusted operating margin for the quarter as compared to the prior year. Adjusted EBITDA was$226 million (adjusted EBITDA margin of 16.6%) during the second quarter of 2022, a decrease of$8 million , or 3.4%, when compared to adjusted EBITDA of$234 million (adjusted EBITDA margin of 17.3%) during the comparable quarter in the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting operating margin noted above. Adjusted EBITDA for the six months endedJune 30, 2022 was$407 million (adjusted EBITDA margin of 15.4%), a decrease of$42 million , or 9.4%, when compared to adjusted EBITDA of$449 million (adjusted EBITDA margin of 17.2%) during the comparable period in prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting operating margin noted above. 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) 2022 2021 Change 2022 2021 Change
Water Infrastructure
Operating income $ 108 $ 93 16.1 % $ 182 $ 164 11.0 %
Operating margin 18.3 % 16.3 % 200 bp 16.2 % 15.2 % 100 bp
Restructuring and realignment costs 3 4 (25.0) % 4 9 (55.6) %
Adjusted operating income $ 111 $ 97 14.4 % $ 186 $ 173 7.5 %
Adjusted operating margin 18.8 % 17.0 % 180 bp 16.6 % 16.0 % 60 bp
Applied Water
Operating income $ 61 $ 64 (4.7) % $ 120 $ 130 (7.7) %
Operating margin 14.2 % 15.5 % (130) bp 14.1 % 16.1 % (200) bp
Restructuring and realignment costs 2 2 - % 3 3 - %
Special charges - - NM - 1 NM
Adjusted operating income $ 63 $ 66 (4.5) % $ 123 $ 134 (8.2) %
Adjusted operating margin 14.7 % 15.9 % (120) bp 14.4 % 16.6 % (220) bp
Measurement & Control Solutions
Operating income (loss) $ (5) $ 13 (138.5) % $ (15) $ 22 168.2 %
Operating margin (1.4) % 3.5 % (490) bp (2.3) % 3.0 % (530) bp
Restructuring and realignment costs 3 - NM 5 2 150.0 %
Special charges 1 - NM 1 - NM
Adjusted operating (loss) income $ (1) $ 13 (107.7) % $ (9) $ 24 137.5 %
Adjusted operating margin (0.3) % 3.5 % (380) bp (1.4) % 3.3 % (470) bp
Corporate and other
Operating loss $ (18) $ (10) (80.0) % $ (30) $ (23) 30.4 %
Special charges - - NM 1 1 - %
Adjusted operating loss $ (18) $ (10) 80.0 % $ (29) $ (22) 31.8 %
Total Xylem
Operating income $ 146 $ 160 (8.8) % $ 257 $ 293 (12.3) %
Operating margin 10.7 % 11.8 % (110) bp 9.7 % 11.2 % (150) bp
Restructuring and realignment costs 8 6 33.3 % 12 14 (14.3) %
Special charges 1 - - % 2 2 - %
Adjusted operating income $ 155 $ 166 (6.6) % $ 271 $ 309 (12.3) %
Adjusted operating margin 11.4 % 12.3 % (90) bp 10.3 % 11.9 % (160) bp
NM - Not meaningful percentage change
45
--------------------------------------------------------------------------------The table below provides a reconciliation of total and each segment's adjusted EBITDA to consolidated EBITDA and net income:
Three Months Ended
June 30, 2022
Net Income $ 112
Net Income margin 8.2 %
Depreciation 28
Amortization 32
Interest expense, net 10
Income tax expense 24
EBITDA $206
Measurement & Control
Water Infrastructure Applied Water Solutions Other* Total
EBITDA $123 $66 $28 $(11) $206
Restructuring and realignment 3 2 3 0 8
Share-based compensation 0 1 2 6 9
Special charges 0 0 1 2 3
Adjusted EBITDA $126 $69 $34 $(3) $226
Adjusted EBITDA margin 21.4 % 16.1 % 9.8 % NM 16.6 %
* Other includes Regional selling locations, corporate and other items.
46
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Three Months Ended
June 30, 2021
Net Income $113
Net Income margin 8.4 %
Depreciation 29
Amortization 33
Interest expense, net 19
Income tax expense 25
EBITDA $219
Measurement & Control
Water Infrastructure Applied Water Solutions Other* Total
EBITDA $104 $71 $49 $(5) $219
Restructuring and realignment 4 2 0 0 6
Share-based compensation 0 1 2 5 8
Special charges 0 0 0 3 3
(Gain) loss from sale of business 0 (2) 0 0 (2)
Adjusted EBITDA $108 $72 $51 $3 $234
Adjusted EBITDA margin 19.0 % 17.4 % 13.9 % NM 17.3 %
* Other includes Regional selling locations, corporate and other items.
2022 versus 2021
Measurement & Control
Water Infrastructure Applied Water Solutions Other* Total
EBITDA $19 $(5) $(21) $(6) $(13)
Restructuring and realignment (1) 0 3 0 2
Share-based compensation 0 0 0 1 1
Special charges 0 0 1 (1) 0
(Gain) loss from sale of business 0 2 0 0 2
Adjusted EBITDA $18 $(3) $(17) $(6) $(8)
Adjusted EBITDA margin 2.4 % (1.3) % (4.1) % NM (0.7) %
* Other includes Regional selling locations, corporate and other items.
47
--------------------------------------------------------------------------------
Six Months Ended
June 30, 2022
Net Income $ 194
Net Income margin 7.4 %
Depreciation 56
Amortization 62
Interest expense, net 21
Income tax expense 40
EBITDA $373
Measurement & Control
Water Infrastructure Applied Water Solutions Other* Total
EBITDA $206 $129 $53 $(15) $373
Restructuring and realignment 4 3 5 0 12
Share-based compensation 1 2 3 12 18
Special charges 0 0 1 4 5
(Gain) loss from sale of
business 0 0 (1) 0 (1)
Adjusted EBITDA $211 $134 $61 $1 $407
Adjusted EBITDA margin 18.8 % 15.7 % 9.2 % NM 15.4 %
* Other includes Regional selling locations, corporate and other items.
Six Months Ended
June 30, 2021
Net Income $200
Net Income margin 7.7 %
Depreciation 59
Amortization 65
Interest expense, net 38
Income tax expense 52
EBITDA $414
Measurement & Control
Water Infrastructure Applied Water Solutions Other* Total
EBITDA $186 $143 $93 $(8) $414
Restructuring and realignment 9 3 2 0 14
Share-based compensation 1 2 3 11 17
Special charges 0 1 0 5 6
(Gain) loss from sale of business 0 (2) 0 0 (2)
Adjusted EBITDA $196 $147 $98 $8 $449
Adjusted EBITDA margin 18.2 % 18.2 % 13.6 % NM 17.2 %
* Other includes Regional selling locations, corporate and other items.
48
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2022 versus 2021
Measurement & Control
Water Infrastructure Applied Water Solutions Other* Total
EBITDA $20 $(14) $(40) $(7) $(41)
Restructuring and realignment (5) 0 3 0 (2)
Share-based compensation 0 0 0 1 1
Special charges 0 (1) 1 (1) (1)
(Gain) loss from sale of business 0 2 (1) 0 1
Adjusted EBITDA $15 $(13) $(37) $(7) $(42)
Adjusted EBITDA margin 0.6 % (2.5) % (4.4) % NM (1.8) %
* Other includes Regional selling locations, corporate and other items.
Water Infrastructure
Operating income for our Water Infrastructure segment increased$15 million , or 16.1%, for the second quarter of 2022 compared to the prior year, with operating margin also increasing from 16.3% to 18.3%. Operating margin benefited from a decrease in restructuring and realignment costs of$1 million during the quarter. Excluding these restructuring and realignment costs, adjusted operating income increased$14 million , or 14.4%, with adjusted operating margin increasing from 17.0% to 18.8%. The increase in adjusted operating margin for the quarter was primarily due to strong price realization, productivity savings, net favorable impacts from movements in exchange rates as well as modest favorability from volume and mix. These items were partially offset by cost inflation and increased spending on strategic investments. For the six months endedJune 30, 2022 , operating income for our Water Infrastructure segment increased$18 million , or 11.0%, as compared to the prior year, with operating margin also increasing from 15.2% to 16.2%. Operating margin benefited from a decrease in restructuring and realignment costs of$5 million in 2022. Excluding these restructuring and realignment costs, adjusted operating income increased$13 million , or 7.5%, with adjusted operating margin increasing from 16.0% to 16.6%. The increase in adjusted operating margin for the period was primarily due to strong price realization, productivity savings, favorable volume and net favorable impacts from movements in exchange rates. These items were partially offset by cost inflation and increased spending on strategic investments. Adjusted EBITDA was$126 million (adjusted EBITDA margin of 21.4%) for the second quarter of 2022, an increase of$18 million , or 16.7%, when compared to adjusted EBITDA of$108 million (adjusted EBITDA margin of 19.0%) during the prior year. The increase in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin also benefited from an increase in investment income in the quarter included in other non-operating income/(expense). Adjusted EBITDA was$211 million (adjusted EBITDA margin of 18.8%) for the six months endedJune 30, 2022 , an increase of$15 million , or 7.7%, when compared to adjusted EBITDA of$196 million (adjusted EBITDA margin of 18.2%) during 2021. The increase in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin.
Applied Water
Operating income for our Applied Water segment decreased$3 million , or 4.7%, for the second quarter of 2022 compared to the prior year, with operating margin decreasing from 15.5% to 14.2%. Operating margin was impacted by restructuring and realignment costs of$2 million in both years. Excluding these items, adjusted operating income decreased$3 million , or 4.5%, with adjusted operating margin decreasing from 15.9% to 14.7%. The decrease in adjusted operating margin for the quarter was primarily due to cost inflation and increased logistics costs, increased spending on strategic investments, as well as unfavorable volume and mix. These impacts were partially offset by strong price realization and productivity savings. 49 -------------------------------------------------------------------------------- For the six months endedJune 30, 2022 , operating income for our Applied Water segment decreased$10 million , or 7.7%, as compared to the prior year, with operating margin decreasing from 16.1% to 14.1%. Operating margin was impacted by restructuring and realignment costs of$3 million in both years and a decrease of special charges of$1 million in the first quarter of 2022. Excluding these items, adjusted operating income decreased$11 million , or 8.2%, with adjusted operating margin decreasing from 16.6% to 14.4%. The decrease in adjusted operating margin for the period was primarily due to cost inflation and increased logistics costs. These impacts were partially offset by price realization. Adjusted EBITDA was$69 million (adjusted EBITDA margin of 16.1%) for the second quarter of 2022, a decrease of$3 million , or 4.2%, when compared to adjusted EBITDA of$72 million (adjusted EBITDA margin of 17.4%) during the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin. Adjusted EBITDA was$134 million (adjusted EBITDA margin of 15.7%) for the six months endedJune 30, 2022 , a decrease of$13 million , or 8.8%, when compared to adjusted EBITDA of$147 million (adjusted EBITDA margin of 18.2%) during the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment decreased$18 million , or 138.5%, for the second quarter of 2022 compared to the prior year, with operating margin decreasing from 3.5% to (1.4)%. Operating margin was negatively impacted during the quarter by an increase of restructuring and realignment costs of$3 million . Excluding these items, adjusted operating income decreased$14 million , or (107.7)%, with adjusted operating margin decreasing from 3.5% to (0.3)%. The decrease in adjusted operating margin for the quarter was primarily due to cost inflation, unfavorable mix, unfavorable volume and increased spending on strategic investments. These impacts were partially offset by price realization and restructuring and productivity savings. For the six months endedJune 30, 2022 , operating income for our Measurement & Control Solutions segment decreased$37 million , or 168.2%, as compared to the prior year, with operating margin decreasing from 3.0% to (2.3)%. Operating margin was negatively impacted by an increase of restructuring and realignment costs of$3 million . Excluding these items, adjusted operating income decreased$33 million , or 137.5%, with adjusted operating margin decreasing from 3.3% to (1.4)%. The decrease in adjusted operating margin for the period was primarily due to cost inflation and unfavorable volume and mix. These impacts were partially offset by price realization as well as restructuring and productivity savings. Adjusted EBITDA was$34 million (adjusted EBITDA margin of 9.8%) for the second quarter of 2022, a decrease of$17 million , or 33.3%, when compared to adjusted EBITDA of$51 million (adjusted EBITDA margin of 13.9%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense. Adjusted EBITDA was$61 million (adjusted EBITDA margin of 9.2%) for the six months endedJune 30, 2022 , a decrease of$37 million , or 37.8%, when compared to adjusted EBITDA of$98 million (adjusted EBITDA margin of 13.6%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense. Corporate and other Operating loss for corporate and other increased$8 million , or 80.0%, during the second quarter of 2022 compared to the prior year period. For the six months endedJune 30, 2022 , operating loss for corporate and other increased$7 million , or 30.4%, compared to the same prior period. The increases in operating loss in both periods are primarily due to spending on strategic investments and other initiatives, as well as timing of certain employee-related expenses as compared to prior year. 50 --------------------------------------------------------------------------------
Interest Expense
Interest expense was$12 million and$25 million for the three and six months endedJune 30, 2022 and$21 million and$42 million for the three and six months endedJune 30, 2021 , respectively. The decrease in interest expense is primarily driven by interest expense incurred during 2021 related to our senior note that was paid off inOctober 2021 . See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt and related interest.
Income Tax Expense
The income tax provision for the three months endedJune 30, 2022 was$24 million resulting in an effective tax rate of 17.5%, compared to a$25 million expense resulting in an effective tax rate of 18.5% for the same period in 2021. The income tax provision for the six months endedJune 30, 2022 was$40 million resulting in an effective tax rate of 17.0%, compared to a$52 million expense resulting in an effective tax rate of 20.7% for the same period in 2021. The effective tax rate for the three and six month period endedJune 30, 2022 differs from the same period in 2021 due to the impact of tax settlement benefits in the current period as compared to tax settlement expenses in the prior year.
Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
Six Months Ended
June 30,
(In millions) 2022 2021 Change
Operating activities $ 32 $ 206 $ (174)
Investing activities (84) (69) (15)
Financing activities (158) (162) 4
Foreign exchange (a) (26) (10) (16)
Total $ (236) $ (35) $ (201) (a)The impact is primarily due to weakening of the Euro and Chinese Yuan partially offset by strengthening of the Russian Ruble.
Sources and Uses of Liquidity
Operating Activities
Cash generated by operating activities was$32 million for the six months endedJune 30, 2022 as compared to$206 million in the comparable prior year period. The reduction in cash generated was primarily driven by higher working capital levels, reflecting increased safety stock and higher advanced payments to suppliers to mitigate supply chain volatility and higher accounts receivable driven by increased sales. Increased customer advances, as well as lower interest and income tax payments partially offset these items.
Investing Activities
Cash used in investing activities was$84 million for the six months endedJune 30, 2022 as compared to$69 million in the comparable prior year period. The increase in spending was driven by higher capital expenditures driven primarily by investments in equipment and rental fleet.
Financing Activities
Cash used by financing activities was$158 million for the six months endedJune 30, 2022 as compared to cash generated of$162 million in the comparable prior year period. The reduction in cash used was primarily driven by a decrease in share repurchases partially offset by higher dividend payments.
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate
cash from operations and access to bank financing and the capital markets. As a
result of uncertainties caused both directly and indirectly by the COVID-19
pandemic and related macroeconomic conditions, we continue to evaluate aspects
of our spending, including capital expenditures, strategic investments and
dividends.
51
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Historically, we have generated operating cash flow sufficient to fund our
primary cash needs. If our cash flows from operations are less than we expect,
we may need to incur debt or issue equity. From time to time, we may need to
access the long-term and short-term capital markets to obtain financing. Our
access to, and the availability of, financing on acceptable terms and conditions
in the future will be impacted by many factors, including: (i) our credit
ratings or absence of a credit rating, (ii) the liquidity of the overall capital
markets, and (iii) the current state of the economy. There can be no assurance
that such financing will be available to us on acceptable terms or that such
financing will be available at all. Our securities are rated investment grade. A
significant change in credit rating could impact our ability to borrow at
favorable rates. Refer to Note 10, "Credit Facilities and Debt", of our
condensed consolidated financial statements for a description of limitations on
obtaining additional funding.
We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis.
Based on our current global cash positions, cash flows from operations and access to the capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other obligations in both theU.S. and outside of theU.S. during the year. In addition, we believe our existing committed credit facilities and access to the public debt markets would provide further liquidity if required. Currently, we have available liquidity of approximately$1.9 billion , consisting of$1.1 billion of cash and$800 million of available credit facilities as disclosed in Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements. OnOctober 1, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of$600 million . Our next long-term debt maturity isMarch 2023 .
Risks related to these items are described in our risk factor disclosures referenced under "Item 1A. Risk Factors" in our 2021 Annual Report.
Credit Facilities & Long-Term Contractual Commitments
See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.
Non-U.S. Operations We generated approximately 54% and 56% of our revenue from non-U.S. operations for the both three and six months endedJune 30, 2022 and 2021, respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of theU.S. , we expect to continue to generate significant revenue from non-U.S. operations and expect that a substantial portion of our cash will be predominately held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to theU.S. and other international subsidiaries when we believe it is cost-effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, and reassess whether there is a need to repatriate funds held internationally to support ourU.S. operations. As ofJune 30, 2022 , we have provided a deferred tax liability of$4 million for net foreign withholding taxes and state income taxes on$485 million of earnings expected to be repatriated to theU.S. parent as deemed necessary in the future.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources
are based on our condensed consolidated financial statements, which have been
prepared in conformity with GAAP. The preparation of these condensed
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses and the disclosure of contingent assets and liabilities. We believe the
most complex and sensitive judgments, because of their significance to the
condensed consolidated financial statements, result primarily from the need to
make estimates about the effects of matters that are inherently uncertain,
particularly at this time and moving forward given the uncertainty around the
magnitude and duration of the COVID-19 pandemic and related macro economic
conditions. Management's Discussion and Analysis of Financial Condition and
Results of Operations in the 2021 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
2021 Annual Report.
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The uncertainty of the future impact of the COVID-19 pandemic and related
macroeconomic impacts, such as the increasing cost of capital, may contribute to
the deterioration of the forecasted future cash flows of our reporting units. If
we do not achieve our forecasts, it is possible that the goodwill of the
Advanced Infrastructure Analytics ("AIA") reporting unit could be deemed to be
impaired in a future period. The risks and potential impacts of COVID-19 on the
fair value of our assets are included in our risk factor disclosures referenced
under "Item 1A. Risk Factors" in the Company's 2021 Annual Report.
Post-retirement Benefit Plans. As described in our 2021 Annual Report, the
Company has initiated the process for a full buy-out of its largest defined
benefit plan in the UK . Upon completion of the buy-out, expected in the
remaining period of 2022, we anticipate a settlement charge of approximately
£125 million (approximately $150 million ), primarily consisting of unrecognized
actuarial losses.
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