Xylem(XYL) - 2021 Q1 - Quarterly Report

PART I – Financial Information Item 1. Condensed Consolidated Financial Statements Xylem Inc.'s unaudited condensed consolidated financial statements for Q1 2021 and 2020 show significant improvements in key financial metrics Condensed Consolidated Income Statements Xylem Inc. reported substantial increases in revenue, net income, and operating income for Q1 2021 compared to Q1 2020 | Metric | 2021 (Millions USD) | 2020 (Millions USD) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Revenue | 1,256 | 1,123 | 11.8% | | Gross profit | 490 | 409 | 19.8% | | Operating income | 133 | 61 | 118.0% | | Net income | 87 | 38 | 128.9% | | Basic EPS | 0.49 | 0.21 | 133.3% | | Diluted EPS | 0.48 | 0.21 | 128.6% | Condensed Consolidated Statements of Comprehensive Income The company's comprehensive income significantly improved from a loss in Q1 2020 to a gain in Q1 2021 | Metric | 2021 (Millions USD) | 2020 (Millions USD) | Change (Millions USD) | | :------------------------------------ | :------------------ | :------------------ | :-------------------- | | Net income | 87 | 38 | 49 | | Foreign currency translation adjustment | 10 | (78) | 88 | | Other comprehensive income (loss), before tax | 1 | (73) | 74 | | Comprehensive income (loss) | 74 | (49) | 123 | Condensed Consolidated Balance Sheets As of March 31, 2021, Xylem's total assets slightly decreased, mainly due to reduced cash and cash equivalents | Metric | March 31, 2021 (Millions USD) | December 31, 2020 (Millions USD) | Change (Millions USD) | | :-------------------------------- | :------------------------------ | :------------------------------- | :-------------------- | | Cash and cash equivalents | 1,688 | 1,875 | (187) | | Total current assets | 3,401 | 3,523 | (122) | | Total assets | 8,545 | 8,750 | (205) | | Total current liabilities | 1,844 | 1,956 | (112) | | Total liabilities | 5,599 | 5,774 | (175) | | Total stockholders' equity | 2,937 | 2,968 | (31) | Condensed Consolidated Statements of Cash Flows Xylem reported increased cash used in operating and financing activities for Q1 2021, resulting in a net decrease in cash | Metric | 2021 (Millions USD) | 2020 (Millions USD) | Change (Millions USD) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Net Cash – Operating activities | (26) | (2) | (24) | | Net Cash – Investing activities | (31) | (48) | 17 | | Net Cash – Financing activities | (115) | 87 | (202) | | Net change in cash and cash equivalents | (187) | 15 | (202) | | Cash and cash equivalents at end of period | 1,688 | 739 | 949 | Notes to the Condensed Consolidated Financial Statements The notes provide detailed disclosures on Xylem's accounting policies, revenue, restructuring, income taxes, and other financial items Note 1. Background and Basis of Presentation Xylem Inc. is a leading water and wastewater equipment and service provider, operating in three segments - Xylem operates in three segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions, providing equipment and services for water and wastewater applications[17][18] - The preparation of financial statements involves estimates and assumptions, with increased uncertainty due to the COVID-19 pandemic[21] Note 2. Revenue Total revenue for Q1 2021 was $1,256 million, with Water Infrastructure generating the highest revenue | Revenue Source | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :------------------------- | :--------------------- | :--------------------- | | Contracts with customers | 1,211 | 1,074 | | Lease Revenue | 45 | 49 | | Total Revenue | 1,256 | 1,123 | | Segment/Application | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :-------------------------- | :--------------------- | :--------------------- | | Water Infrastructure - Transport | 370 | 318 | | Water Infrastructure - Treatment | 94 | 71 | | Applied Water - Commercial | 147 | 137 | | Applied Water - Residential | 67 | 50 | | Applied Water - Industrial | 179 | 151 | | Measurement & Control - Water | 283 | 265 | | Measurement & Control - Energy | 71 | 82 | | Total Contracts Revenue | 1,211 | 1,074 | | Geographic Region (Contracts Revenue) | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | | Water Infrastructure - United States | 123 | 121 | | Water Infrastructure - Western Europe | 173 | 142 | | Water Infrastructure - Emerging Markets | 122 | 86 | | Applied Water - United States | 194 | 191 | | Applied Water - Western Europe | 92 | 74 | | Applied Water - Emerging Markets | 78 | 50 | | Measurement & Control - United States | 213 | 221 | | Measurement & Control - Western Europe | 74 | 63 | | Measurement & Control - Emerging Markets | 46 | 41 | | Total Contracts Revenue | 1,211 | 1,074 | Note 3. Restructuring and Asset Impairment Charges Xylem recognized $6 million in restructuring and asset impairment charges in Q1 2021, primarily due to headcount reductions | Charge Type | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :-------------------------------- | :--------------------- | :--------------------- | | Severance and other charges | 4 | 2 | | Asset impairment | 1 | — | | Total restructuring charges | 5 | 2 | | Asset impairment charges | 1 | — | | Total restructuring and asset impairment charges | 6 | 2 | - The company initiated a restructuring plan in June 2020 in response to COVID-19, aiming to optimize costs, simplify operations, and strengthen competitive positioning[31] | Segment (Restructuring Accruals) | March 31, 2021 (Millions USD) | March 31, 2020 (Millions USD) | | :------------------------------- | :---------------------------- | :---------------------------- | | Water Infrastructure | 2 | 1 | | Applied Water | 1 | 1 | | Measurement & Control Solutions | 14 | 17 | | Regional selling locations | 4 | 1 | | Total Accruals | 21 | 20 | Note 4. Income Taxes Xylem's income tax expense for Q1 2021 was $27 million, resulting in a 23.3% effective tax rate | Metric | Q1 2021 | Q1 2020 | | :---------------- | :------ | :------ | | Income tax expense | $27 million | $4 million | | Effective tax rate | 23.3% | 10.0% | - The higher effective tax rate in Q1 2021 was primarily due to tax settlements and the Global Intangible Low Taxed Income (GILTI) inclusion, partially offset by favorable earnings mix[37] - Unrecognized tax benefits amounted to $113 million at March 31, 2021, with $8 million in accrued interest[38] Note 5. Earnings Per Share Basic earnings per share increased to $0.49 in Q1 2021 from $0.21 in Q1 2020, reflecting higher net income | Metric | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | Net income (in millions) | $87 | $38 | | Basic earnings per share | $0.49 | $0.21 | | Diluted earnings per share | $0.48 | $0.21 | | Weighted average common shares outstanding (Basic, in thousands) | 180,267 | 180,179 | | Weighted average common shares outstanding (Diluted, in thousands) | 181,474 | 181,294 | Note 6. Inventories Total inventories increased to $596 million as of March 31, 2021, with increases across all components | Inventory Component | March 31, 2021 (Millions USD) | December 31, 2020 (Millions USD) | | :------------------ | :---------------------------- | :------------------------------- | | Finished goods | 232 | 221 | | Work in process | 58 | 49 | | Raw materials | 306 | 288 | | Total inventories | 596 | 558 | Note 7. Goodwill and Other Intangible Assets Goodwill slightly decreased to $2,831 million as of March 31, 2021, primarily due to foreign currency adjustments | Metric | March 31, 2021 (Millions USD) | January 1, 2021 (Millions USD) | | :-------------------------------- | :---------------------------- | :----------------------------- | | Goodwill - Water Infrastructure | 662 | 668 | | Goodwill - Applied Water | 526 | 529 | | Goodwill - Measurement & Control Solutions | 1,643 | 1,657 | | Total Goodwill | 2,831 | 2,854 | | Intangible Asset Type | Net Intangibles (March 31, 2021, Millions USD) | Net Intangibles (December 31, 2020, Millions USD) | | :-------------------------------- | :--------------------------------------------- | :---------------------------------------------- | | Customer and distributor relationships | 518 | 531 | | Proprietary technology and patents | 71 | 75 | | Trademarks | 78 | 80 | | Software | 236 | 235 | | Indefinite-lived intangibles | 169 | 169 | | Total Other Intangibles | 1,075 | 1,093 | - Amortization expense for finite-lived intangible assets was $32 million for the three months ended March 31, 2021, down from $35 million in the prior year[44] Note 8. Derivative Financial Instruments Xylem uses derivative financial instruments to manage foreign exchange and interest rate fluctuations, with $400 million in purchased notional amounts - Xylem uses foreign currency derivatives (e.g., currency forward agreements) to manage exposure to foreign exchange rate fluctuations, with principal exposures to Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty, and Australian Dollar[46][47] | Derivative Type | March 31, 2021 (Millions USD) | December 31, 2020 (Millions USD) | | :------------------------------------ | :------------------------------ | :------------------------------- | | Purchased notional amounts (FX contracts) | 400 | 0 | | Notional amount (Net investment hedges) | 1,196 | 1,249 | | Foreign Currency Denominated Debt (Net Investment Hedge) | 585 | 610 | | Effect on Comprehensive Income (Q1 2021, Millions USD) | | :---------------------------------------------------- | | Foreign Exchange Contracts (loss recognized in OCI) | (11) | | Cross Currency Swaps (gain recognized in OCI) | 30 | | Foreign Currency Denominated Debt (gain recognized in OCI) | 26 | Note 9. Accrued and Other Current Liabilities Total accrued and other current liabilities decreased to $714 million as of March 31, 2021, primarily due to reductions in compensation | Liability Component | March 31, 2021 (Millions USD) | December 31, 2020 (Millions USD) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Compensation and other employee-benefits | 211 | 258 | | Customer-related liabilities | 180 | 186 | | Accrued taxes | 93 | 103 | | Lease liabilities | 64 | 63 | | Accrued warranty costs | 51 | 54 | | Other accrued liabilities | 115 | 123 | | Total accrued and other current liabilities | 714 | 787 | Note 10. Credit Facilities and Debt Total debt outstanding was $3,060 million as of March 31, 2021, with an undrawn $800 million revolving credit facility | Debt Type | March 31, 2021 (Millions USD) | December 31, 2020 (Millions USD) | | :------------------------------------ | :---------------------------- | :------------------------------- | | 4.875% Senior Notes due 2021 | 600 | 600 | | 2.250% Senior Notes due 2023 | 587 | 612 | | 3.250% Senior Notes due 2026 | 500 | 500 | | 1.950% Senior Notes due 2028 (Green Bond) | 500 | 500 | | 2.250% Senior Notes due 2031 (Green Bond) | 500 | 500 | | 4.375% Senior Notes due 2046 | 400 | 400 | | Debt issuance costs and unamortized discount | (27) | (28) | | Total debt | 3,060 | 3,084 | | Less: short-term borrowings and current maturities | 600 | 600 | | Total long-term debt | 2,460 | 2,484 | - The 2019 Five-Year Revolving Credit Facility provides up to $800 million, undrawn as of March 31, 2021, and includes an ESG score-based pricing grid[65][66][68] - The company has U.S. Dollar and Euro commercial paper programs with maximum issuing balances of $600 million and €500 million respectively, both undrawn as of March 31, 2021[69][71] Note 11. Post-retirement Benefit Plans Total net periodic benefit cost for defined benefit pension plans was $8 million in Q1 2021, with international plans contributing the majority | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :-------------------------------- | :--------------------- | :--------------------- | | Domestic defined benefit pension plans (Net periodic benefit cost) | 1 | 1 | | International defined benefit pension plans (Net periodic benefit cost) | 7 | 6 | | Total net periodic benefit cost | 8 | 7 | - Xylem contributed $6 million to its defined benefit plans in Q1 2021 and anticipates further contributions of $13 million to $21 million for the rest of 2021[74] Note 12. Equity Total equity decreased slightly to $2,946 million as of March 31, 2021, reflecting net income offset by other comprehensive loss and repurchases | Equity Component | Balance at Jan 1, 2021 (Millions USD) | Net Income (Millions USD) | Other Comprehensive Loss (Millions USD) | Dividends Declared (Millions USD) | Repurchase of Common Stock (Millions USD) | Balance at Mar 31, 2021 (Millions USD) | | :-------------------------------- | :------------------------------------ | :------------------------ | :-------------------------------------- | :-------------------------- | :---------------------------------------- | :------------------------------------ | | Common Stock | 2 | — | — | — | — | 2 | | Capital in Excess of Par Value | 2,037 | — | — | — | — | 2,049 | | Retained Earnings | 1,930 | 87 | — | (50) | — | 1,967 | | Accumulated Other Comprehensive Loss | (413) | — | (13) | — | — | (426) | | Treasury Stock | (588) | — | — | — | (60) | (655) | | Non-controlling Interests | 8 | — | — | — | — | 9 | | Total Equity | 2,976 | 87 | (13) | (50) | (60) | 2,946 | Note 13. Share-Based Compensation Plans Share-based compensation expense was $9 million in Q1 2021, with 257 thousand stock options granted - Share-based compensation expense increased to $9 million in Q1 2021 from $8 million in Q1 2020[77] | Share-Based Award | Outstanding at Jan 1, 2021 (Thousands) | Granted (Thousands) | Outstanding at Mar 31, 2021 (Thousands) | | :-------------------------------- | :------------------------------------- | :------------------ | :-------------------------------------- | | Stock Options | 1,961 | 257 | 2,166 | | Restricted Stock Units | 537 | 191 | 529 | | ROIC Performance Share Units | 182 | 60 | 184 | | TSR Performance Share Units | 182 | 60 | 184 | | ESG Performance Share Units | <0.1 | <0.1 | <0.1 | - The total intrinsic value of options exercised during Q1 2021 was $2.3 million[78] Note 14. Capital Stock Xylem repurchased approximately 0.7 million shares for $67 million in Q1 2021, with $228 million remaining under the program | Repurchase Activity | Q1 2021 (Shares in Millions) | Q1 2021 (Value in Millions USD) | Q1 2020 (Shares in Millions) | Q1 2020 (Value in Millions USD) | | :-------------------------------- | :----------------------------- | :------------------------------ | :----------------------------- | :------------------------------ | | Total shares repurchased | 0.7 | 67 | 0.8 | 60 | | Under $500M program | 0.6 | 60 | 0.7 | 50 | | For employee tax withholding | 0.1 | 7 | 0.1 | 10 | - As of March 31, 2021, $228 million in shares may still be purchased under the $500 million repurchase program[86] Note 15. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased to $426 million as of March 31, 2021, driven by foreign currency translation | Component | Balance at Jan 1, 2021 (Millions USD) | Foreign Currency Translation (Millions USD) | Post-retirement Benefit Plans (Millions USD) | Derivative Instruments (Millions USD) | Balance at Mar 31, 2021 (Millions USD) | | :-------------------------------- | :------------------------------------ | :---------------------------------- | :----------------------------------- | :------------------------------------ | :------------------------------------ | | Foreign Currency Translation | (86) | (4) | — | — | (90) | | Post-retirement Benefit Plans | (330) | — | 4 | — | (326) | | Derivative Instruments | 3 | — | — | (13) | (10) | | Total | (413) | (4) | 4 | (13) | (426) | Note 16. Commitments and Contingencies Xylem is involved in various legal and regulatory proceedings, with $5 million accrued for general legal matters - Xylem is involved in various legal and regulatory proceedings incidental to its business operations, covering environmental, tax, intellectual property, product liability, and other disputes[90] - The company has accrued $5 million for general legal matters and $3 million for environmental matters as of March 31, 2021[93][98] - Xylem has indemnification from ITT Corporation for asbestos and silica liability claims arising before October 31, 2011[91][94] Note 17. Segment Information All three of Xylem's segments reported increased revenue and operating income in Q1 2021 compared to Q1 2020 - Xylem's three reportable segments are Water Infrastructure (transportation and treatment of water), Applied Water (residential, commercial, industrial uses), and Measurement & Control Solutions (advanced technology for water/energy resources and analytical instrumentation)[101] | Segment | Q1 2021 Revenue (Millions USD) | Q1 2020 Revenue (Millions USD) | Q1 2021 Operating Income (Millions USD) | Q1 2020 Operating Income (Millions USD) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------------------------- | :-------------------------------------- | | Water Infrastructure | 509 | 438 | 71 | 39 | | Applied Water | 393 | 338 | 66 | 47 | | Measurement & Control Solutions | 354 | 347 | 9 | (12) | | Total | 1,256 | 1,123 | 133 | 61 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Xylem's Q1 2021 financial condition and results, highlighting strong growth and the 2021 outlook Overview Xylem is a global water technology company providing engineered products and solutions across the water cycle - Xylem is a global water technology company offering engineered products and solutions for the full water cycle, from delivery and measurement to treatment and analysis[110] - The company's offerings are organized into three segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions, aligned with critical market applications[110] COVID-19 Pandemic Update The COVID-19 pandemic continues to impact Xylem's supply chains, causing component shortages and increased logistics costs - The COVID-19 pandemic has adversely affected Xylem's supply chains, leading to component shortages, raw material interruptions, and increased logistics costs in 2021[112] - Xylem is mitigating supply chain challenges through enhanced supplier pulsing, redundancy, buffer stock, and alternative suppliers[112] - The company continues to prioritize employee health and safety, maintaining support pay programs and remote work for many offices[114][115] Executive Summary Xylem reported strong Q1 2021 financial performance, with revenue up 11.8% and operating income more than doubling | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Revenue | 1,256 | 1,123 | 11.8% | | Operating income | 133 | 61 | 118.0% | | Operating margin | 10.6% | 5.4% | 520 bp | | Adjusted operating income | 143 | 70 | 104.3% | | Adjusted operating margin | 11.4% | 6.2% | 520 bp | | Orders | 1,538 | 1,261 | 22.0% | | Diluted EPS | 0.48 | 0.21 | 128.6% | | Adjusted Diluted EPS | 0.56 | 0.23 | 143.5% | - The increase in adjusted operating margin was primarily driven by cost reductions from productivity, restructuring, and other cost-saving initiatives, favorable volume from COVID-19 recovery, and decreased quality management costs[118] Key Performance Indicators and Non-GAAP Measures Management uses non-GAAP measures like organic revenue, adjusted net income, and free cash flow to evaluate performance - Management uses non-GAAP measures such as organic revenue, constant currency, adjusted net income, adjusted operating income, EBITDA, and free cash flow to evaluate operating performance and capital generation[120][122][123][126] | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :-------------------------------- | :--------------------- | :--------------------- | | Net income | 87 | 38 | | Adjusted net income | 102 | 42 | | EBITDA | 195 | 120 | | Adjusted EBITDA | 215 | 138 | | Free cash flow | (65) | (53) | 2021 Outlook Xylem anticipates total revenue growth of 8% to 10% in 2021, with organic revenue growth projected between 5% and 7% - Xylem forecasts total revenue growth of 8% to 10% in 2021, with organic revenue growth of 5% to 7%[127] | End Market | 2021 Organic Revenue Growth Outlook | | :---------------- | :---------------------------------- | | Utilities | Mid to high-single-digit | | Industrial | Mid-single-digit | | Commercial | Low-single-digit | | Residential | High-single-digit to low-double-digit | - The company expects to incur $50-60 million in restructuring and realignment costs in 2021, yielding approximately $40 million in net savings[127] Results of Operations Xylem's Q1 2021 results show significant improvements across key financial metrics, driven by organic growth and cost reductions | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Revenue | 1,256 | 1,123 | 11.8% | | Gross profit | 490 | 409 | 19.8% | | Gross margin | 39.0% | 36.4% | 260 bp | | Operating income | 133 | 61 | 118.0% | | Operating margin | 10.6% | 5.4% | 520 bp | | Net income | 87 | 38 | 128.9% | - Revenue growth was primarily driven by strong organic growth in emerging markets (especially China's COVID-19 recovery) and Western Europe, partially offset by organic declines in the U.S[130] Revenue Total revenue for Q1 2021 increased by $133 million (11.8%) to $1,256 million, with constant currency growth of 7.9% | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :------- | :--------------------- | :--------------------- | :--------- | | Revenue | 1,256 | 1,123 | 11.8% | | Organic Growth | 91 | N/A | 8.1% | | Foreign currency translation | 44 | N/A | 3.9% | - Strong organic growth was observed in emerging markets, particularly China, and Western Europe, driven by recovery from COVID-19 impacts[130] Water Infrastructure Revenue Water Infrastructure revenue grew by 16.2% to $509 million in Q1 2021, driven by strong organic growth in utility and industrial end markets | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Revenue | 509 | 438 | 16.2% | | Organic Growth | 47 | N/A | 10.7% | | Foreign currency translation | 24 | N/A | 5.5% | - Organic growth was strong in utility and industrial end markets, especially in Asia Pacific (China's COVID-19 recovery) and Western Europe, with transport and treatment applications contributing[132][133] Applied Water Revenue Applied Water revenue increased by 16.3% to $393 million in Q1 2021, with organic growth across all end markets and regions | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Revenue | 393 | 338 | 16.3% | | Organic Growth | 44 | N/A | 13.0% | | Foreign currency translation | 11 | N/A | 3.3% | - Organic growth was driven by strength in industrial water (emerging markets, North America, Western Europe) and residential building services (China, North America, Western Europe), with commercial building services showing modest growth[135] Measurement & Control Solutions Revenue Measurement & Control Solutions revenue increased by 2.0% to $354 million in Q1 2021, but organic revenue was flat | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Revenue | 354 | 347 | 2.0% | | Organic Growth | — | N/A | —% | | Divestitures | (2) | N/A | (0.6)% | | Foreign currency translation | 9 | N/A | 2.6% | - Organic revenue was flat, with declines in the energy application (slower gas project deployments) offset by growth in the water application (strong backlog execution in Western Europe and China COVID-19 recovery)[137] Orders / Backlog Total orders for Q1 2021 increased by 22.0% to $1,538 million, driven by strong organic order growth across all segments | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Orders | 1,538 | 1,261 | 22.0% | | Organic Growth | 235 | N/A | 18.6% | | Foreign currency translation | 49 | N/A | 3.9% | - Total backlog was $2,403 million at March 31, 2021, an increase of $516 million (27.3%) from March 31, 2020[144] - Approximately 54% of the backlog at March 31, 2021, is expected to be recognized as revenue in the remainder of 2021[144] Water Infrastructure Orders Water Infrastructure orders increased by 18.9% to $611 million in Q1 2021, primarily due to organic growth in the transport application | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Orders | 611 | 514 | 18.9% | | Organic Growth | 70 | N/A | 13.6% | | Foreign currency translation | 27 | N/A | 5.3% | - Organic order growth was driven by the transport application (India, Europe, North America) and treatment application (Asia Pacific, North America, Europe)[140] Applied Water Orders Applied Water orders surged by 28.2% to $477 million in Q1 2021, driven by organic growth across all end markets | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Orders | 477 | 372 | 28.2% | | Organic Growth | 92 | N/A | 24.7% | | Foreign currency translation | 13 | N/A | 3.5% | - Organic order growth was strong across all end markets, especially in the U.S. (strong demand, early ordering) and in Western Europe and emerging markets (China's COVID-19 recovery)[141] Measurement & Control Solutions Orders Measurement & Control Solutions orders increased by 20.0% to $450 million in Q1 2021, with 19.5% organic order growth | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Orders | 450 | 375 | 20.0% | | Organic Growth | 73 | N/A | 19.5% | | Divestitures | (7) | N/A | (1.9)% | | Foreign currency translation | 9 | N/A | 2.4% | - Organic order growth was driven by the water application (U.S., Western Europe, emerging markets COVID-19 recovery) and large project deployments in the North American energy application[142][143] Backlog Total backlog reached $2,403 million at March 31, 2021, a 27.3% increase year-over-year | Metric | March 31, 2021 (Millions USD) | March 31, 2020 (Millions USD) | December 31, 2020 (Millions USD) | | :------- | :---------------------------- | :---------------------------- | :------------------------------- | | Backlog | 2,403 | 1,887 | 2,124 | - The backlog increased by $516 million (27.3%) year-over-year and $279 million (13.1%) quarter-over-quarter due to significant order increases[144] - Approximately 54% of the backlog is anticipated to be recognized as revenue in the remainder of 2021[144] Gross Margin Gross margin expanded by 260 basis points to 39.0% in Q1 2021, driven by cost reductions and favorable volume | Metric | Q1 2021 | Q1 2020 | Change (bp) | | :---------- | :------ | :------ | :---------- | | Gross margin | 39.0% | 36.4% | 260 | | Gross profit | $490 million | $409 million | 19.8% | | Revenue | $1,256 million | $1,123 million | 11.8% | - The gross margin increase was driven by cost reductions from global procurement and productivity initiatives, decreased quality management costs, and favorable volume from COVID-19 recovery[145] Operating Expenses Total operating expenses increased by 2.6% to $357 million in Q1 2021, but decreased as a percentage of revenue | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Selling, general and administrative expenses | 301 | 297 | 1.3% | | Research and development expenses | 50 | 49 | 2.0% | | Restructuring and asset impairment charges | 6 | 2 | 200.0% | | Operating expenses | 357 | 348 | 2.6% | | Expense to revenue ratio | 28.4% | 31.0% | (260) bp | Selling, General and Administrative ("SG&A") Expenses SG&A expenses increased by $4 million to $301 million in Q1 2021, but decreased as a percentage of revenue to 24.0% | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | SG&A expenses | 301 | 297 | 1.3% | | SG&A as a % of revenue | 24.0% | 26.4% | (240) bp | - The improvement in SG&A as a percentage of revenue was driven by cost reductions from productivity, restructuring, and other cost-saving initiatives[147] Research and Development ("R&D") Expenses R&D expense slightly increased to $50 million in Q1 2021, but decreased as a percentage of revenue to 4.0% | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | R&D expenses | 50 | 49 | 2.0% | | R&D as a % of revenue | 4.0% | 4.4% | (40) bp | Restructuring and Asset Impairment Charges Restructuring and asset impairment charges increased to $6 million in Q1 2021, primarily due to headcount reductions | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :-------------------------------- | :--------------------- | :--------------------- | | Restructuring and asset impairment charges | 6 | 2 | | Employee position eliminations (Planned reductions - March 31) | 228 | 186 | - The restructuring plan, initiated in June 2020 in response to COVID-19, aims to optimize cost structure, improve operational efficiency, and strengthen competitive positioning[150] - Xylem expects to incur $35-45 million in restructuring costs for the full year 2021, anticipating approximately $4 million in total net savings[153] Operating Income Operating income for Q1 2021 significantly increased by 118.0% to $133 million, with operating margin expanding by 520 basis points | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Operating income | 133 | 61 | 118.0% | | Operating margin | 10.6% | 5.4% | 520 bp | | Adjusted operating income | 143 | 70 | 104.3% | | Adjusted operating margin | 11.4% | 6.2% | 520 bp | - The increase in adjusted operating margin was primarily due to cost reductions from productivity, restructuring, and other cost-saving initiatives, favorable volume from COVID-19 recovery, and decreased quality management costs[154] Water Infrastructure Operating Income Water Infrastructure operating income increased by 82.1% to $71 million in Q1 2021, driven by cost reductions and favorable volume | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Operating income | 71 | 39 | 82.1% | | Operating margin | 13.9% | 8.9% | 500 bp | | Adjusted operating income | 76 | 44 | 72.7% | | Adjusted operating margin | 14.9% | 10.0% | 490 bp | - The increase in adjusted operating margin was primarily due to cost reductions from productivity, restructuring, and other cost-saving initiatives, and favorable volume from COVID-19 recovery[156] Applied Water Operating Income Applied Water operating income increased by 40.4% to $66 million in Q1 2021, with adjusted operating margin rising to 17.3% | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Operating income | 66 | 47 | 40.4% | | Operating margin | 16.8% | 13.9% | 290 bp | | Adjusted operating income | 68 | 49 | 38.8% | | Adjusted operating margin | 17.3% | 14.5% | 280 bp | - The increase in adjusted operating margin was primarily due to cost reductions from productivity, restructuring, and other cost-saving initiatives, and favorable volume from COVID-19 recovery[157] Measurement & Control Solutions Operating Income Measurement & Control Solutions operating income significantly improved from a $12 million loss in Q1 2020 to a $9 million gain in Q1 2021 | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Operating income (loss) | 9 | (12) | 175.0% | | Operating margin | 2.5% | (3.5)% | 600 bp | | Adjusted operating income (loss) | 11 | (10) | 210.0% | | Adjusted operating margin | 3.1% | (2.9)% | 600 bp | - The increase in adjusted operating margin was primarily due to cost reductions from restructuring, productivity, and other cost-saving initiatives, and decreased quality management costs, including the non-recurrence of a prior-year warranty charge[158] Corporate and other Operating Income Corporate and other operating loss remained constant at $13 million in Q1 2021 compared to the prior year | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | | Operating loss | (13) | (13) | —% | | Adjusted operating loss | (12) | (13) | (7.7)% | Interest Expense Interest expense increased to $21 million in Q1 2021 from $16 million in Q1 2020, primarily due to the Green Bond issuance | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (Millions USD) | | :------------- | :--------------------- | :--------------------- | :-------------------- | | Interest expense | 21 | 16 | 5 | - The increase in interest expense was primarily driven by the issuance of the Green Bond in Q2 2020[160] Income Tax Expense Income tax expense for Q1 2021 was $27 million, resulting in a 23.3% effective tax rate, significantly higher than Q1 2020 | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | | :---------------- | :--------------------- | :--------------------- | | Income tax expense | 27 | 4 | | Effective tax rate | 23.3% | 10.0% | - The higher effective tax rate was primarily due to tax settlements and the Global Intangible Low Taxed Income (GILTI) inclusion, partially offset by favorable earnings mix[161] Liquidity and Capital Resources Xylem's liquidity saw a net decrease in cash of $187 million in Q1 2021, but maintains strong liquidity with $1.7 billion in cash | Cash Flow Activity | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (Millions USD) | | :------------------- | :--------------------- | :--------------------- | :-------------------- | | Operating activities | (26) | (2) | (24) | | Investing activities | (31) | (48) | 17 | | Financing activities | (115) | 87 | (202) | | Foreign exchange | (15) | (22) | 7 | | Total | (187) | 15 | (202) | - As of March 31, 2021, Xylem has approximately $2.5 billion in available liquidity, comprising $1.7 billion in cash and $800 million in available credit facilities[170] - The company expects to pay its $600 million Senior Notes due in 2021 out of cash and believes it has sufficient liquidity to meet future funding requirements and service debt[170] Sources and Uses of Liquidity In Q1 2021, Xylem experienced increased cash usage from operating and financing activities, while investing activities used less cash - Net cash used by operating activities increased to $26 million in Q1 2021, primarily due to increased working capital, higher interest and tax payments, and timing of compensation-related payments[163] - Cash used in investing activities decreased to $31 million in Q1 2021, mainly driven by lower capital expenditures[164] - Cash used by financing activities increased to $115 million in Q1 2021, primarily due to higher short-term debt levels in Q1 2020 and increased share repurchase and dividend payments in Q1 2021[165] Operating Activities Net cash used by operating activities was $26 million for Q1 2021, an increase of $24 million in cash used compared to the prior year | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (Millions USD) | | :------------------------- | :--------------------- | :--------------------- | :-------------------- | | Net cash used by operating activities | (26) | (2) | (24) | - The increase in cash used was primarily driven by increased working capital to support year-over-year growth, higher interest and tax payments, and timing of compensation-related payments[163] Investing Activities Cash used in investing activities decreased by $17 million to $31 million for Q1 2021, mainly due to lower capital expenditures | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (Millions USD) | | :------------------------- | :--------------------- | :--------------------- | :-------------------- | | Cash used in investing activities | (31) | (48) | 17 | - The decrease in cash used was mainly driven by lower spending on capital expenditures compared to the prior year[164] Financing Activities Cash used by financing activities was $115 million for Q1 2021, a significant shift from $87 million generated in the prior year | Metric | Q1 2021 (Millions USD) | Q1 2020 (Millions USD) | Change (Millions USD) | | :------------------------- | :--------------------- | :--------------------- | :-------------------- | | Cash used by financing activities | (115) | 87 | (202) | - The net increase in cash used was primarily due to higher levels of short-term debt during Q1 2020 and an increase in share repurchase activity and dividend payments in Q1 2021[165] Funding and Liquidity Strategy Xylem relies on operating cash flow, bank financing, and capital markets for funding, expecting to meet its liquidity needs - Xylem's funding strategy relies on generating cash from operations and access to bank financing and capital markets[166] - The company has approximately $2.5 billion in available liquidity, consisting of $1.7 billion in cash and $800 million in available credit facilities, and expects to meet its funding requirements and service debt[170] - Capital expenditures are expected to gradually increase to normal levels during 2021 as markets recover[166] Non-U.S. Operations Non-U.S. operations generated 56% of Xylem's revenue in Q1 2021, with $6 million deferred tax liability for repatriated earnings | Metric | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | Revenue from non-U.S. operations | 56% | 50% | - Xylem manages worldwide cash requirements by transferring funds among subsidiaries when cost-effective[173] - A deferred tax liability of $6 million has been provided for net foreign withholding taxes and state income taxes on $356 million of earnings expected to be repatriated[173] Critical Accounting Estimates Financial statements rely on critical accounting estimates, with a $58 million goodwill impairment charge recorded in Q3 2020 - Financial statements rely on critical accounting estimates and assumptions, with increased uncertainty due to the COVID-19 pandemic[174] - In Q3 2020, a $58 million goodwill impairment charge was recorded for the Advanced Infrastructure Analytics (AIA) businesses due to COVID-119 impacts and ongoing investments[175] - The remaining goodwill balance in the AIA reporting unit was $112 million as of March 31, 2021, with a risk of future impairment if forecasts are not achieved[175][176] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk disclosures have occurred since the 2020 Annual Report - No material changes in market risk disclosures have occurred since the 2020 Annual Report[177] Item 4. Controls and Procedures Management concluded Xylem's disclosure controls and procedures were effective as of March 31, 2021 - Xylem's disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of March 31, 2021[178] - No material changes in internal control over financial reporting occurred during the fiscal quarter[179] PART II – Other Information Item 1. Legal Proceedings Xylem is routinely involved in various legal and regulatory proceedings, with further details in Note 16 - Xylem is involved in various legal and regulatory proceedings incidental to its business operations, covering environmental, tax, intellectual property, product liability, and other disputes[182] - Additional information on legal proceedings is available in Note 16, 'Commitments and Contingencies,' of the financial statements[182] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in Xylem's 2020 Annual Report on Form 10-K - No material changes have occurred in the risk factors since the 2020 Annual Report[183] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2021, Xylem repurchased 0.6 million shares for $60 million under its share repurchase program | Period | Shares Purchased (Millions) | Average Price Paid Per Share ($) | Shares Purchased Under Publicly Announced Plans (Millions) | Dollar Value Remaining Under Plans (Millions $) | | :---------------- | :-------------------------- | :------------------------------- | :------------------------------------------------------- | :-------------------------------------------- | | 1/1/21 - 1/31/21 | — | — | — | 288 | | 2/1/21 - 2/28/21 | 0.3 | 100.07 | 0.3 | 258 | | 3/1/21 - 3/31/21 | 0.3 | 101.07 | 0.3 | 228 | - For Q1 2021, Xylem repurchased 0.6 million shares for $60 million under its $500 million share repurchase program, with $228 million still available[185] - Additionally, 0.1 million shares were repurchased for $7 million to satisfy employee tax withholding obligations related to restricted stock unit vesting[187] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities occurred[186] Item 4. Mine Safety Disclosures Not applicable to the registrant - Mine Safety Disclosures are not applicable to the registrant[187] Item 5. Other Information No other information is reported under this item - No other information is reported under this item[188] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents and certifications - Exhibits include organizational documents (Articles of Incorporation, By-laws), employment contracts, various incentive plan agreements (stock option, performance share unit, restricted stock unit, ESG performance share unit), and certifications (Sarbanes-Oxley Act Section 302 and 906)[191] - The report also includes financial statements and notes formatted in Inline Extensible Business Reporting Language (Inline XBRL)[192] Signatures The report is duly signed on behalf of Xylem Inc. by Geri McShane, Vice President, Controller, and Chief Accounting Officer - The report is signed by Geri McShane, Vice President, Controller and Chief Accounting Officer of Xylem Inc., on May 4, 2021[195]