Xylem(XYL) - 2022 Q2 - Quarterly Report

PART I – Financial Information Financial Statements Unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022, and 2021 are presented, covering income, balance sheet, cash flows, and detailed accounting notes Condensed Consolidated Income Statement Highlights (Six Months Ended June 30) | (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Revenue | $2,636 | $2,607 | | Gross profit | $987 | $1,010 | | Operating income | $257 | $293 | | Net income | $194 | $200 | | Diluted EPS | $1.07 | $1.10 | Condensed Consolidated Balance Sheet Highlights | (in millions) | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $8,189 | $8,276 | | Cash and cash equivalents | $1,113 | $1,349 | | Inventories | $852 | $700 | | Goodwill | $2,714 | $2,792 | | Total Liabilities | $4,986 | $5,050 | | Total Long-term debt | $1,879 | $2,440 | | Total Equity | $3,203 | $3,226 | Condensed Consolidated Statement of Cash Flows Highlights (Six Months Ended June 30) | (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash – Operating activities | $32 | $206 | | Net Cash – Investing activities | ($84) | ($69) | | Net Cash – Financing activities | ($158) | ($162) | | Net change in cash | ($236) | ($35) | Note 2: Revenue Total revenue is primarily from customer contracts, with detailed breakdowns by business segment application and geographical region Revenue from Contracts with Customers by Application (Six Months Ended June 30) | (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Water Infrastructure | | | | Transport | $825 | $784 | | Treatment | $194 | $200 | | Applied Water | | | | Commercial Building Services | $308 | $303 | | Residential Building Services | $153 | $135 | | Industrial Water | $394 | $369 | | Measurement & Control Solutions | | | | Water | $544 | $571 | | Energy | $116 | $151 | | Total | $2,534 | $2,513 | Revenue from Contracts with Customers by Geography (Six Months Ended June 30, 2022) | (in millions) | Water Infrastructure | Applied Water | Measurement & Control Solutions | | :--- | :--- | :--- | :--- | | United States | $312 | $440 | $393 | | Western Europe | $376 | $195 | $128 | | Emerging Markets | $221 | $159 | $94 | | Other | $110 | $61 | $45 | Note 3: Restructuring and Asset Impairment Charges Restructuring charges were incurred to optimize cost structures through headcount reductions, with accruals decreasing to $8 million by June 30, 2022 Total Restructuring and Asset Impairment Charges | (in millions) | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Restructuring charges | $6 | $6 | | Asset impairment charges | $1 | $1 | | Total | $7 | $7 | - Restructuring actions commenced in 2022 are expected to cost a total of $6 million, primarily for severance. Actions in the Water Infrastructure and Applied Water segments are complete, while those in Measurement & Control Solutions are expected to continue through the end of 2022[31] Note 10: Credit Facilities and Debt Total debt decreased to $2.40 billion as of June 30, 2022, consisting of Senior Notes and undrawn credit facilities Total Debt Outstanding | (in millions) | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | 2.250% Senior Notes due 2023 | $522 | $564 | | 3.250% Senior Notes due 2026 | $500 | $500 | | 1.950% Senior Notes due 2028 | $500 | $500 | | 2.250% Senior Notes due 2031 | $500 | $500 | | 4.375% Senior Notes due 2046 | $400 | $400 | | Total debt | $2,400 | $2,440 | - The company has an $800 million Five-Year Revolving Credit Facility which was undrawn as of June 30, 2022. Additionally, its U.S. Dollar ($600M) and Euro (€500M) commercial paper programs were also outstanding[65][67][68] Note 17: Segment Information The company operates through three segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions, showing varied revenue growth and profitability in H1 2022 Segment Financials (Six Months Ended June 30, 2022) | (in millions) | Revenue | Operating Income (Loss) | | :--- | :--- | :--- | | Water Infrastructure | $1,122 | $182 | | Applied Water | $854 | $120 | | Measurement & Control Solutions | $660 | ($15) | | Total Segment | $2,636 | $287 | | Corporate and other | - | ($30) | | Total | $2,636 | $257 | - The Water Infrastructure segment focuses on water transport and treatment. Applied Water serves residential, commercial, and industrial water use. Measurement & Control Solutions provides advanced technology like smart metering and analytics for water and energy conservation[100] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2022 performance, highlighting a 1% Q2 revenue increase, supply chain impacts, and an updated full-year organic revenue growth outlook of 8-10% - Q2 2022 revenue was $1,364 million, a 1.0% increase YoY (5.4% on a constant currency basis), driven by organic growth in industrial, residential, and utilities end markets, partially offset by declines in commercial[114] - Operating margin decreased to 10.7% in Q2 2022 from 11.8% in Q2 2021, primarily due to cost inflation and strategic investments, partially offset by strong price realization and productivity savings[115] - The company updated its full-year 2022 outlook, expecting total revenue growth of 3% to 5% and organic revenue growth of 8% to 10%[122] Results of Operations For H1 2022, revenue grew 1.1% to $2.64 billion, while operating income fell 12.3% to $257 million, with gross margin contracting due to cost inflation Revenue Change Analysis (Q2 2022 vs Q2 2021) | (in millions) | 2021 Revenue | Organic Growth | Divestitures | Foreign Currency | 2022 Revenue | | :--- | :--- | :--- | :--- | :--- | :--- | | Water Infrastructure | $569 | +$54 | $0 | -$34 | $589 | | Applied Water | $414 | +$30 | $0 | -$15 | $429 | | M&C Solutions | $368 | -$8 | -$3 | -$11 | $346 | | Total Xylem | $1,351 | +$76 | -$3 | -$60 | $1,364 | - Total backlog increased 35.2% YoY to $3.76 billion as of June 30, 2022, driven by a significant increase in orders, with approximately 40% expected to be recognized as revenue in the remainder of 2022[147] Liquidity and Capital Resources Operating cash flow significantly decreased to $32 million in H1 2022 due to higher working capital, but the company maintains $1.9 billion in liquidity Cash Flow Summary (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 | - The reduction in operating cash flow was primarily driven by higher working capital, including increased safety stock and advance payments to suppliers, as well as higher accounts receivable[191] - As of June 30, 2022, the company has available liquidity of approximately $1.9 billion, consisting of $1.1 billion of cash and $800 million of available credit facilities[197] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk information were reported compared to the 2021 Annual Report on Form 10-K - There has been no material change in the information concerning market risk as stated in the 2021 Annual Report[204] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of the end of the period, the Company's disclosure controls and procedures were effective at the reasonable assurance level[205] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[206] PART II – Other Information Legal Proceedings The company is involved in various routine legal and regulatory proceedings incidental to its business operations - The company is involved in routine legal and regulatory proceedings related to its business, including matters of environmental, tax, intellectual property, and product liability[209] Risk Factors No material changes were reported from the risk factors previously disclosed in the 2021 Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the 2021 Annual Report[210] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock in Q2 2022, with $182 million remaining available under the authorized share repurchase program Share Repurchases (Q2 2022) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased as Part of Program | Value Remaining in Program | | :--- | :--- | :--- | :--- | :--- | | 4/1/22 - 4/30/22 | — | — | — | $182M | | 5/1/22 - 5/31/22 | — | — | — | $182M | | 6/1/22 - 6/30/22 | — | — | — | $182M | - The Board of Directors authorized a $500 million share repurchase program on August 24, 2015, with no expiration date. As of June 30, 2022, $182 million remains available under this plan[215] Exhibits This section indexes all exhibits filed with the quarterly report, including incentive plans, a separation agreement, and CEO/CFO certifications - The report includes several exhibits, such as the Annual Incentive Plan, Special Senior Executive Severance Pay Plan, a separation agreement with Colin R. Sabol, and certifications pursuant to the Sarbanes-Oxley Act[217]