Xylem(XYL) - 2020 Q3 - Quarterly Report

Part I – Financial Information Financial Statements The company's financial statements for the three and nine months ended September 30, 2020, show a decline in revenue and net income compared to the same periods in 2019, with operating income significantly impacted by impairment charges and the balance sheet reflecting increased cash and long-term debt Condensed Consolidated Income Statements For Q3 2020, revenue decreased to $1.22 billion from $1.30 billion in 2019, and net income fell to $37 million from $65 million, with operating income significantly affected by a $58 million goodwill impairment charge Condensed Consolidated Income Statements (in millions) | | Three Months Ended Sep 30, | | Nine Months Ended Sep 30, | | | :--- | :--- | :--- | :--- | :--- | | (in millions) | 2020 | 2019 | 2020 | 2019 | | Revenue | $1,220 | $1,296 | $3,503 | $3,878 | | Gross Profit | $461 | $509 | $1,304 | $1,509 | | Operating Income | $73 | $11 | $188 | $291 | | Net Income | $37 | $65 | $106 | $283 | | Diluted EPS | $0.20 | $0.36 | $0.58 | $1.56 | - A goodwill impairment charge of $58 million was recorded in Q3 2020, compared to a $148 million charge in Q3 2019[10] Condensed Consolidated Balance Sheets As of September 30, 2020, total assets increased to $8.45 billion from $7.71 billion, driven by higher cash and short-term investments, while total liabilities rose to $5.57 billion due to a $1.01 billion increase in long-term debt Condensed Consolidated Balance Sheets (in millions) | | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | (in millions) | | | | Assets | | | | Cash and cash equivalents | $1,402 | $724 | | Total current assets | $3,311 | $2,450 | | Goodwill | $2,795 | $2,839 | | Total assets | $8,448 | $7,710 | | Liabilities & Equity | | | | Total current liabilities | $1,280 | $1,501 | | Long-term debt | $3,053 | $2,040 | | Total liabilities | $5,573 | $4,743 | | Total equity | $2,875 | $2,967 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, net cash from operating activities remained stable at $454 million, while net cash from financing activities significantly shifted to a $550 million source due to new long-term debt issuance Condensed Consolidated Statements of Cash Flows (in millions) | | Nine Months Ended Sep 30, | | | :--- | :--- | :--- | | (in millions) | 2020 | 2019 | | Net Cash – Operating activities | $454 | $451 | | Net Cash – Investing activities | $(326) | $(185) | | Net Cash – Financing activities | $550 | $(99) | | Net change in cash and cash equivalents | $678 | $157 | - The company issued $985 million in long-term debt and repaid $600 million in short-term debt during the first nine months of 2020[15] Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, revenue declines, restructuring charges due to COVID-19, significant impairment charges in the Measurement & Control Solutions segment, and a substantial increase in debt from a new bond issuance - The global outbreak of COVID-19 has created significant volatility and uncertainty, affecting estimates and assumptions in the financial statements[21] - In Q3 2020, a $58 million goodwill impairment charge was recorded for the Advanced Infrastructure Analytics (AIA) reporting unit due to negative volume impacts from the COVID-19 pandemic[48] - On June 26, 2020, the company issued $1 billion in new Senior Notes (the "Green Bond")[69] Management's Discussion and Analysis (MD&A) Management discusses the significant impact of the COVID-19 pandemic on operations, leading to revenue and order declines across all segments, with Q3 2020 revenue falling 6.6% organically, while liquidity remains strong, bolstered by a $1 billion Green Bond issuance COVID-19 Pandemic Impact The COVID-19 pandemic significantly impacted Xylem, causing volume reductions across all segments and geographic regions, leading to restructuring, temporary pay cuts, and reduced capital expenditures, though global operating capacity remains over 90% - The most significant operational impacts have been volume reductions across all segments and major geographic regions[132] - In response to the pandemic, management initiated restructuring activities, temporary salary reductions for senior leadership, and reduced capital and discretionary spending[134] - Despite some production disruptions, overall operating capacity remains just over 90% globally, with all production facilities operational[131] Results of Operations For Q3 2020, revenue decreased 5.9% to $1.22 billion, with an organic decline of 6.6%, and gross margin fell 150 basis points to 37.8% due to inflation and unfavorable mix, while adjusted operating margin decreased to 13.0% reflecting operational pressures Results of Operations (in millions) | (In millions) | Q3 2020 | Q3 2019 | Change | Nine Months 2020 | Nine Months 2019 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,220 | $1,296 | (5.9)% | $3,503 | $3,878 | (9.7)% | | Gross Profit | $461 | $509 | (9.4)% | $1,304 | $1,509 | (13.6)% | | Operating Income | $73 | $11 | 563.6% | $188 | $291 | (35.4)% | | Net Income | $37 | $65 | (43.1)% | $106 | $283 | (62.5)% | - Q3 organic revenue declined 6.6%, driven by weakness across all segments, with Measurement & Control Solutions falling 15.2%, Applied Water 4.0%, and Water Infrastructure 2.1%[153] - Q3 adjusted operating margin decreased to 13.0% from 15.1% in the prior year, primarily due to cost inflation, unfavorable volume and mix, and increased strategic investments[197] Segment Performance In Q3 2020, all segments experienced organic revenue and adjusted operating margin declines, with Measurement & Control Solutions revenue falling 15.2% organically and its adjusted operating margin dropping significantly by 640 basis points to 3.6% Segment Performance (in millions) | Segment | Q3 2020 Revenue (M) | Organic Change | Q3 2020 Adj. Op. Margin | YoY Change (bps) | | :--- | :--- | :--- | :--- | :--- | | Water Infrastructure | $524 | (2.1)% | 18.5% | (110) | | Applied Water | $364 | (4.0)% | 15.9% | (110) | | Measurement & Control Solutions | $332 | (15.2)% | 3.6% | (640) | Orders and Backlog Third-quarter 2020 orders decreased 7.4% to $1.25 billion (8.2% organically), with declines across all segments, most notably in Measurement & Control Solutions, yet total backlog increased 17.3% year-over-year to $2.19 billion - Q3 2020 orders decreased 8.2% organically to $1.246 billion, with the largest decline in the Measurement & Control Solutions segment[166][167] - Total backlog was $2.192 billion at September 30, 2020, an increase of 17.3% compared to the prior year[177] Liquidity and Capital Resources The company maintained a strong liquidity position with approximately $2.4 billion available as of September 30, 2020, bolstered by a $1 billion Senior Notes issuance in June 2020, while net cash from operations for the first nine months remained stable at $454 million - Available liquidity as of September 30, 2020, was approximately $2.4 billion[221] - In June 2020, the company issued $1 billion in Senior Notes to fund green projects and manage liquidity risk[217] - Net cash provided by operating activities for the nine months ended September 30, 2020, was $454 million, a slight increase from $451 million in the prior year[213] Part II – Other Information Legal Proceedings The company is involved in various routine legal and regulatory proceedings incidental to its business operations, with further details on these matters provided in Note 18 of the financial statements - The company is involved in routine legal and regulatory proceedings related to environmental, tax, intellectual property, and other matters incidental to its business[237] Share Repurchases During Q3 2020, Xylem did not repurchase any common stock under its publicly announced program, with approximately $288 million remaining available for future repurchases as of September 30, 2020 - No shares were repurchased under the company's publicly announced plan during the three months ended September 30, 2020[239][243] - As of September 30, 2020, $288 million remained authorized for purchase under the share repurchase program[239][243]