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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
or | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-35229
Xylem Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Indiana | | 45-2080495 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
301 Water Street SE, Washington, DC 20003
(Address of principal executive offices) (Zip code)
(202) 869-9150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange of which registered |
Common Stock, par value $0.01 per share | | XYL | | New York Stock Exchange |
| | | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☑ | | Accelerated filer | | ☐ |
| | | | | |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 25, 2024, there were 242,944,703 outstanding shares of the registrant’s common stock, par value $0.01 per share.
Xylem Inc.
Table of Contents | | | | | | | | | | | |
ITEM | | | PAGE |
PART I – Financial Information | |
Item 1 | - | | |
| | | |
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| | | |
| | | |
| | | |
Item 2 | - | | |
Item 3 | - | | |
Item 4 | - | | |
PART II – Other Information | |
Item 1 | - | | |
Item 1A | - | | |
Item 2 | - | | |
Item 3 | - | | |
Item 4 | - | | |
Item 5 | - | | |
Item 6 | - | | |
| | | |
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | Nine Months |
| | | |
For the periods ended September 30, | 2024 | | 2023 | | 2024 | | 2023 |
Revenue from products | $ | 1,744 | | | $ | 1,720 | | | $ | 5,236 | | | $ | 4,535 | |
Revenue from services | 360 | | | 356 | | | 1,070 | | | 711 | |
Revenue | 2,104 | | | 2,076 | | | 6,306 | | | 5,246 | |
Cost of revenue from products | 1,047 | | | 1,043 | | | 3,147 | | | 2,730 | |
Cost of revenue from services | 273 | | | 269 | | | 804 | | | 555 | |
Cost of revenue | 1,320 | | | 1,312 | | | 3,951 | | | 3,285 | |
Gross profit | 784 | | | 764 | | | 2,355 | | | 1,961 | |
Selling, general and administrative expenses | 445 | | | 491 | | | 1,404 | | | 1,291 | |
Research and development expenses | 55 | | | 61 | | | 172 | | | 172 | |
Restructuring and asset impairment charges | 4 | | | 21 | | | 37 | | | 57 | |
| | | | | | | |
Operating income | 280 | | | 191 | | | 742 | | | 441 | |
Interest expense | 10 | | | 14 | | | 35 | | | 35 | |
| | | | | | | |
Other non-operating income, net | 1 | | | 8 | | | 11 | | | 19 | |
(Loss) on sale of businesses | (2) | | | — | | | (6) | | | — | |
Income before taxes | 269 | | | 185 | | | 712 | | | 425 | |
Income tax expense | 52 | | | 33 | | | 148 | | | 82 | |
Net income | $ | 217 | | | $ | 152 | | | $ | 564 | | | $ | 343 | |
| | | | | | | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 0.89 | | | $ | 0.63 | | | $ | 2.33 | | | $ | 1.64 | |
Diluted | $ | 0.89 | | | $ | 0.63 | | | $ | 2.32 | | | $ | 1.63 | |
Weighted average number of shares: | | | | | | | |
Basic | 242.9 | | | 240.9 | | | 242.5 | | | 208.9 | |
Diluted | 243.8 | | | 242.2 | | | 243.4 | | | 210.1 | |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | Nine Months |
For the periods ended September 30, | 2024 | | 2023 | | 2024 | | 2023 |
Net income | $ | 217 | | | $ | 152 | | | $ | 564 | | | $ | 343 | |
Other comprehensive income (loss), before tax: | | | | | | | |
Foreign currency translation adjustment | 97 | | | (61) | | | 38 | | | (77) | |
| | | | | | | |
Net change in derivative hedge agreements: | | | | | | | |
Unrealized gain (loss) | 3 | | | (4) | | | — | | | (3) | |
Amount of (gain) loss reclassified into net income | 2 | | | — | | | 2 | | | 4 | |
Net change in post-retirement benefit plans: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Amortization of prior service credit | — | | | (1) | | | — | | | (2) | |
Amortization of actuarial (gain) loss into net income | — | | | — | | | — | | | (1) | |
| | | | | | | |
Foreign currency translation adjustment | (2) | | | 1 | | | — | | | — | |
Other comprehensive income (loss), before tax | 100 | | | (65) | | | 40 | | | (79) | |
Income tax (benefit) expense related to items of other comprehensive income (loss) | (13) | | | 9 | | | 3 | | | (5) | |
Other comprehensive income (loss), net of tax | 113 | | | (74) | | | 37 | | | (74) | |
Comprehensive income | $ | 330 | | | $ | 78 | | | $ | 601 | | | $ | 269 | |
| | | | | | | |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 989 | | | $ | 1,019 | |
| | | |
Receivables, less allowances for discounts, returns and credit losses of $60 and $56 in 2024 and 2023, respectively | 1,707 | | | 1,617 | |
Inventories | 1,091 | | | 1,018 | |
Prepaid and other current assets | 226 | | | 230 | |
| | | |
Total current assets | 4,013 | | | 3,884 | |
Property, plant and equipment, net | 1,158 | | | 1,169 | |
Goodwill | 7,593 | | | 7,587 | |
Other intangible assets, net | 2,326 | | | 2,529 | |
Other non-current assets | 956 | | | 943 | |
Total assets | $ | 16,046 | | | $ | 16,112 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 930 | | | $ | 968 | |
Accrued and other current liabilities | 1,105 | | | 1,221 | |
Short-term borrowings and current maturities of long-term debt | 17 | | | 16 | |
Total current liabilities | 2,052 | | | 2,205 | |
Long-term debt | 1,977 | | | 2,268 | |
Accrued post-retirement benefits | 332 | | | 344 | |
Deferred income tax liabilities | 535 | | | 557 | |
Other non-current accrued liabilities | 550 | | | 562 | |
Total liabilities | 5,446 | | | 5,936 | |
Commitments and contingencies (Note 18) | | | |
Stockholders’ equity: | | | |
Common stock – par value $0.01 per share: | | | |
Authorized 750.0 shares, issued 259.2 shares and 257.6 shares in 2024 and 2023, respectively | 3 | | | 3 | |
Capital in excess of par value | 8,673 | | | 8,564 | |
Retained earnings | 2,902 | | | 2,601 | |
Treasury stock – at cost 16.2 shares and 16.0 shares in 2024 and 2023, respectively | (753) | | | (733) | |
Accumulated other comprehensive loss | (232) | | | (269) | |
Total stockholders’ equity | 10,593 | | | 10,166 | |
Non-controlling interests | 7 | | | 10 | |
Total equity | 10,600 | | | 10,176 | |
Total liabilities and stockholders’ equity | $ | 16,046 | | | $ | 16,112 | |
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) | | | | | | | | | | | |
For the nine months ended September 30, | 2024 | | 2023 |
Operating Activities | | | |
Net income | $ | 564 | | | $ | 343 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 191 | | | 132 | |
Amortization | 229 | | | 167 | |
Share-based compensation | 43 | | | 45 | |
Restructuring and asset impairment charges | 37 | | | 57 | |
| | | |
| | | |
Loss from sale of business | 6 | | | — | |
Other, net | (4) | | | (20) | |
Payments for restructuring | (24) | | | (12) | |
Changes in assets and liabilities (net of acquisitions): | | | |
Changes in receivables | (101) | | | (142) | |
Changes in inventories | (88) | | | (41) | |
Changes in accounts payable | (31) | | | 15 | |
| | | |
Changes in accrued and deferred taxes | (11) | | | (77) | |
| | | |
Other, net | (123) | | | (85) | |
Net Cash – Operating activities | 688 | | | 382 | |
Investing Activities | | | |
Capital expenditures | (221) | | | (177) | |
Acquisitions of businesses, net of cash acquired | (5) | | | (476) | |
Proceeds from sale of businesses | 11 | | | 103 | |
Proceeds from the sale of property, plant and equipment | 3 | | | 2 | |
Cash received from investments | 5 | | | 1 | |
Cash paid for investments | (8) | | | (1) | |
Cash paid for equity investments | (4) | | | (58) | |
Cash received from interest rate swaps | — | | | 38 | |
Cash received from cross-currency swaps | 25 | | | 25 | |
Other, net | 1 | | | 4 | |
Net Cash – Investing activities | (193) | | | (539) | |
Financing Activities | | | |
Short-term debt issued, net | — | | | 1 | |
Short-term debt repaid | (268) | | | — | |
Long-term debt issued, net | — | | | 275 | |
Long-term debt repaid | (13) | | | (155) | |
Repurchase of common stock | (19) | | | (10) | |
| | | |
Proceeds from exercise of employee stock options | 66 | | | 45 | |
Dividends paid | (263) | | | (219) | |
| | | |
Other, net | (23) | | | (8) | |
Net Cash – Financing activities | (520) | | | (71) | |
Effect of exchange rate changes on cash | (5) | | | (11) | |
Net change in cash and cash equivalents | (30) | | | (239) | |
Cash and cash equivalents at beginning of year | 1,019 | | | 944 | |
Cash and cash equivalents at end of period | $ | 989 | | | $ | 705 | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 49 | | | $ | 43 | |
Income taxes (net of refunds received) | $ | 160 | | | $ | 159 | |
See accompanying notes to condensed consolidated financial statements.
XYLEM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Background and Basis of Presentation
Background
Xylem Inc. (“Xylem” or the “Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment.
Xylem operates in four segments, Water Infrastructure, Applied Water, Measurement and Control Solutions and Water Solutions and Services. See Note 19, "Segment Information," to the condensed consolidated financial statements for further segment background information.
Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries.
Acquisition of Evoqua
On May 24, 2023, Xylem completed the acquisition of Evoqua Water Technologies Corp. (“Evoqua”). Refer to Note 3, "Acquisitions and Divestitures," for additional information.
Basis of Presentation
The interim condensed consolidated financial statements reflect our financial position and results of operations in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions between our businesses have been eliminated.
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair statement of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 Annual Report") in preparing these unaudited condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 2023 Annual Report. Certain prior year amounts have been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, valuation results associated with purchase accounting, post-retirement obligations and assets, revenue recognition, income taxes, valuation of intangible assets, goodwill and indefinite-lived intangible impairment testing and contingent liabilities. Actual results could differ from these estimates.
The Company announced a change to its reportable segments effective January 1, 2024, and as a result, is now reporting the financial position and results of operations of its former Integrated Solutions and Services segment together with the dewatering business, previously within our Water Infrastructure segment, and the assessment services business, previously within our Measurement and Control Solutions segment, in a new segment that is referred to as Water Solutions and Services. The Company’s Water Infrastructure reportable segment no longer includes the results of the dewatering business, and the Company’s Measurement and Control Solutions reportable segment no longer includes the results of the assessment services business. The Company's Applied Water reportable segment remains unchanged. As a result of the change, the Company has recast prior period segment amounts to align with the new segment reporting. The recast financial information reflects depreciation, amortization and share-based compensation specifically identified to the segments that were previously reported
within Corporate and other and Regional selling locations as part of an overall allocation. These changes have no impact on the Company’s historical consolidated financial position or results of operations.
Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends on December 31. For ease of presentation, the condensed consolidated financial statements included herein are described as ending on the last day of the calendar quarter.
Note 2. Recently Issued Accounting Pronouncements
Pronouncements Not Yet Adopted
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-07, "Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures." This guidance requires disclosure information about significant segment expenses. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is required to be applied on a retrospective basis to all periods presented in the consolidated financial statements. We plan to adopt the new standard in our 2024 Annual Report on Form 10-K by expanding related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, "Improvements to Income Tax Disclosures." The ASU is intended to improve income tax disclosure requirements, primarily through additional disclosures about a reporting entity’s effective tax rate reconciliations as well as information on income taxes paid. The standard is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025, with early adoption permitted. The amendments are required to be applied on a prospective basis, with the option to apply retrospectively to all prior periods presented in the consolidated financial statements. The Company is currently evaluating the method of adoption and the impacts of the guidance on our disclosures in future periods.
Recently Adopted Pronouncements
In September 2022, the FASB issued ASU 2022-04, "Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations." This guidance requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The standard does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. The ASU became effective January 1, 2023, and the rollforward requirement became effective January 1, 2024. Refer to Note 11, "Current Liabilities" for the disclosures related to our adoption of the standard.
Note 3. Acquisitions and Divestitures
Evoqua Water Technologies Corp.
On May 24, 2023, the Company completed the acquisition of 100% of the issued and outstanding shares of Evoqua, a leader in providing water and wastewater treatment solutions, offering a broad portfolio of products and services to support industrial, municipal, and recreational customers, pursuant to the Agreement and Plan of Merger dated January 22, 2023 (the “Merger Agreement”). The Merger Agreement provided that Fore Merger Sub, Inc., a wholly owned subsidiary of the Company, merge with and into Evoqua, with Evoqua surviving as a wholly owned subsidiary of Xylem (the “Merger”). Under the terms and conditions of the Merger Agreement, each share of Evoqua common stock issued and outstanding immediately prior to the effective time of the Merger (other than certain excluded shares as described in the Merger Agreement) was converted into the right to receive 0.48 (the “Exchange Ratio”) of a share of the common stock of Xylem. Upon the effectiveness of the Merger on May 24, 2023, legacy Evoqua stockholders owned approximately 25% and legacy Xylem shareholders owned approximately 75% of the combined company. The purchase price for purposes of the Merger consisted of an aggregate of $6,121 million of the Company’s common stock, $160 million in replacement equity awards, and $619 million to repay certain indebtedness of Evoqua (refer to Note 12, "Credit Facilities and Debt").
The acquisition-date fair value of the consideration totaled $6,900 million, which consisted of the following:
| | | | | |
(in millions) | Fair Value of Purchase Consideration |
Xylem Common Stock issued to Evoqua stockholders (58,779,096 shares) | $ | 6,121 | |
Estimated replacement equity awards | 160 | |
Payment of certain Evoqua indebtedness | 619 | |
Total | $ | 6,900 | |
The Company has applied the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”) and recognized assets acquired and liabilities assumed at their fair value as of the date of acquisition, with the excess purchase consideration recorded to goodwill. During the second quarter of 2024, the Company finalized the purchase price allocation. The following table summarizes the acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Evoqua:
| | | | | |
(in millions) | Fair Value |
Cash and cash equivalents | $ | 143 | |
Receivables(a) | 430 | |
Inventories | 258 | |
| |
Prepaid and other current assets | 78 | |
| |
Assets held for sale | 8 | |
Property, plant and equipment, net | 508 | |
Goodwill | 4,801 | |
Other intangible assets, net | 1,769 | |
| |
| |
Other non-current assets | 180 | |
Non-current assets held for sale | 85 | |
Accounts payable | (210) | |
| |
| |
Accrued and other current liabilities | (357) | |
| |
Short-term borrowings and current maturities of long-term debt | (166) | |
Liabilities held for sale | (1) | |
Long-term debt | (111) | |
| |
| |
Other non-current accrued liabilities | (120) | |
Deferred income tax liabilities | (392) | |
Non-current liabilities held for sale | (3) | |
Total | $ | 6,900 | |
(a) Including $320 million of receivables and $110 million of contract assets.
The fair values of the assets acquired and liabilities assumed were determined using the income and cost approaches. In many cases, the determination of the fair values required estimates about discount rates, future expected cash flows and other future events that are judgmental and subject to change.
The fair value of receivables acquired is $320 million, with the gross contractual amount being $329 million. The Company expects $9 million to be uncollectible.
The $4,801 million of goodwill recognized, which is not deductible for U.S. income tax purposes, is primarily attributable to synergies and economies of scale expected from combining the operations of Evoqua and Xylem as well as the assembled workforce of Evoqua.
Identifiable Intangible Assets Acquired
The following table summarizes key information underlying identifiable intangible assets related to the Evoqua acquisition:
| | | | | | | | | | | |
(in millions) | Useful Life (in years) | Useful Life Weighted Average (in years) | Fair Value (in millions) |
Trademarks | 6 | 6.0 | $ | 50 | |
Proprietary technology and patents | 4 - 9 | 7.1 | 120 | |
Customer and distributor relationships | 6 - 20 | 17.9 | 1,395 | |
Backlog | 1 - 10 | 5.4 | 120 | |
Permits | 8 | 8.0 | 70 | |
Software | 1 - 13 | 2.3 | 14 | |
Total | | 15.4 | $ | 1,769 | |
The estimate of the fair value of Evoqua’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement of the fair value hierarchy as defined in ASC 820, Fair Value Measurements (“ASC 820”). Intangible assets consisting of the Evoqua tradename, technology, customer relationships, backlog, and permits were valued using the multi-period excess earnings method (“MEEM”), the relief from royalty (“RFR”) method, or the with and without method, which are all forms of the income approach. Intangible assets related to Evoqua software were valued using the cost approach.
•Trademarks and proprietary technology intangible assets were valued using the RFR method. The RFR method of valuation suggests that in lieu of ownership, the acquirer can obtain comparable rights to use the subject asset via a license from a hypothetical third-party owner. The asset’s Fair Value is the present value of license fees avoided by owning it (i.e., the royalty savings).
•Customer and distributor relationships and backlog intangible assets were valued using the MEEM method. The MEEM method of valuation is an approach where the net earnings attributable to the asset being measured are isolated from other “contributory assets” over the intangible asset’s remaining economic life.
•The Permits intangible asset was valued using the with and without method. The with and without method of valuation is an approach that considers the hypothetical impact to the projected cash flows of the business if the intangible asset was not put in place.
•The Software intangible asset was valued using the cost approach. The cost approach method of valuation is an approach that relies on estimating the replacement or reproduction costs new of assets, along with factors of physical deterioration, based on the principle that an asset would not be purchased for a price higher than the cost to replace it with an asset of comparable utility.
•Inventory was estimated using the comparative sales method, which quantifies the fair value of inventory based on the expected sales price of the subject inventory (when complete), reduced for: (i) all costs expected to be incurred in its completion and disposition efforts and (ii) a profit on those value-added completion and disposition costs.
Stock-Based Compensation
In connection with the Merger, each outstanding and issued option, restricted stock unit (“RSU”), performance stock unit (“PSU”) and cash-settled stock appreciation right (“SAR”) was converted into the Xylem equivalent, with outstanding PSUs being converted into Xylem RSUs. As a result, Xylem issued 2 million replacement equity options and 707 thousand RSU awards (of which 330 thousand were converted PSUs.) The portion of the fair value related to pre-combination services of $160 million was included in the purchase price, and $56 million will be recognized over the remaining service periods. As of September 30, 2024, the future unrecognized expense related to the outstanding options and RSUs was less than $1 million and approximately $4 million, respectively. The future unrecognized expense related to options and RSUs will be recognized over a weighted-average service period of approximately one year. SARs are immaterial.
Pro Forma Financial Information
The following table summarizes, on an unaudited pro forma basis, the condensed combined results of operations of the Company for the three and nine months ended September 30, 2023, assuming the acquisition had occurred on January 1, 2022.
| | | | | | | | | | | | | | |
| (Unaudited) Three Months Ended September 30,
| | | (Unaudited) Nine Months Ended September 30,
|
(in millions) | 2023 | | | 2023 | | |
Revenue | $ | 2,076 | | | | $ | 6,025 | | | |
Net income | $ | 180 | | | | $ | 358 | | | |
The foregoing unaudited pro forma results are for informational purposes only and are not necessarily indicative of the actual results of operations that might have occurred had the acquisition occurred on January 1, 2022, nor are they necessarily indicative of future results. The unaudited pro-forma information for all periods presented includes the following adjustments, where applicable, for business combination accounting effects resulting from the acquisition: (i) amortization of the fair value step up in inventory, (ii) additional amortization expense related to finite-lived intangible assets acquired, (iii) repayment of Evoqua’s term loan and revolver and the settlement of the related interest rate swap, (iv) additional interest expense related to financing for the acquisition (refer to Note 12, "Credit Facilities and Debt"), (v) depreciation expense on property, plant and equipment, (vi) additional incremental stock-based compensation expense for the replacement of Evoqua’s outstanding equity awards with Xylem’s replacement equity awards, and (vii) the related tax effects assuming that the business combination occurred on January 1, 2022.
The significant nonrecurring adjustments reflected in the unaudited pro-forma consolidated information above include the reclassification of the transaction costs to the earliest period presented and the reversal of the impacts related to the settlement of the interest rate swap, each net of tax.
Divestitures
During the third quarter ended September 30, 2023, Xylem sold the former Evoqua hemodialysis concentrates business for approximately $12 million.
On June 15, 2023, Xylem sold the former Evoqua carbon reactivation and slurry operations to Desotec US LLC, a subsidiary of Desotec N.V., for approximately $91 million, a price equal to the fair value less costs to sell the business.
Note 4. Revenue
Disaggregation of Revenue
The following table illustrates the sources of revenue: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in millions) | 2024 | | 2023 | | 2024 | | 2023 |
Revenue from contracts with customers | $ | 1,973 | | | $ | 1,950 | | | $ | 5,920 | | | $ | 4,970 | |
Lease Revenue | 131 | | | 126 | | | 386 | | | 276 | |
Total | $ | 2,104 | | | $ | 2,076 | | | $ | 6,306 | | | $ | 5,246 | |
The following table reflects revenue from contracts with customers by application. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in millions) | 2024 | | 2023 | | 2024 | | 2023 |
Water Infrastructure | | | | | | | |
Transport | $ | 349 | | | $ | 333 | | | $ | 1,057 | | | $ | 1,006 | |
Treatment | 273 | | | 280 | | | 770 | | | 536 | |
| | | | | | | |
Applied Water | | | | | | | |
Building Solutions | 248 | | | 260 | | | 743 | | | 770 | |
Industrial Water | 199 | | | 205 | | | 596 | | | 626 | |
| | | | | | | |
Measurement and Control Solutions | | | | | | | |
Smart Metering and Other | 372 | | | 320 | | | 1,142 | | | 907 | |
Analytics | 86 | | | 93 | | | 260 | | | 268 | |
| | | | | | | |
Water Solutions and Services | 446 | | | 459 | | | 1,352 | | | 857 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total | $ | 1,973 | | | $ | 1,950 | | | $ | 5,920 | | | $ | 4,970 | |
The following table reflects revenue from contracts with customers by geographical region. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in millions) | 2024 | | 2023 | | 2024 | | 2023 |
Water Infrastructure | | | | | | | |
United States | $ | 209 | | | $ | 215 | | | $ | 638 | | | $ | 521 | |
Western Europe | 218 | | | 210 | | | 654 | | | 576 | |
Emerging Markets (a) | 136 | | | 137 | | | 372 | | | 309 | |
Other | 59 | | | 51 | | | 163 | | | 136 | |
| | | | | | | |
Applied Water | | | | | | | |
United States | 237 | | | 243 | | | 708 | | | 735 | |
Western Europe | 96 | | | 97 | | | 297 | | | 306 | |
Emerging Markets (a) | 81 | | | 91 | | | 238 | | | 250 | |
Other | 33 | | | 34 | | | 96 | | | 105 | |
| | | | | | | |
Measurement and Control Solutions | | | | | | | |
United States | 322 | | | 272 | | | 956 | | | 753 | |
Western Europe | 61 | | | 68 | | | 220 | | | 209 | |
Emerging Markets (a) | 47 | | | 50 | | | 138 | | | 146 | |
Other | 28 | | | 23 | | | 88 | | | 67 | |
| | | | | | | |
Water Solutions and Services | | | | | | | |
United States | 342 | | | 361 | | | 1,035 | | | 589 | |
Western Europe | 24 | | | 27 | | | 71 | | | 78 | |
Emerging Markets (a) | 42 | | | 36 | | | 125 | | | 106 | |
Other | 38 | | | 35 | | | 121 | | | 84 | |
| | | | | | | |
Total | $ | 1,973 | | | $ | 1,950 | | | $ | 5,920 | | | $ | 4,970 | |
(a)Emerging Markets includes results from the following regions: Eastern Europe, the Middle East and Africa, Latin America and Asia Pacific (excluding Japan, Australia and New Zealand, which are presented in "Other")
Contract Balances
We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Changes in contract assets and liabilities are due to our performance under the contract. The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:
| | | | | | | | | | | | |
(in millions) | Contract Assets (a) | Contract Liabilities | | | | |
Balance at January 1, 2023 | $ | 151 | | $ | 183 | | | | | |
Opening balance from the acquisition of Evoqua | 110 | | 107 | | | | | |
Additions, net | 101 | | 123 | | | | | |
Revenue recognized from opening balance | — | | (99) | | | | | |
Billings transferred to accounts receivable | (97) | | — | | | | | |
Foreign currency and other | (2) | | (14) | | | | | |
Balance at September 30, 2023 | $ | 263 | | $ | 300 | | | | | |
| | | | | | |
Balance at January 1, 2024 | $ | 263 | | $ | 315 | | | | | |
| | | | | | |
Additions, net | 353 | | 211 | | | | | |
Revenue recognized from opening balance | — | | (227) | | | | | |
Billings transferred to accounts receivable | (343) | | — | | | | | |
Foreign currency and other | 1 | | (5) | | | | | |
Balance at September 30, 2024 | $ | 274 | | $ | 294 | | | | | |
(a)Excludes receivable balances, which are disclosed on the Condensed Consolidated Balance Sheets
Performance obligations
Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of September 30, 2024, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $1.2 billion, of which $581 million was contributed by the Evoqua acquisition. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.
Note 5. Restructuring and Asset Impairment Charges
Restructuring
During the three and nine months ended September 30, 2024, we incurred restructuring charges of $4 million and $36 million, respectively. For the three and nine months ended September 30, 2024, the charges incurred primarily related to strengthening our competitive positioning and the integration of Evoqua.
The following table presents the components of restructuring expense and asset impairment charges: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in millions) | 2024 | | 2023 | | 2024 | | 2023 |
By component: | | | | | | | |
Severance and other charges | $ | 4 | | | $ | 17 | | | $ | 21 | | | $ | 52 | |
| | | | | | | |
Asset impairment | 3 | | | 3 | | | 19 | | | 3 | |
| | | | | | | |
Reversal of restructuring accruals | (3) | | | — | | | (4) | | | (1) | |
Total restructuring costs | $ | 4 | | | $ | 20 | | | $ | 36 | | | $ | 54 | |
Asset impairment charges | — | | | 1 | | | 1 | | | 3 | |
Total restructuring and asset impairment charges | $ | 4 | | | $ | 21 | | | $ | 37 | | | $ | 57 | |
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By segment: | | | | | | | |
Water Infrastructure | $ | 3 | | | $ | — | | | $ | 9 | | | $ | 3 | |
Applied Water | 1 | | | 5 | | | 2 | | | 6 | |
Measurement and Control Solutions | (3) | | | 4 | | | (3) | | | 10 | |
Water Solutions and Services | 3 | | | 1 | | | 27 | | | 5 | |
Corporate and other | — | | | 11 | | | 2 | | | 33 | |
The following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within "Accrued and other current liabilities" and "Other non-current accrued liabilities", for the nine months ended September 30, 2024 and 2023:
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(in millions) | | 2024 | | 2023 |
Restructuring accruals - January 1 | | $ | 24 | | | $ | 10 | |
Restructuring costs, net | | 36 | | | 54 | |
Cash payments | | (24) | | | (12) | |
Asset impairment | | (19) | | | (3) | |
Stock based compensation expense included within AOCL | | (2) | | | (25) | |
Foreign currency and other | | — | | | 3 | |
Restructuring accruals - September 30 | | $ | 15 | | | $ | 27 | |
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By segment: | | | | |
Water Infrastructure | | $ | 4 | | | $ | 3 | |
Applied Water | | — | | | 1 | |
Measurement and Control Solutions | | 3 | | | 7 | |
Water Solutions and Services | | 4 | | | 4 | |
Regional selling locations (a) | | 3 | | | 3 | |
Corporate and other | | 1 | | | 9 | |
(a)Regional selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense that was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.
The following table presents expected restructuring spend in 2024 and thereafter:
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(in millions) | | Water Infrastructure | | Applied Water | | Measurement and Control Solutions | | Water Solutions and Services | | Corporate | | Total |
Actions Commenced in 2024: | | | | | | | | | | | | |
Total expected costs | | $ | 6 | | | $ | 1 | | | $ | — | | | $ | 27 | | | $ | — | | | $ | 34 | |
Costs incurred during Q1 2024 | | — | | | 1 | | | — | | | 2 | | | — | | | 3 | |
Costs incurred during Q2 2024 | | — | | | — | | | — | | | 22 | | | — | | | 22 | |
Costs incurred during Q3 2024 | | 3 | | | — | | | — | | | 3 | | | — | | | 6 | |
Total expected costs remaining | | $ | 3 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | |
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Actions Commenced in 2023: | | | | | | | | | | | | |
Total expected costs | | $ | 20 | | | $ | 7 | | | $ | 7 | | | $ | 7 | | | $ | 37 | | | $ | 78 | |
Costs incurred in 2023 | | 13 | | | 6 | | | 10 | | | 7 | | | 35 | | | 71 | |
Costs incurred during Q1 2024 | | 5 | | | — | | | — | | | — | | | 1 | | | 6 | |
Costs incurred during Q2 2024 | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
Costs incurred during Q3 2024 | | — | | | 1 | | | (3) | | | — | | | — | | | (2) | |
Total expected costs remaining | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 2 | |
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The actions commenced in 2024 consist primarily of severance and asset impairment charges. The actions are expected to continue through the end of 2025.
Through the second quarter of 2024, we recognized $16 million in impairment charges primarily related to customer relationships and trademarks due to restructuring actions within our Water Solutions and Services segment. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.
During the third quarter of 2024, we recognized $3 million in fixed asset impairment charges due to restructuring actions within our Water Solutions and Services segment.
Asset Impairment
During the first quarter of 2024, we recognized a $1 million impairment charge for internally developed software within Corporate. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.
During the third quarter of 2023, we recognized a $1 million impairment charge for certain fixed assets within our Measurement and Control Solutions segment. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.
During the first quarter of 2023, we determined that internally developed in-process software within our Measurement and Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and we therefore recognized an impairment charge of $2 million. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.
Note 6. Income Taxes
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within the periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
The income tax provision for the three months ended September 30, 2024 was $52 million resulting in an effective tax rate of 19.3%, compared to a $33 million expense resulting in an effective tax rate of 17.8% for the same period in 2023. The income tax provision for the nine months ended September 30, 2024 was $148 million resulting in an effective tax rate of 20.7%, compared to a $82 million expense resulting in an effective tax rate of 19.3% for the same period in 2023. The effective tax rate for the three and nine month periods ended September 30, 2024 was lower than the U.S. federal statutory rate primarily due to earnings mix.
Unrecognized Tax Benefits
During 2019, Xylem’s Swedish subsidiary received a tax assessment from the Swedish Tax Agency (the "STA") for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. Xylem filed an appeal with the Administrative Court of Växjö, which rendered a decision adverse to Xylem in June 2022 for SEK837 million (approximately $83 million), consisting of the full tax assessment amount plus penalties and interest. Xylem appealed this decision with the intermediate appellate court, the Administrative Court of Appeal, and on May 15, 2024, that court rendered a decision in favor of Xylem and also remanded an issue to the trial court for resolution. In June 2024, the STA filed a notice of appeal of this decision to the Supreme Administrative Court (the “Court”). The parties await the Court’s decision as to whether it will hear the STA’s appeal, and the trial court has stayed the proceeding on the issue on remand until the Court's decision. Management, in consultation with external legal advisors, continues to believe it is more likely than not that Xylem will prevail on the proposed assessment and will continue to vigorously defend our position through this litigation. There can be no assurance that the final determination by the authorities will not be materially different than our position. As of September 30, 2024, we do not have any unrecognized tax benefits related to this tax position.
Note 7. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net income (in millions) | $ | 217 | | | $ | 152 | | | $ | 564 | | | $ | 343 | |
Shares (in thousands): | | | | | | | |
Weighted average common shares outstanding | 242,911 | | | 240,840 | | | 242,425 | | | 208,905 | |
Add: Participating securities (a) | 21 | | | 30 | | | 28 | | | 30 | |
Weighted average common shares outstanding — Basic | 242,932 | | | 240,870 | | | 242,453 | | | 208,935 | |
Plus incremental shares from assumed conversions: (b) | | | | | | | |
Dilutive effect of stock options | 419 | | | 832 | | | 574 | | | 776 | |
Dilutive effect of restricted stock units and performance share units | 399 | | | 487 | | | 410 | | | 372 | |
Weighted average common shares outstanding — Diluted | 243,750 | | | 242,189 | | | 243,437 | | | 210,083 | |
Basic earnings per share | $ | 0.89 | | | $ | 0.63 | | | $ | 2.33 | | | $ | 1.64 | |
Diluted earnings per share | $ | 0.89 | | | $ | 0.63 | | | $ | 2.32 | | | $ | 1.63 | |
(a)Restricted stock units containing rights to non-forfeitable dividends that participate in undistributed earnings with common stockholders are considered participating securities for purposes of computing earnings per share.
(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 15, "Share-Based Compensation Plans," to the condensed consolidated financial statements for further detail on the performance share units.
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Stock options | 766 | | | 1,722 | | | 1,000 | | | 1,729 | |
Restricted stock units | 391 | | | 773 | | | 424 | | | 570 | |
Performance share units | 199 | | | 256 | | | 284 | | | 272 | |
Note 8. Inventories
The components of total inventories are summarized as follows: | | | | | | | | | | | |
(in millions) | September 30, 2024 | | December 31, 2023 |
Finished goods | $ | 386 | | | $ | 355 | |
Work in process | 118 | | | 102 | |
Raw materials | 587 | | | 561 | |
Total inventories | $ | 1,091 | | | $ | 1,018 | |
Note 9. Goodwill and Other Intangible Assets
Goodwill
As a result of the change in reportable segments disclosed in Note 1, "Background and Basis of Presentation," goodwill was reallocated amongst segments. This reallocation and changes in the carrying value of goodwill by reportable segment for the nine months ended September 30, 2024 are as follows:
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(in millions) | Water Infrastructure | | Applied Water | | Measurement and Control Solutions | | Water Solutions and Services | | | | Total | | |
Balance as of December 31, 2023 | $ | 2,434 | | | $ | 895 | | | $ | 1,739 | | | $ | 2,519 | | | | | $ | 7,587 | | | |
Reallocation | (287) | | | — | | | (64) | | | 351 | | | | | — | | | |
Balance as of January 1, 2024 | 2,147 | | | 895 | | | 1,675 | | | 2,870 | | | | | 7,587 | | | |
Activity in 2024 | | | | | | | | | | | | | |
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Foreign currency and other | 14 | | | 1 | | | 13 | | | (22) | | | | | 6 | | | |
Balance as of September 30, 2024 | $ | 2,161 | | | $ | 896 | | | $ | 1,688 | | | $ | 2,848 | | | | | $ | 7,593 | | | |
The Company has applied the acquisition method of accounting in accordance with ASC 805 and recognized assets acquired and liabilities assumed of Evoqua at their fair value as of the date of acquisition, with the excess purchase consideration recorded to goodwill. We have allocated goodwill to segments of the Company that are expected to benefit from the synergies of the acquisition.
Other Intangible Assets
Information regarding our other intangible assets is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
(in millions) | Carrying Amount | | Accumulated Amortization | | Net Intangibles | | Carrying Amount | | Accumulated Amortization | | Net Intangibles |
Customer and distributor relationships | $ | 2,158 | | | $ | (558) | | | $ | 1,600 | | | $ | 2,172 | | | $ | (475) | | | $ | 1,697 | |
Proprietary technology and patents | 264 | | | (137) | | | 127 | | | 292 | | | (141) | | | 151 | |
Trademarks | 182 | | | (104) | | | 78 | | | 188 | | | (96) | | | 92 | |
Software | 606 | | | (372) | | | 234 | | | 598 | | | (335) | | | 263 | |
Other | 196 | | | (75) | | | 121 | | | 201 | | | (41) | | | 160 | |
Indefinite-lived intangibles | 166 | | | — | | | 166 | | | 166 | | | — | | | 166 | |
Other Intangibles | $ | 3,572 | | | $ | (1,246) | | | $ | 2,326 | | | $ | 3,617 | | | $ | (1,088) | | | $ | 2,529 | |
Amortization expense related to finite-lived intangible assets was $73 million and $229 million for the three and nine-month periods ended September 30, 2024, respectively, and $84 million and $167 million for the three and nine-month periods ended September 30, 2023.
During the second quarter of 2024, we recognized $13 million in impairment charges primarily related to customer relationships and trademarks due to restructuring actions within our Water Solutions and Services segment.