Let’s Solve Water
2013 AnnuAl RepoR t
13
Selected Financial Highlights
Dollars in Millions
Revenue
Operating Income 1
Net Income 2
EPS 3
Free Cash Flow 4
2011
2012
2013
$3,803 $3,791
$3,837
$482
$489
$451
$358
$330
$311
$1.93
$1.77
$1.67
$388
$312
$198
2013 Revenue by Geography
2013 Revenue by End Market
14%
Other
14%
Other
12%
12%
Asia Pacific
Asia Pacific
7%
7%
Residential
Residential
3%
3%
Agriculture
Agriculture
11%
11%
Commercial
Commercial
45%
45%
Industrial
Industrial
38%
38%
United States
United States
36%
Europe
36%
Europe
34%
34%
Public Utility
Public Utility
Earnings Per Share
(EPS) – Diluted3
$1.93
$1.61
$1.77
$1.67
Annual Dividend
$0.47
$0.40
$0.10
$0.00
2010
2011
2012
2013
2010
2011
2012
2013
1 Operating income — Adjusted to exclude restructuring and realignment costs of $64M and $24M in 2013 and 2012, respectively, and special charges of $24M in 2013; also excludes one-time separation
costs of $22M and $87M in 2012 and 2011, respectively.
2 Net income — Adjusted to exclude restructuring and realignment costs, net of tax of $46M and $17M in 2013 and 2012, respectively, and special charges, net of tax, of $23M in 2013; also excludes
one-time separation costs, net of tax of $16M and $72M in 2012 and 2011, respectively and special tax expense items of $14M and $7M in 2013 and 2011, respectively.
3 Earnings per share (EPS) — Diluted — Adjusted to exclude restructuring and realignment costs, net of tax, of $0.25 and $0.09 in 2013 and 2012, respectively and special charges, net of tax, of $0.13 in
2013. It also excludes one-time separation costs, net of tax, of $0.09 and $0.39 in 2012 and 2011, respectively and special tax expense items of $0.07 and $0.04 in 2013 and 2011, respectively.
4 Free cash flow is net cash provided by operating activities less capital expenditures and other significant items that impact current results that management believes are not related to our ongoing
operations and performance. Free cash flow has been adjusted to exclude $28M and $65M of separation cash payments in 2012 and 2011, respectively.
Dear Shareowners, Customers,
Employees and Friends,
In January 2014, the World Economic Forum placed “water supply crises”
near the top of its global risk landscape, both in terms of impact and
likelihood. While the situation is disheartening and concerning, we at
Xylem view the world’s increasing awareness of water-related challenges
as a long overdue step in the right direction.
“In 2013, we leveraged our talent, strategies,
vision and drive to advance our goal
of becoming the world’s trusted leader in
solving water issues.”
Water isn’t a side business for us; it’s our passion and our reason for
being. Working in more than 150 countries, we specialize in transporting,
treating and testing water at all stages of the water cycle. We understand
water’s personal and political value, its critical role in economic
development and the need for towns, cities and nations to become more
water resilient.
No one person, company or organization can single-handedly “solve
water.” But Xylem has what it takes — innovative products and applications
expertise, diverse global exposure, a large installed base, world-class
distribution and strategic partnerships in the water industry — to deliver on
our goal of becoming the world’s trusted leader in solving water issues.
In 2013, we made meaningful progress in many areas, but we also had
some challenges. Our breakthroughs helped balance setbacks, and we
never wavered in our determination to get back on track and deliver on
our vision. When we named our interim CEO in September, the Xylem
team recommitted itself to consistent financial performance and to quick
course corrections that ensure we‘re maximizing value to our customers
and shareowners.
Full-year 2013 revenues were $3.8 billion, up 1 percent over 2012;
however, adjusted earnings per share declined 6 percent to $1.67 per
share. Xylem’s full-year adjusted operating margins were 11.8 percent,
down 110 basis points, and free cash flow was $198 million, which is
87 percent of net earnings. In 2013 we increased our dividend by 15
percent and repurchased $67 million in Xylem shares, under our Share
Repurchase Programs.
We accomplished all of this despite less than optimal market conditions
in Europe, and continued weakness in public utilities and some industrial
end markets. Initially in 2013, we didn’t see our desired results, but by
the second half of the year, we achieved a notable upturn in momentum.
The key was a series of transformation efforts to enhance our company’s
simplicity, accountability and speed in 2013 — and beyond.
1
left to right:
Markos I. Tambakeras, Chairman, Xylem Inc.
Patrick K. Decker, President and Chief
Executive Officer, Xylem Inc.
Steven R. Loranger, Director, Xylem Inc.
On March 17, 2014, Patrick Decker joined
Xylem as our new President and Chief
Executive Officer and was appointed to
our board of directors. With a proven
track record of leading large global
businesses, a commitment to operating
discipline and execution, and extensive
knowledge of the water industry, Mr.
Decker will ensure that Xylem continues
improvement initiatives to realize the
company’s full potential. As President and
CEO, he replaces Steven Loranger, who
led the company on an interim basis since
September 2013 during Xylem’s search for
a new company leader. On the Company’s
board, Decker joins 10 other directors,
including Loranger and Chairman Markos
Tambakeras, in ensuring Xylem maintains
its strategic direction to maximize
shareholder return.
OSCAR™, a process performance optimizer that uses
real-time controls and data to reduce energy consumption
at wastewater plants by up to 65 percent.
In the areas of smart systems, our new P 700 IQ® analyzer
was named a 2013 Breakthrough Product of the Year by
Processing magazine for its ability to detect even a modest
increase of phosphorous levels in the wastewater treatment
process, which — unchecked — can hamper operations and
harm ecosystems.
In 2013, our expansion of smart, energy-
efficient solutions included upgrades to
the high-efficiency, non-clogging Flygt
Adaptive-N™ pump.
Simplicity
In our quest for simplicity, Xylem took steps in 2013 to
begin integrating our “front end” for customers. Through
specialized training and incentives, our sales team will
be better able to take a wider view of our markets and all
of the many Xylem technologies that can be applied to
customers’ business challenges. We are also simplifying
life for our customers by combining multiple products into
integrated solutions that achieve their goals in the areas
of aquaculture, data-driven wastewater networks and
advanced process control systems.
In the past year, we also tightened our focus on high-
growth — and increasingly essential — segments, including
dewatering, water reuse, monitoring and controls, energy-
efficient technologies and smart systems. A quick scan
across our company landscape shows progress in all
these areas.
We acquired Pollmann Pumpen, a German company with
extensive dewatering expertise and technologies, and
we continue to offer the broadest range of treatment
technologies for water reuse installations. To expand our
energy-efficient product portfolio, we acquired MultiTrode,
an Australian company with leading-edge, energy-
saving monitoring and control devices, and introduced
2
Through Lean initiatives at all of our
sites, we saved an additional $73
million in 2013.
Speed
Xylem is moving in a more focused direction — and we’re
also moving faster. We accelerated our Lean initiatives
to eliminate waste and to create the appropriate cost base
for Xylem.
We’ve also moved quickly to establish our new Xylem
Europe, Middle East, India and Africa (EMEIA)
headquarters organization in Schaffhausen, Switzerland. By
realigning and streamlining our EMEIA team, we are
improving our customer alignment and operating
strategies, and maximizing our growth opportunities
in this important region.
In 2013 we continued our expansion efforts in China,
Russia, South America, the Middle East and other emerging
water markets. By introducing in-country engineering
and sales sites, we now have the capability to customize
products more quickly and streamline delivery to meet the
local and unique water needs and economic realities in
these regions.
Xylem employees recognize the true
value of water, and this past year
they continued to partner with and
enable customers who need
innovative water solutions.
Accountability
Seizing the Day
Working in an industry that impacts everyone on Earth in
such a profound way, it’s not enough just to be a product
and business leader. You have to understand the big
picture, consider long-term consequences and be the first
to market with sustainable solutions. At Xylem, we have
always accepted this responsibility, and in 2013 we found
ways to take it to even greater levels.
We joined other water leaders in The Value of Water
Coalition to draw more attention to the urgent issues of
limited water supplies and aging water infrastructure in
the United States. We also formalized a partnership with
the technology development center for Mekorot, Israel’s
national water company, to evaluate and accelerate the
development of emerging technologies that address
present and future water challenges.
Our Company continues to sponsor the Stockholm
Junior Water Prize and through the end of 2013, our Xylem
Watermark corporate citizenship program had helped
deliver clean water and sanitation solutions to more than 2
million people in 20 countries.
The trust we continue to earn in the water space was
validated in September when, for the second year in a row,
Xylem was named to the Dow Jones Sustainability
World Index recognizing the work we’ve done to advance
sustainable business practices.
The key to success in the water industry is to keep
moving forward with a plan and a purpose. We see the
opportunities right in front of us — like growth in the
global analytics, dewatering and building services water
technology markets — and are always looking ahead to
anticipate our customers’ needs.
Water is local, with unique challenges in every market.
But we know water better than anyone else, and in 2013
we delivered everything from human-powered “treadle
pumps” for rural farms to highly engineered pumps for
smart buildings. At Xylem, we bring solutions to bear on
water challenges around the world. And we’re doing this
with simplicity, accountability and speed.
Water issues have an impact on everyone — and everyone
can have an impact on water issues. As more companies
and communities wake up to the water challenges facing
them, we stand ready to help them solve their water
challenges. It’s what we do best, and we invite everyone to
join us on this journey. With our new President and CEO
Patrick Decker in place, we will continue our unwavering
pursuit of sustainable, superior shareowner value.
This is where it gets exciting!
Let’s Solve Water.
Steven R. Loranger
Director, Former Chief Executive Officer and President
Markos I. Tambakeras
Chairman
3
Board of Directors
From left to right:
Surya N. Mohapatra, Ph.D.
Former Chairman, President and
Chief Executive Officer
Quest Diagnostics Incorporated
Jerome A. Peribere
President and Chief Executive Officer
Sealed Air Corporation
Curtis J. Crawford, Ph.D.
President and Chief Executive Officer
XCEO, Inc.
Victoria D. Harker
Chief Financial Officer
Gannett Co., Inc.
Executive Leadership
James P. Rogers
Chairman
Eastman Chemical Company
Sten E. Jakobsson
Former President and
Chief Executive Officer, ABB AB
Steven R. Loranger
Former Chairman, President and Chief
Executive Officer, ITT Corporation
Markos I. Tambakeras
Chairman, Xylem Inc.
Former Chairman, President and
Chief Executive Officer
Kennametal, Inc.
Robert F. Friel
Chairman, President and
Chief Executive Officer
PerkinElmer, Inc.
Edward J. Ludwig
Former Chairman, President and
Chief Executive Officer,
Becton, Dickinson and Company
Patrick K. Decker (not pictured)
President and Chief Executive Officer
Xylem Inc.; was named to the
Xylem Board of Directors on March 17
Patrick K. Decker
President and Chief Executive Officer
Andre Dhawan
President, EMEIA
Tomas Brannemo
Vice President, Transport
Shuping Lu
President, China
Angela A. Buonocore
Senior Vice President and
Chief Communications Officer
Nicholas R. Colisto
Senior Vice President and
Chief Information Officer
4
Christopher R. McIntire
Senior Vice President and
President, Analytics and Treatment
Robyn T. Mingle
Senior Vice President and
Chief Human Resources Officer
Kenneth Napolitano
Senior Vice President and
President, Applied Water Systems
Colin R. Sabol
Senior Vice President and
President, Dewatering
Michael T. Speetzen
Senior Vice President and
Chief Financial Officer
Joseph P. Vesey
Vice President, Americas and
Chief Marketing Officer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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
(State or other jurisdiction of incorporation or
organization)
45-2080495
(I.R.S. Employer Identification No.)
1 International Drive, Rye Brook, NY 10573
(address of principal executive offices and zip code)
(914) 323-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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 and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted 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 and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of June 30, 2013
was approximately $5.0 billion. As of January 31, 2014, there were 184,681,473 outstanding shares of the registrant’s common
stock, par value $0.01 per share.
The information required by Part III of this Report is incorporated herein by reference from the registrant’s definitive proxy
statement relating to its annual meeting of shareholders to be held in May 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Xylem Inc.
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2013
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM
1
1A.
1B.
2
3
4
*
5
6
7
7A.
Quantitative and Qualitative Disclosures About Market Risk
8
9
9A.
9B.
10
11
12
13
14
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
15
Exhibits, Financial Statement Schedules
Signatures
Exhibit Index
*
Included pursuant to Instruction 3 of Item 401(b) of Regulation S-K.
2
PAGE
3
17
25
26
26
27
28
29
31
32
52
53
103
103
103
105
105
105
105
105
106
107
108
PART I
The following discussion should be read in conjunction with the consolidated and combined financial statements,
including the notes thereto, included in this Annual Report on Form 10-K (this "Report"). Xylem Inc. was
incorporated in Indiana on May 4, 2011. Except as otherwise indicated or unless the context otherwise requires,
“Xylem,” “we,” “us,” “our” and “the Company” refer to Xylem Inc. and its subsidiaries. References in the
consolidated and combined financial statements to “ITT” or “parent” refers to ITT Corporation and its consolidated
subsidiaries (other than Xylem Inc.), former parent of Xylem.
Forward-Looking Statements
This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Act of
1995 that are based on our current expectations and assumptions. Forward-looking statements by their nature
address matters that are, to different degrees, uncertain. Generally, the words “anticipate,” “estimate,” “expect,”
“project,” “intend,” “plan,” “strategy,” “may,” “will,” “believe,” “target” and similar expressions identify forward-
looking statements, which generally are not historical in nature. However, the absence of these words or similar
expressions does not mean that a statement is not forward-looking.
Forward-looking statements include, but are not limited to, statements about the capitalization of the Company, the
Company's restructuring and realignment, our future strategic plans and other statements that describe the
Company’s business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future operating
or financial performance. All statements that address performance, events or developments that we expect or
anticipate will occur in the future - including statements relating to orders, sales, operating margins and earnings
per share growth, cash flows, and statements expressing general views about future operating results - are forward-
looking statements.
Caution should be taken not to place undue reliance on any such forward-looking statements because they involve
risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or
implied in, or reasonably inferred from, such statements. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except
as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from the Company’s historical experience and its present expectations or
projections. These risks and uncertainties include, but are not limited to, those set forth below under “Item 1A. Risk
Factors” and those described from time to time in subsequent filings with the U.S. Securities and Exchange
Commission ("SEC").
ITEM 1.
BUSINESS
Business Overview
Xylem, with 2013 revenue of $3.8 billion and more than 12,500 employees, is a world leader in the design,
manufacturing, and application of highly engineered technologies for the water industry. We are 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. We have leading market positions among equipment and service providers in the core application
areas of the water equipment industry: transport, treatment, test, building services, industrial processing and
irrigation. Our Company’s brands, such as Bell & Gossett and Flygt, are well known throughout the industry and
have served the water market for many years.
We serve a global customer base across diverse end markets while offering localized expertise. We sell our
products in more than 150 countries through a balanced distribution network consisting of our direct sales force and
independent channel partners. In 2013, 62% of our revenue was generated outside the United States, with 36% of
revenue generated in Europe.
We initiated an organizational redesign during the fourth quarter of 2013, shifting from individually managed
businesses to an integrated approach within geographical regions. We expect that this will enable us to leverage
the breadth of the Company’s product and services portfolio to better serve our customers and address market
opportunities as well as effectively utilize internal support organizations to realize economies of scale and efficient
use of resources. This organizational redesign has implications on how we will manage the business and the
3
related measurement system by which we will hold our management team accountable. We are in the process of
changing our measurement system, including our underlying accounting system, which we expect to complete by
the middle of 2014.
Our Industry
Our planet faces a serious water challenge. Less than 1% of the total water available on earth is fresh water, and
this percentage is declining due to factors such as the draining of aquifers, increased pollution and climate change.
In addition, demand for fresh water is rising rapidly due to population growth, industrial expansion, and increased
agricultural development, with consumption estimated to double every 20 years. By 2025, more than 30% of the
world’s population is expected to live in areas without adequate water supply. Even in developed countries with
sufficient supply, existing infrastructure for water supply is relatively underfunded and aging. In the United States,
degrading pipe systems leak one out of every six gallons of water, on average, on its way from a treatment plant to
the customer. These challenges are driving opportunities for growth in the global water industry, which we estimate
to have a total market size of approximately $550 billion.
The water industry supply chain is comprised of Equipment and Services companies, Design and Build service
providers, and Water Utilities. Equipment and Service providers serve distinct customer types. The utilities type
supply water through an infrastructure network. Companies that operate on this side of the supply chain provide
single, or sometimes combined, functions from equipment manufacturing and services to facility design
(engineering, procurement and construction, or “EPC” firms) to plant operations (utilities), as depicted below in
Figure 1. The utility and EPC customers are looking for technology and application expertise from their Equipment
and Services providers, due to trends such as rising pollution, stricter regulations, and the increased outsourcing of
process knowledge. The customer type serves the end users of water and comprises a wide array of entities,
including farms, mines, power plants, industrial facilities and residential homes. These customers are predominately
served through specialized distributors and original equipment manufacturers (“OEMs”).
Figure 1: Water Industry Supply Chain
Our business focuses on the beginning of the supply chain by providing technology-intensive equipment and
services. We sell our equipment and services via direct and indirect channels that serve the needs of each
customer type. On the utility side, we provide the majority of our sales direct to customers with strong application
expertise, with the remaining amount going through distribution partners. To end users of water, we provide the
majority of our sales through long-standing relationships with the world’s leading distributors, with the remainder
going direct to customers.
4
The Equipment and Services market addresses the key processes of the water industry, which are best illustrated
through the cycle of water, as depicted in Figure 2, below. We believe this industry has two distinct sectors within
the cycle of water: Water Infrastructure and Usage Applications. The key processes of this cycle begin when raw
water is extracted by pumps, which provide the necessary pressure and flow, to move, or transport, this water from
natural sources, such as oceans, ground water, lakes and rivers, through pipes to treatment facilities. Treatment
facilities can provide many forms of treatment, such as filtration, disinfection and desalination, to remove solids,
bacteria, and salt, respectively. Throughout each of these stages, analytical instruments test the treated water to
ensure regulatory requirements are met so that it can be utilized by end-use customers. A network of pipes and
pumps again transports this clean water to where it is needed, such as to crops for irrigation, to power plants to
provide cooling in industrial water, or to an apartment building as drinking water in residential and commercial
buildings. After usage, the wastewater is collected by a separate network of pipes and pumps and transported to a
wastewater treatment facility, where processes such as digestion deactivate and reduce the volume of solids, and
disinfection purifies effluent water. Once treated, analytical instruments test the treated water to ensure regulatory
requirements are met so that it can be discharged back to the environment, thereby completing the cycle.
Figure 2: Cycle of Water
In the Water Infrastructure sector, two primary end markets exist: public utility and industrial. The public utility
market comprises public, private and public-private institutions that handle water and wastewater for mostly
residential and commercial purposes. The industrial market involves the supply of water and removal of wastewater
for industrial facilities. We view the main macro drivers of this sector to be water quality, the desire for energy-
efficient products, water scarcity, regulatory requirements and infrastructure needs, for both the repair of aging
systems in developed countries as well as new installations in emerging markets.
In the Usage Applications sector, end-use customers fall into four main markets: residential, commercial, industrial
and agricultural. Homeowners represent the end users in the residential market. Owners and managers of
properties such as apartment buildings, retail stores, restaurants, hospitals, and hotels are examples of end users
in the commercial market. The industrial market is wide ranging, involving developers and managers of facilities
operated by electrical power generators, chemical manufacturers, machine shops, clothing manufacturers,
beverage production and dispensing firms, and car washes. The agricultural market end users are owners and
operators of businesses such as crop and livestock farms, aquaculture, golf courses, and other turf applications.
We believe population growth, urbanization and regulatory requirements are the primary macro drivers of these
markets, as these trends drive the need for housing, food, community services and retail goods within growing city
centers. Water reuse and conservation are driving the need for new technologies.
5
Business Strategy
Our strategy is to enhance shareholder value by providing distinctive solutions for our customers' most important
water challenges, enabling us to grow revenue, organically and through strategic acquisitions, as we streamline our
cost structure. Key elements of our strategy are summarized below:
• Advance our High Performance Organization. We plan to continue to operate with an emphasis on speed,
simplicity and accountability. We focus on attracting, developing and managing talent within the Company.
Further, we align individual performance to the objectives of the Company in order to ensure accountability,
standardization and alignment of all key business processes, and to ensure a seamless transition from
strategy to execution.
• Drive Profitable Growth. To achieve our goal of accelerating growth, we have identified the following four
priorities:
Leverage Integrated Front End Resources - We plan to drive more sales growth through our
regionally integrated sales organization. We will enhance our marketing and sales capabilities with the
assistance of digital marketing and automation. We will implement technologies we believe will
accelerate our growth, including a customer relationship management system that will enable us to
have a view of all customer touch points and to share leads and expertise.
Accelerate Innovation and Product Renewal - We plan to focus our research and development on
products designed to offer specialized advantages to customers; multi-product packages; and
integrated offers that leverage Xylem's intelligent analytics and monitoring and control technologies.
Accelerate International Expansion - We plan to target fast-growing markets for additional
investment and resource allocation, including the expansion of distribution and sales channels. We
plan to customize product offerings based upon local needs.
Expand Industrial End-Market Presence - We plan to build upon our current capabilities to serve
industrial end-markets through the development of key vertical strategies, including channel
development and market-specific offerings.
•
Improve Operational Excellence. We will focus on growth in our operating margins to make the Company
more profitable. To accomplish this, we will build on our global strategic sourcing capability to maximize
leverage from global spend and reinvigorate lean capabilities. We are committed to optimizing our cost
structure by eliminating unnecessary costs and inefficient overhead, as well as by simplifying the business by
streamlining product relationships across our businesses. We have been executing our plan to simplify our
business through restructuring and realignment actions which we believe will better position the Company for
the future and enable us to re-prioritize investments to high-priority areas. We will also continue to align the
Company to leverage our existing cost structure and broad product portfolio into a greater competitive
advantage. We will implement additional cost reductions in an effort to further reduce manufacturing, selling
and general and administrative costs.
• Optimize Capital Deployment. We plan to continue to allocate capital strategically in an effort to drive strong
returns for shareholders, taking decisive action to pivot our portfolio composition and future growth
investments in order to create the greatest value. These investments include share repurchases, dividend
payments and acquisitions. We intend to continue to execute on our share repurchase programs. We recently
announced a 10% increase in our quarterly dividend to shareholders. Finally, although we announced a slow
down in acquisitions during 2013 as we focused on growth and operational efficiency, we will continue to
selectively evaluate and pursue acquisitions that will broaden our core product portfolio, expand our
geographic footprint and enhance our position in strategic markets.
Business Segments
We operate in two business segments that are aligned with the cycle of water and the key strategic market
applications they provide: Water Infrastructure (collection, distribution, return) and Applied Water (usage). See
Note 21, “Industry Segment and Geographic Data,” in our consolidated and combined financial statements for
financial information about segments and geographic areas.
6
The table and descriptions below provide an overview of our business segments.
Market
Applications
2013
Revenue
%
Revenue
Major Products
Primary Brands
Water Infrastructure
Transport
$
1,812
Treatment
Test
329
298
74%
14%
12%
$
2,439
100%
• Water and
wastewater pumps
• Filtration,
disinfection and
biological treatment
equipment
• Test equipment
• Controls
• Flygt
• WEDECO
• Godwin
Pumps
• WTW
• Sanitaire
• YSI
• Leopold
Applied Water
Building Services
$
Industrial Water
Irrigation
696
600
102
50%
43%
7%
$
1,398
100%
• Pumps
• Valves
• Heat exchangers
• Controls
• Dispensing
equipment systems
• Goulds
Water
Technology
• Bell &
Gossett
• AC Fire
• Standard
• Lowara
• Jabsco
• Flojet
• Flowtronex
Water Infrastructure
Water Infrastructure involves the process that collects water from a source and distributes it to users, and then
returns the wastewater responsibly to the environment. Within the Water Infrastructure segment, our pump systems
transport water from oceans, groundwater, lakes and rivers. From there, our filtration, ultraviolet and ozone systems
provide treatment, making the water fit for use. After consumption, our pump lift stations move the wastewater to
treatment facilities where our mixers, biological treatment, monitoring, and control systems provide the primary
functions in the treatment process. Throughout each of these stages, our analytical systems test to ensure quality of
water for consumption as well as for its return to nature. Water Infrastructure serves its customers, public utilities
and industrial applications, through three closely linked applications: Transport, Treatment and Test of water and
wastewater. We estimate our served market size in this sector to be approximately $20 billion.
Transport
The Transport application includes all of the equipment and services involved in the safe and efficient movement of
water from sources such as oceans, lakes, rivers and ground water, to treatment facilities, and then to users. It also
includes the movement of wastewater from the point of use to a treatment facility and then back into the
environment. Finally, the Transport application also includes dewatering pumps, equipment and services which
provide the safe removal or draining of ground water and surface water from a riverbed, construction site or mine
shaft. We serve the higher-value equipment markets, such as water and wastewater submersible pumps,
monitoring controls, and application solutions; we do not serve the market for lower-value equipment such as pipes
and fittings. We believe our business is one of the largest players in this served market based on management
estimates. With operations on six continents, we also have one of the world’s largest dewatering rental fleets,
serviced with our Flygt and Godwin brands. In our Water Infrastructure Segment, Transport accounted for
approximately 74% of our segment revenue in 2013 and 73% in 2012.
Flygt — Flygt is a world-leader in the design and manufacture of dry and submersible pumps and related intelligent
controls systems. Under the Flygt banner, customers have access to a complete range of products and solutions for
moving water, wastewater, and advanced monitoring and control equipment to optimize their use. Founded in
Sweden in 1901, Flygt is the originator of the reliable, energy-efficient electrical submersible pump. Flygt products
7
have applications in various markets, including wastewater lift stations, water and wastewater treatment facilities,
pressurized sewage systems, oil and gas, steel, mining and leisure markets. Customers include public utility and
industrial water and wastewater systems operators. In 2012, Xylem successfully launched Flygt Experior which
brings together advanced controls, hydraulics and energy-efficient motor technology to deliver substantial energy
savings. For example, energy consumption at London’s Heathrow Airport cargo center pump station was reduced
by 50% following installation of the new Flygt Experior pumps.
Godwin Pumps — With more than 35 years as a leader in pump manufacturing and applications, Godwin Pumps
("Godwin") has established itself as a well-recognized, market leading brand in the global portable pump market.
Godwin manufactures, sells, rents and services its products. Its quick response and 24/7 capabilities allow it to
provide customized pumping solutions to meet the specific needs of its customers. Founded in Quenington,
England, Godwin is currently headquartered in Bridgeport, New Jersey. Godwin's products include fully automatic
self-priming Dri-Prime® pumps, a full range of Flygt electric submersible pumps, Heidra hydraulic submersible
pumps, Wet-Prime gasoline-powered contractor pumps and a broad line of generators and portable light towers, as
well as a multitude of pumping accessories and pipe. Godwin products are primarily used in construction, water &
wastewater transport, oil & gas markets, hydraulic fracturing, industrial, mining, and municipal, as well as
government, temporary fire protection, environmental, agriculture, and marine. Godwin products are also
instrumental in disaster relief efforts. After Superstorm Sandy hit the United States in October 2012, Godwin's
pumps were instrumental in minimizing or eliminating flood damage in various flooded regions throughout the
Northeast. Godwin's fleet of equipment is rented through 45 U.S. branches and a global network of distributors and
Xylem rental and sales facilities.
Treatment
The Treatment application includes equipment and services that treat both water for consumption and wastewater
to be returned responsibly to the environment. Primary served markets include public utilities and industrial
operations. While there are several treatment solutions in the market today, we focus on three basic treatment
types: (i) filtration, (ii) disinfection and (iii) biological treatment systems. Filtration uses gravity-based media filters
and clarifiers to clean both water and wastewater. Leopold, with more than 80 years of experience, is our leading
filtration brand. Disinfection systems, both ultraviolet ("UV") and ozone oxidation, treat both public utility drinking
water and wastewater, as well as industrial process water, and are provided through our WEDECO brand.
Biological treatment systems are key to the treatment and mixing of solids in wastewater plants, which are provided
through our Sanitaire and Flygt brands. We believe our business is one of the largest players in this served market
based on management estimates. In our Water Infrastructure Segment, Treatment accounted for approximately
14% of our segment revenue in 2013 and 15% in 2012.
Leopold — Founded in 1924 in Pittsburgh, Pennsylvania, Leopold is a leader in rapid gravity media filtration and
clarification solutions for the water and wastewater industry. In potable drinking water treatment plants, the Clari-
DAF system is used to clarify raw water to remove contaminants such as turbidity, algae, color, iron/manganese,
organics, and taste and odor compounds. Several years ago, we augmented our filtration products with membrane
technology. Our filtration products include the rapid gravity media, membranes and reverse osmosis/ultrafine
filtration. Leopold gravity media filtration is used in potable water treatment plants to remove particulate in the final
filtration step. In public utility wastewater treatment plants, the ClariVAC system is used in final clarifiers to remove
the sludge solids. For those areas where nitrogen and phosphorus nutrient removal is required, we provide elimi-
NITE systems which convert the filters to become biologically active so that the effluent meets the mandated nitrate
and phosphorus levels. In desalination systems, Leopold Clari-DAF® systems and Filterworx systems are provided
to remove contaminants that will harm reverse osmosis membranes, so that salt can be removed from the seawater
to make it potable. Primary customers are public utility water and wastewater systems, as well as desalination plant
facilities. Leopold won an order in the fourth quarter of 2013 to provide a new pre-treatment DAF system to help
ensure an uninterrupted potable water supply to Abu Dhabi Emirate and the east coast of the United Arab Emirates.
The source water in the Arabian Gulf is subject to harmful algal blooms also known as "red-tides." Xylem’s Leopold
Clari-DAF® system is proven to be over 95 percent effective in removing these microorganisms prior to
desalination, ensuring the production of clean, fresh, drinking water.
WEDECO — WEDECO was founded in 1975 in Herford, Germany to develop chemical-free and environmentally
friendly water treatment technologies, including ultraviolet light and ozone systems. There are more than 250,000
installed WEDECO systems for UV disinfection and ozone oxidation globally in private, public utility and industrial
locations. WEDECO introduced ozone technology in 1988 and has been expanding internationally ever since. UV
disinfection systems have a number of applications including water treatment and aquaculture. Ozone disinfection
systems have applications in drinking water, wastewater, process water, product polishing, bleaching, ozonolysis/
8
synthesis and deodorization. Customers include public utility wastewater and clean water treatment facilities, power
plants, pulp and paper mills, food product manufacturers and aquaculture facilities. In the fourth quarter of 2013, a
WEDECO LBX 1000 UV system was installed in a hospital in the German city of Warstein to combat an outbreak of
Legionnaire's disease, a potentially fatal form of pneumonia which had contaminated a municipal wastewater
treatment plant.
Sanitaire — Launched in 1967, the Sanitaire brand provides complete biological wastewater treatment solutions for
public utility and industrial applications. Sanitaire’s comprehensive offering includes diffused aeration, sequencing
batch reactors, drum filters and state-of-the-art controls that drive efficient operations. Sanitaire is regarded as a
leading brand in diffused aeration, which is a process that introduces air into a liquid, providing an aerobic
environment for degradation of organic matter. Fine-pore diffusion of air is highly competitive due to its high oxygen
transfer efficiency and lower energy costs. Sanitaire wide-band aeration systems are used in applications such as
grit chambers and sludge that require non-clogging, maintenance-free systems. Principal Sanitaire customers are
public utility and industrial wastewater treatment facilities. In 2013, Xylem launched the Sanitaire OSCAR process
performance optimization system. When combined with Sanitaire’s advanced aeration system, Xylem was able to
deliver 65 percent energy savings to the operators of the Sterno, Sweden wastewater treatment plant.
Flygt — Flygt is a also a world-leader in the design and manufacturing of submersible, jet and top-entry mixers.
Flygt has over 30 years of expertise in the area of wastewater treatment mixing, as well as over 100,000
applications globally. Submersible mixers are often used in sewage treatment plants to keep solids in suspension in
the various process tanks and/or sludge holding tanks. During the fourth quarter of 2013, Xylem won an order to
provide Flygt submersible mixers for the Panama Canal. The project includes four anti-sedimentation mixers at
each lock gate of a new Panama Canal channel, as well as local electrical panels and accessories.
Test
Analytical instrumentation is used across most industries to ensure regulatory requirements are met. Growth in this
market is primarily driven by increasing regulation of water and wastewater in North America, Europe and Asia. Our
served market is predominately focused on water and the environment for quality levels throughout the water
infrastructure loop. Analytical systems are applied in three primary ways: in the field, in a facility laboratory, or real
time, online monitoring in a treatment facility process. We believe we have a leading position in this served market
based on management estimates. In our Water Infrastructure Segment, Test accounted for approximately 12% of
our segment revenue in both 2013 and 2012.
WTW — In wastewater treatment facilities, WTW-branded systems monitor parameters such as dissolved oxygen,
pH, and turbidity throughout the water process to ensure regulatory standards are met before water is discharged
back into the environment. Founded in 1945 as a major brand in Europe, WTW has particularly strong market
penetration in the environmental, water and wastewater segments. WTW holds leading market positions in both
field and on-line instrumentation and manufactures premium positioned robust and reliable analysis products for the
measurement of pH, dissolved oxygen, conductivity, total dissolved solids, turbidity, specific ions and biological
oxygen demand. WTW’s product offering includes meters, sensors, data-loggers, photometers and software
providing customer solutions for even the most challenging applications. WTW instruments have been placed in
major monitoring stations around the globe to monitor water quality. One of our largest installations is in the Yangtze
river station in China.
YSI — Yellow Springs Instrument Company ("YSI"), founded in 1948, develops and manufactures sensors,
instruments, software and data collection platforms for environmental and coastal water quality monitoring and
testing. YSI also offers Life Sciences products including biochemical analyzers for bioprocess monitoring, food and
beverage processing, and sports physiology. The main market areas are water quality, environmental monitoring,
aquaculture, life sciences and ocean research. YSI sensors played a critical role in monitoring water levels and
providing other real-time data that helped track Superstorm Sandy which hit the Mid-Atlantic and Northeast United
States in October of 2012.
OI Analytical — Oceanography International Corporation ("OIC"), founded in 1969, provides innovative products
used for chemical analysis. Data from our analytical instruments serve as the basis for informed decisions affecting
human health and safety, environmental protection, industrial operations and product quality. OIC was originally
focused on oceanography equipment moving to production of water-quality measurement instrumentation, as
oceanography equipment sales declined. OIC developed the Company’s first total organic carbon analyzer. Since
that time, the Company has become recognized worldwide as a provider of quality analytical instrumentation. OIC
developed a Total Organic Carbon Analyzer in cooperation with National Aeronautics and Space Administration
9
specifically for use on the International Space Station. Without this validation that the drinking water has been
purified for human consumption, the Space Station would not be suitable for astronaut habitation.
Aanderaa Data Instruments AS — ("Aandera") was founded in 1966 in Bergen, Norway, and offers sensors,
instruments and systems for measuring and monitoring in the most demanding environments such as rivers,
oceans and the polar regions through fully networked systems using wireless technology that monitors temperature,
salinity, oxygen, turbidity, current and waves for ecosystem health. The main market areas are marine
transportation, environmental and ocean research, oil and gas, aquaculture, road and traffic, and construction.
Aanderaa's new technologies underlie the most advanced distributed instrumentation for underwater and
atmospheric measurements. Hydro-acoustic, electro-optical, electro-chemical, pressure, temperature and
meteorological data are captured by observing networks and self-contained instrumentation using real-time
communication. Key customers include many oceanographic institutes, universities, geophysical surveyors, navies,
offshore oil and gas companies, drilling companies, port and harbor authorities, government agencies, water
authorities and international electric power utilities. Key installations include our new on-line tide and salinity station
at Palmer Station in the Antarctic and coastal ocean wave and water quality monitoring station for United States
Geological Survey alongside a National Oceanic and Atmospheric Administration Sentinel site in Galveston, Texas.
Applied Water
Applied Water encompasses the uses of water. Since water is used to some degree in almost every aspect of
human, economic and environmental activity, this segment has a significant number of potential applications and
we participate in all major areas of water demand. Irrigation applications constitute the majority of all water usage
globally. Examples of what we provide include: boosting systems for farming irrigation, pumps for dairy operations,
and rainwater reuse systems for small scale crop and turf irrigation. Industrial Water applications account for the
next largest amount of global water consumption. Our pumps, heat exchangers, valves and controls provide cooling
to power plants and manufacturing facilities, as well as circulation for food and beverage processing. The remaining
portion of global water use resides in human and building consumption, where we deliver water boosting systems
for drinking, heating, ventilation and air conditioning ("HVAC") and fire protection systems to Residential and
Commercial Building Services. We estimate our served market size in this sector to be approximately $15 billion.
Residential & Commercial Building Services
This business is defined by four main uses of water in building services applications, such as in residential homes
and commercial buildings, including offices, hotels, hospitals, schools, restaurants and malls. The first application is
in HVAC, where Bell & Gossett and Lowara specialize in pumps and valves that are used in water-driven heating
and cooling systems, along with heat exchangers, valves, and monitoring and control products that augment the
system. The second is the supply of potable water for consumption, such as for drinking and hygiene. The Goulds
Water Technology and Lowara brands provides pumps and boosting systems utilized within buildings, sourcing
water from distribution networks or from wells. The third application is wastewater removal with sump and sewage
pumps, provided by Bell & Gossett, Goulds Water Technology and Lowara. The fourth water-related building service
area is fire protection, where our AC Fire brand supplies full pump systems for emergency fire suppression. Bell &
Gossett, Goulds Water Technology and Lowara have continued to innovate, focusing on providing industry-leading
energy-efficient pumps for the building services market; many of these products are more efficient than competitive
devices. We believe our business is one of the largest players in this served market based on management
estimates. In our Applied Water Segment, Building Services accounted for approximately 50% of our segment
revenue in 2013 and 53% in 2012.
Industrial Water
Water is used in most industrial facilities to provide processing steps such as cooling, heating, cleaning and mixing.
Our Goulds Water Technology brand supplies vertical multistage pumps to bring in source water or to boost
pressure for purposes such as circulating water through a manufacturing facility to cool machine tools. Our Lowara
brand focuses on industrial washing equipment and machine tool cooling. Our Standard Xchange brand delivers
heat exchangers for combined heat and power applications within power generation plants. We also service niche
applications such as flexible impeller pumps for wine processing facilities served by our Jabsco brand, and water-
based detergent dispensing and water circulation within car washes served by Flojet and Goulds Water Technology
air-operated diaphragm and end suction pumps. Our boosting pumps are also increasingly being used in hydraulic
fracturing applications. Across all these various end applications, we believe our business is the second largest
player in this served market based on management estimates. In our Applied Water Segment, Industrial Water
accounted for approximately 43% of our segment revenue in 2013 and 40% in 2012.
10
Irrigation
The irrigation business consists of irrigation-related equipment and services associated with bringing water from a
source to the plant or livestock need, including hoses, sprinklers, center pivot and drip irrigation. We focus on the
pumps and boosting systems that supply this ancillary equipment with water. Our Goulds Water Technology brand
brings mixed flow pumps, and our Flowtronex group specializes in equipment "packaged solutions" incorporating
monitoring and controls to optimize energy efficiency in irrigation delivery. Our Lowara brand also produces pumps
for agriculture applications and irrigation of gardens and parks. We believe we have a leading position in this served
market based on management estimates. In our Applied Water Segment, Irrigation accounted for approximately 7%
of our segment revenue in 2013 and 7% in 2012.
As described above, the following brands and products are used across the applications in our Applied Water
segment:
Goulds Water Technology — With origins dating back more than 150 years, Goulds Water Technology is a leading
brand of centrifugal and turbine pumps, controllers, variable frequency drives and accessories for residential and
commercial water supply and wastewater applications. Goulds Water Technology is a leader in the water
technologies market with its line of residential water well pumps. The Goulds Water Technology product portfolio
includes submersible and line shaft turbine, 4” submersible, jet, sump, effluent, sewage and centrifugal pumps for
residential, agriculture and irrigation, sewage and drainage, commercial and light industrial use. Goulds Water
Technology has various vertical configuration high pressure centrifugal pumps which are utilized for water boost,
filtration and boiler feed applications in industrial environments. Goulds Water Technology submersible, deepwell or
other pumps can be found in more than a quarter of the existing 15 million household wells and more than 380,000
public and community wells in the United States. Products for commercial wastewater include sewage, effluent and
grinder pumps and packages. Agriculture products include pump and control products for irrigation, stockwater,
wash systems, cooling systems and waste management, with turf irrigation products, including submersible and
surface pumps for landscape and turf irrigation systems. We serve the building trades market with filtration, chilling,
pressure boost, wash system, water supply, wastewater and boiler feed applications. We also have a range of
standard cast iron and bronze end-suction and multistage pumps for various commercial applications. During 2012,
Goulds Water Technology products were installed to help protect the Ancient Sphinx and Pyramids in Giza, Egypt
from rising ground water that was causing erosion to the soft limestone structures.
Lowara — Founded in 1968 in Vicenza, Italy, Lowara is a leader in stainless steel pump manufacturing technology
for water technology applications. The Lowara range of products includes submersible, sump, effluent, sewage,
centrifugal pumps and booster packages for water supply and water pumping needs in the residential, agriculture,
industrial, public utility, building service and commercial markets worldwide, with particular strength in Europe.
Residential applications include pumps for pressurization, conditioning, fire-fighting systems, lifting stations and
dewatering. Agriculture applications include pumps for irrigation of gardens and parks. Industrial applications
include drinking water, industrial washing equipment and machine tool cooling. The German water services
company Erftverband implemented a comprehensive system of Lowara pumps and a Hydrovar speed control smart
system to address complex water management needs in Korschenbroich and Kaarst, Germany during 2013.
Bell & Gossett — Founded in 1916 in Chicago, Illinois, Bell & Gossett ("B&G") is a leader in plumbing and water-
based heating and air conditioning markets. Products are used in residential applications where single- or multi-
family homes are heated with hot water or steam. Key products include circulating pumps, valves, and specialty
products used in these systems. B&G also sells wastewater pumps for commercial and residential applications. In
commercial applications, B&G provides a broad range of products, including a wide variety of pumps, heat
exchangers, valves and controls for heating and air-conditioning systems, sump pumps for wastewater systems,
condensate pumping systems for steam heating systems and a comprehensive line of energy-saving variable
speed controls. Training is provided for building system design engineers at B&G’s industry renowned Little Red
Schoolhouse in Morton Grove, Illinois which has educated more than 60,000 engineers. Key commercial building
types include hospitals, schools, and data centers. B&G products are sold globally by independent manufacturer
representatives and distributed locally by HVAC wholesalers. One of the most interesting installations of B&G
products is at McMurdo Station in Antarctica. McMurdo is operated by the United States through the United States
Antarctica Program, a branch of the National Science Foundation. This station includes more than 200 B&G pumps
in various applications throughout the facility.
A-C Fire Pump — Allis-Chalmers Company ("A-C Fire Pump") was founded in the 1840s in Milwaukee, Wisconsin.
It offers turnkey fire pump systems for commercial, residential and industrial applications. A-C Fire Pump designs
and custom-builds a wide range of fire pump systems, including prefabricated packages and house units that meet
11
every fire protection need. A-C Fire Pump products include In-Line Pumps, Vertical Turbine, Package Systems, Split
Case (various series) and 13D Home Defender for residential fire pump service. The 13D Home Defender is
designed to boost water pressure for automatic residential sprinkler systems. In addition to residential applications,
turnkey fire pumping systems from A-C Fire Pump protect an increasing number of petrochemical facilities,
commercial buildings and factories around the world. During 2013, A-C Fire Pump provided fire pump packages to
CNOOC (Chinese National Offshore Oil Company) as part of a large project in China.
Flowtronex — Flowtronex, founded in 1974 as Pumping Systems, Inc., began by producing some of the golf
industry’s first prefabricated water pumping systems. The Silent Storm package and Pace Integrated Pump
Controller are our two primary products sold into the golf market. In landscape, Flowtronex products, primarily the
Floboy system, are sold to customers such as cities and nurseries. In golf, Flowtronex products are sold to golf
course superintendents through our Toro Distribution partnership. Retrofit sales of golf pumping systems are sold
through our FlowNet Service Network, a group of factory authorized service technicians that provide set up and
start up, and service and repair of Flowtronex pump stations. Flowtronex has pumping systems operating in more
than seventy countries around the world. In the United States alone, 78 of the Top 100 golf courses use Flowtronex
golf irrigation pumping systems.
Standard Xchange — Since 1917, Standard Xchange has been the leader in the design and manufacture of shell
and tube heat exchangers. Standard Xchange is the brand of our complete line of heat transfer products used in
industrial and process applications such as heating or cooling liquids or gases, heat recovery in chemical
processing, power and co-generation, paper and pulp, OEM and commercial marine markets. Products include
basic shell-and-tube heat exchangers, air coolers, heat transfer coils, compact brazed, welded, gasketed plate units
and packaged steam condensers. Standard Xchange heat exchangers provide cooling for many of the major
turbine manufacturers in electrical power generation plants around the world.
Jabsco — The Jabsco brand is known for its marine, industrial, and hygienic/sanitary pumps and systems that are
used in many industries, including marine, industrial, healthcare and food processing. It was founded in 1938 by the
inventors of the flexible impeller pump. Jabsco is a leader in the leisure marine market, with a broad range of
products including water system, engine cooling pumps, searchlights and marine waste systems. Jabsco also offers
industrial pumps for hygienic applications, fluid transfer in chemical processing, laboratory, paint processing,
plating, and construction. Jabsco rotary lobe pumps offer outstanding performance with unique capabilities. Jabsco
Hy-line and Ultima rotary lobe pumps support food and dairy product production, healthcare, chemical,
pharmaceutical and biotech applications, whether the product is thin, viscous or fragile. Jabsco also offers multi-
purpose and specialized flexible impeller, diaphragm and sliding vane pumps for chemical and general transfer
applications. Jabsco marine products can be found under the decks of millions of pleasure boats around the world.
Flojet — Established in 1975, the Flojet brand encompasses a broad range of small pumps, motors and dispensing
pumps for the beverage, industrial, recreational vehicle, marine and food processing markets. Flojet is a leader in
the small pump market, offering a versatile range of products serving the beverage market, including both air- and
motor-operated diaphragm pumps and centrifugal chilling pumps, as well as booster systems and accumulator
tanks. Flojet’s beverage pumps can be found in applications such as beer dispensing, syrup mixing for carbonated
drinks, re-circulation in vending machines and refrigerators, bottled water dispensers, icemakers and coffee
machines. In addition to significant beverage applications, Flojet’s electric and air-operated diaphragm pumps are
utilized in street sweepers, car washes, carpet cleaners, parts washers, agricultural spraying and road rollers.
Flojet’s positive displacement diaphragm pumps can be driven by air, electric motor or solenoid. The positive
displacement diaphragm design of Flojet pumps makes them ideal for use in conditions that require self-priming
and dry running capability for short periods of time. Additionally, the compact size of these pumps makes them very
useful in tight spaces where one cannot ensure a flooded suction. Flojet pumps are designed to be more efficient
and are often the choice of customers for applications where low power consumption is critical. Xylem services
many of the world's leading beverage producers and during 2013 secured a large contract that will require 22 Flojet
beverage pumps per store for a large national restaurant chain.
12
Geographic Profile
In addition to the traditional markets of the United States and Europe, opportunities in emerging markets within Asia
Pacific, Eastern Europe, Latin America and other countries are growing.
The table below illustrates the annual revenue and percentage of revenue by geographic area for each of the three
years ended December 31, 2013.
(in millions)
United States
Europe
Asia Pacific
Other
Total
2013
$ Amount
1,434
$
1,387
467
549
3,837
$
Revenue
2012
2011
% of Total
$ Amount
% of Total
$ Amount
% of Total
38% $
36%
12%
14%
$
1,400
1,338
469
584
3,791
37% $
35%
12%
16%
$
1,363
1,422
426
592
3,803
36%
37%
11%
16%
Revenue derived from emerging markets comprised 19%, 20% and 19% of our revenue in 2013, 2012 and 2011,
respectively.
The table below illustrates the property, plant & equipment and percentage of property, plant & equipment by
geographic area for each of the three years ended December 31, 2013.
(in millions)
United States
Europe
Asia Pacific
Other
Total
2013
Property, Plant & Equipment
2012
2011
$ Amount
186
$
225
45
32
488
$
% of Total
$ Amount
% of Total
$ Amount
% of Total
38% $
46%
9%
7%
$
183
219
65
20
487
38% $
45%
13%
4%
$
178
209
57
19
463
38%
45%
12%
5%
Distribution, Training and End Use
Water Infrastructure provides the majority of its sales through direct channels with remaining sales through indirect
channels and service capabilities. Both public utility and industrial facility customers increasingly require our teams’
global but locally proficient expertise to use our equipment in their specific applications. Several trends are
increasing the need for this application expertise: (i) the increase in type and amount of contaminants in water
supply, (ii) increasing environmental regulations, (iii) the need to increase system efficiencies due to rising energy
costs, and (iv) the retirement of a largely aging water industry workforce not systematically replaced at utilities.
In the Applied Water segment, many end-use areas are widely different, so specialized distribution partners are
often preferred. Our commercial teams have built long-standing relationships around our brands in many of these
industries through which we can continue to leverage new product and service applications. Revenue opportunities
are balanced between OEM and after-market customers. Our products in the Applied Water segment are sold
through our global direct sales and strong indirect channels with the majority of revenue going through indirect
channels. We have long-standing relationships with the leading independent distributors in the markets we serve,
and we provide incentives to distributors, such as specialized training programs, to sell our products exclusively.
13
Aftermarket Parts and Service
We have many service centers around the world which employ service employees to provide aftermarket parts and
services to our customers. During their lifecycle, installed products require maintenance, repair services and parts
due to the harsh environments in which they operate.
In addition, depending on the type of product, median lifecycles range from 5 years to over 50 years, at which time
they must be replaced. Many of our products are precisely selected and applied within a larger network of
equipment driving a strong preference by customers and installers to replace them with the same exact brand and
model when they reach the end of their lifecycle. This dynamic establishes a large recurring revenue stream for our
business.
Supply and Seasonality
We have a global manufacturing footprint, with production facilities in Europe, North America, Latin America, and
Asia. In addition, we maintain a global network of service centers providing after-market customer care. Service
centers offer an array of integrated service solutions for the industry including: preventive monitoring, contract
maintenance, emergency field service, engineered upgrades, inventory management, and overhauls for pumps and
other rotating equipment.
We offer a wide range of highly engineered products. We primarily employ configure-to-order capabilities to
maximize manufacturing and logistics efficiencies by producing high volumes of basic product configurations. When
we provide a configure-to-order solution, we configure a standard product to our customers’ specifications. To a
lesser extent, we provide engineer-to-order products to meet the customization requirements of our customers. This
process requires that we apply our technical expertise and production capabilities to provide a non-standard
solution to the customer.
Our inventory management and distribution practices seek to minimize inventory holding periods by taking delivery
of the inventory and manufacturing immediately prior to the sale or distribution of products to our customers. All of
our businesses require various parts and raw materials, of which the availability and prices may fluctuate. Parts and
raw materials commonly used in our products include motors, fabricated parts, castings, bearings, seals, nickel,
copper, aluminum, and plastics. While we may recover some cost increases through operational improvements, we
are still exposed to some pricing risk. We attempt to control costs through fixed-priced contracts with suppliers and
various other programs, such as our global strategic sourcing initiative.
Our business relies on third-party suppliers, contract manufacturing and commodity markets to secure raw
materials, parts and components used in our products. We typically acquire materials and components through a
combination of blanket and scheduled purchase orders to support our materials requirements. For most of our
products, we have existing alternate sources of supply, or such sources are readily available.
We may experience price volatility or supply constraints for materials that are not available from multiple sources.
From time to time, we acquire certain inventory in anticipation of supply constraints or enter into longer-term pricing
commitments with vendors to improve the priority, price and availability of supply. There have been no raw material
shortages that have had a significant adverse impact on our business as a whole.
Our Water Infrastructure and Applied Water segments experience some modest level of seasonality in its business.
This seasonality is dependent on factors such as capital spending of customers as well as weather conditions,
including heavy flooding, droughts and fluctuations in temperatures, which can positively or negatively impact
portions of our business.
Customers
Our business is not dependent on any single customer or a few customers, the loss of which would have a material
adverse effect on the applicable market or on the Company as a whole. No individual customer accounted for more
than 10% of our consolidated 2013, 2012 or 2011 revenue.
Backlog
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. Total backlog was $707 million at
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December 31, 2013 and $647 million at December 31, 2012. We anticipate that more than 90% of the backlog at
December 31, 2013 will be recognized as revenue during 2014.
Competition
Given the highly fragmented nature of the water industry, Water Infrastructure competes with a large number of
businesses. Competition in the water transport and treatment technologies markets focuses on product
performance, application expertise, design, quality, delivery, and price. In the sale of products and services, we
benefit from our large installed base of pumps and complementary products, which require maintenance, repair and
replacement parts due to the nature of the products and the conditions under which they operate. Timeliness of
delivery, quality and the proximity of service centers are important customer considerations when selecting a
provider for after-market products and services as well as equipment rentals. In geographic regions where we are
locally positioned to provide a quick response, customers have historically relied on us, rather than our competitors,
for after-market products relating to our highly engineered and customized solutions. Our key competitors within the
Water Infrastructure segment include KSB Inc., Sulzer Ltd., Evoqua Water Technologies (formerly Siemans AG) and
Danaher Corporation.
Competition in the Applied Water segment focuses on brand names, application expertise, product delivery and
performance, quality, and price. We compete by offering a wide variety of innovative and high-quality products,
coupled with world-class application expertise. We believe our distribution through well-established channels and
our reputation for quality significantly enhance our market position. Our ability to deliver innovative product offerings
has allowed us to compete effectively, to cultivate and maintain customer relationships and to serve and expand
into many niche and new markets. Our key competitors within the Applied Water segment include Grundfos, Wilo
SE, Pentair Ltd. and Franklin Electric Co., Inc.
Research and Development
Research and development (“R&D”) is a key element of our engineering culture and is generally focused on the
design and development of products and application know-how that anticipate customer needs and emerging
trends. Our engineers are involved in new product development and improvement of existing products. Our
businesses invest substantial resources for R&D. We anticipate we will continue to develop and invest in our R&D
capabilities to promote a steady flow of innovative, high-quality and reliable products and applications to further
strengthen our position in the markets we serve. We invested $104 million, $106 million, and $100 million for the
years ended December 31, 2013, 2012 and 2011, respectively, towards R&D.
We have engineering and research employees in technology centers around the world. R&D activities are initially
conducted in our technology centers, located in conjunction with some of our major manufacturing facilities to
ensure an efficient development process. We have a wastewater Center of Excellence in Stockholm, Sweden, with
research, development and engineering employees. We have Centers of Excellence in India and China, where we
are accelerating the customization of our application expertise to local needs. In the scale-up process, our R&D
activities are conducted at our piloting and testing facilities or at strategic customer sites. These piloting and testing
facilities enable us to serve our strategic markets in each region of the world.
We generally seek patent protection for those inventions and improvements that we believe will improve our
competitive position. We believe that our patents and applications are important for maintaining the competitive
differentiation of our products and improving our return on research and development investments. While we own,
control or license a significant number of patents, trade secrets, proprietary information, trademarks, trade names,
copyrights, and other intellectual property rights which, in the aggregate, are of material importance to our business,
management believes that our business, as a whole, as well as each of our core business segments, is not
materially dependent on any one intellectual property right or related group of such rights.
Patents, patent applications, and license agreements expire or terminate over time by operation of law, in
accordance with their terms or otherwise. As the portfolio of our patents, patent applications, and license
agreements has evolved over time, we do not expect the expiration of any specific patent to have a material
adverse effect on our financial position or results of operations.
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Environmental Matters and Regulation
Our manufacturing operations worldwide are subject to many requirements under environmental laws. In the United
States, the Environmental Protection Agency and similar state agencies administer laws and regulations concerning
air emissions, water discharges, waste disposal, environmental remediation, and other aspects of environmental
protection. Such environmental laws and regulations in the United States include, for example, the Federal Clean
Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive
Environmental Response, Compensation and Liability Act. Environmental requirements significantly affect our
operations. We have established an internal program to address compliance with applicable environmental
requirements and, as a result, management believes that we are in substantial compliance with current
environmental regulations.
While environmental laws and regulations are subject to change, such changes can be difficult to predict reliably
and the timing of potential changes is uncertain. Management does not believe, based on current circumstances,
that compliance costs pursuant to such regulations will have a material adverse effect on our financial position or
results of operations. However, the effect of future legislative or regulatory changes could be material to our
financial condition or results of operations.
Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on current law and existing
technologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various
factors. Our accrued liabilities for these environmental matters represent the best estimates related to the
investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as
related legal fees based upon the facts and circumstances as currently known to us. These estimates, and related
accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in
facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted
basis. We do not anticipate these liabilities will have a material adverse effect on our consolidated and combined
financial position or results of operations. We cannot make assurances that other sites, or new details about sites
known to us, that could give rise to environmental liabilities with such material adverse effects on us will not be
identified in the future. At December 31, 2013, we had estimated and accrued $8 million related to environmental
matters.
Employees
As of December 31, 2013, Xylem had more than 12,500 employees worldwide. We have over 3,700 employees in
the United States, of whom approximately 17% are represented by labor unions, and in certain foreign countries
some of our employees are represented by work councils. We believe that our facilities are in favorable labor
markets with ready access to adequate numbers of workers and believe our relations with our employees are good.
Available Information
Xylem’s website address is www.xyleminc.com. We make available free of charge on or through
www.investors.xyleminc.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Information contained on our website is not incorporated by
reference unless specifically stated therein.
In addition, the public may read or copy any materials filed with the SEC at the SEC’s Public Reference Room
located at 100 F Street NE, Washington, D.C. 20549. The public may also obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports and other information are also
available, free of charge, at www.sec.gov.
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ITEM 1A.
RISK FACTORS
In evaluating our business, each of the following risks should be carefully considered, along with all of the other
information in this Report and in our other filings with the SEC. Should any of these risks and uncertainties develop
into actual events, our business, financial condition or results of operations could be materially and adversely
affected.
Risks Related to Operational and External Factors
Failure to compete successfully in our markets could adversely affect our business.
We provide products and services into competitive markets. We believe the principal points of competition in our
markets are product performance, reliability and innovation, application expertise, brand reputation, energy
efficiency, product life cycle cost, timeliness of delivery, proximity of service centers, effectiveness of our distribution
channels and price. Maintaining and improving our competitive position will require continued investment by us in
manufacturing, research and development, engineering, marketing, customer service and support, and our
distribution networks. We may not be successful in maintaining our competitive position. Our competitors may
develop products that are superior to our products, or may develop more efficient or effective methods of providing
products and services or may adapt more quickly than we do to new technologies or evolving customer
requirements. Pricing pressures also could cause us to adjust the prices of certain products to stay competitive. We
may not be able to compete successfully with our existing or new competitors. Failure to continue competing
successfully or to win large contracts could adversely affect our business, financial condition or results of
operations.
Our results of operations and financial condition may be adversely affected by global economic and
financial market conditions.
We compete around the world in various geographic and product markets. In 2013, 38% and 36% of our total
revenue was from customers located in the United States and Europe, respectively. We expect revenue from these
markets to be significant for the foreseeable future. Important factors impacting our businesses include the overall
strength of these economies and our customers’ confidence in both local and global macro-economic conditions;
industrial and federal, state, local and municipal governmental spending; the strength of the residential and
commercial real estate markets; interest rates; availability of commercial financing for our customers and end-users;
and unemployment rates. A slowdown or downturn in these financial or macro-economic conditions could have a
significant adverse effect on our business, financial condition and results of operations.
Economic and other risks associated with international sales and operations could adversely affect our
business.
In 2013, 62% of our total revenue was from customers outside the United States. We expect our international
operations and export sales to continue to be a significant portion of our revenue. Both our sales from international
operations and export sales are subject in varying degrees to risks inherent to doing business outside the United
States. These risks include the following:
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possibility of unfavorable circumstances arising from host country laws or regulations;
currency exchange rate fluctuations and restrictions on currency repatriation;
potential negative consequences from changes to taxation policies;
disruption of operations from labor and political disturbances;
changes in tariff and trade barriers and import and export licensing requirements; and
insurrection or war.
Any payment of distributions, loans or advances to us by our foreign subsidiaries could be subject to restrictions on,
or taxation of, dividends on repatriation of earnings under applicable local law, monetary transfer restrictions and
foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate. In addition to the
general risks that we face outside the United States, we now conduct more of our operations in emerging markets
than we have in the past, which could involve additional uncertainties for us, including risks that governments may
impose limitations on our ability to repatriate funds; governments may impose withholding or other taxes on
remittances and other payments to us, or the amount of any such taxes may increase; an outbreak or escalation of
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any insurrection or armed conflict may occur; governments may seek to nationalize our assets; or governments
may impose or increase investment barriers or other restrictions affecting our business. In addition, emerging
markets pose other uncertainties, including the protection of our intellectual property and other assets, pressure on
the pricing of our products, higher business conduct risks, less qualified talent and risks of political instability. We
cannot predict the impact such future, largely unforeseeable events might have on our business, financial condition
and results of operations.
Our business could be adversely affected by the inability of suppliers to meet delivery requirements.
Our business relies on third-party suppliers, contract manufacturing and commodity markets to secure raw
materials, parts and components used in our products. Parts and raw materials commonly used in our products
include motors, fabricated parts, castings, bearings, seals, nickel, copper, aluminum, and plastics. We are exposed
to the availability of these materials, which may be subject to curtailment or change due to, among other things,
interruptions in production by suppliers, labor disputes, the impaired financial condition of a particular supplier,
suppliers’ allocations to other purchasers, changes in exchange rates and prevailing price levels, ability to meet
regulatory requirements, weather emergencies or acts of war or terrorism. Any delay in our suppliers’ abilities to
provide us with necessary materials could impair our ability to deliver products to our customers and, accordingly,
could have a material adverse effect on our business, financial condition or results of operations.
Our business could be adversely affected by significant movements in foreign currency exchange rates.
We are exposed to fluctuations in foreign currency exchange rates, particularly with respect to the Euro, Swedish
Krona, British Pound, Australian Dollar, Canadian Dollar, Polish Zloty, and Hungarian Forint. Any significant change
in the value of currencies of the countries in which we do business relative to the value of the U.S. Dollar or Euro
could affect our ability to sell products competitively and control our cost structure, which could have a material
adverse effect on our business, financial condition and results of operations.
Weather conditions may adversely affect our financial results.
Weather conditions, including heavy flooding, droughts and fluctuations in temperatures, can positively or
negatively impact portions of our business. Within the dewatering space, our pumps provided through our Godwin
brand are used to remove excess or unwanted water. Heavy flooding due to weather conditions drives increased
demand for these applications. On the other hand, drought conditions drive higher demand for pumps used in
agricultural and turf irrigation applications, such as those provided by our Goulds Water Technology, Flowtronex and
Lowara brands. Fluctuations to warmer and cooler temperatures result in varying levels of demand for products
used in residential and commercial applications where homes and buildings are heated and cooled with HVAC units
such as those provided by our B&G brand. Given the unpredictable nature of weather conditions, this may result in
volatility for certain portions of our business, as well as the operations of certain of our customers and suppliers.
Our financial results can be difficult to predict.
Our business is impacted by an increasing amount of short cycle, and book and bill business, which we have limited
insight into, particularly for the business that we transact through our distributors. We are also impacted by large
projects, whose timing can change based upon customer requirements due to a number of factors affecting the
project, such as funding, readiness of the project and regulatory approvals. Accordingly, our financial results for any
given period can be difficult to predict.
Our strategy includes acquisitions, and we may not be able to make acquisitions of suitable candidates or
integrate acquisitions successfully.
Our historical growth has included acquisitions. As part of our growth strategy, we plan to pursue the acquisition of
other companies, assets and product lines that either complement or expand our existing business. We cannot
make assurances, however, that we will be able to identify suitable candidates successfully, negotiate appropriate
acquisition terms, obtain financing that may be needed to consummate those acquisitions, complete proposed
acquisitions, successfully integrate acquired businesses into our existing operations or expand into new markets. In
addition, we cannot make assurances that any acquisition, once successfully integrated, will perform as planned, be
accretive to earnings, or prove to be beneficial to our operations or cash flow.
Acquisitions involve a number of risks and present financial, managerial and operational challenges, including:
diversion of management attention from existing businesses and operations; integration of technology, operations
personnel, and financial and other systems; potentially insufficient internal controls over financial activities or
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financial reporting at an acquired entity that could impact us on a combined basis; the failure to realize expected
synergies; the possibility that we have acquired substantial undisclosed liabilities; and the loss of key employees of
the acquired businesses.
We may incur impairment charges for our goodwill and other indefinite-lived intangible assets which would
negatively impact our operating results.
We have a significant amount of goodwill and purchased intangible assets on our balance sheet as a result of
acquisitions we have completed. As of December 31, 2013, the net carrying value of our goodwill and other
indefinite-lived intangible assets totaled approximately $2 billion. The carrying value of goodwill represents the fair
value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying
value of indefinite-lived intangible assets represents the fair value of trademarks and trade names as of the
acquisition date. We do not amortize goodwill and indefinite-lived intangible assets that we expect to contribute
indefinitely to our cash flows, but instead we evaluate these assets for impairment at least annually, or more
frequently if interim indicators suggest that a potential impairment could exist. In testing for impairment, we will
make a qualitative assessment, and if we believe that it is more likely than not that the fair value of a reporting unit
is less than its carrying amount, the quantitative two-step goodwill impairment test is required. Significant negative
industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses,
unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization
declines may impair our goodwill and other indefinite-lived intangible assets. Any charges relating to such
impairments could adversely affect our results of operations and financial condition in the periods recognized.
Our ability to successfully execute our organizational redesign as well as other restructuring and
realignment actions could impact our business results.
We initiated an organizational redesign during the fourth quarter of 2013, shifting from individually managed
businesses to an integrated approach within geographical regions. We expect that this will enable us to leverage
the breadth of the Company’s product and services portfolio to better serve our customers and address market
opportunities as well as effectively utilize internal support organizations to realize economies of scale and efficient
use of resources. The successful implementation and execution of this redesign, which is still in the process of
being implemented, as well as our other restructuring and realignment actions, is critical to achieving our expected
cost savings as well as effectively competing in the marketplace. Other factors that may impede a successful
implementation is retention of key employees, the impact of regulatory matters, and adverse economic market
conditions. If the organizational redesign or restructuring and realignment actions are not executed successfully, the
Company’s financial results could be adversely impacted.
Changes in our effective tax rates may adversely affect our financial results.
We sell our products in more than 150 countries and 62% of our revenue was generated outside the United States
in 2013. Given the global nature of our business, a number of factors may increase our future effective tax rates,
including:
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our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes;
the jurisdictions in which profits are determined to be earned and taxed;
sustainability of historical income tax rates in the jurisdictions in which we conduct business;
the resolution of issues arising from tax audits with various tax authorities; and
changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation
allowances.
Any significant increase in our future effective tax rates could reduce net income for future periods.
Our business could be adversely affected by inflation and other manufacturing and operating cost
increases.
Our operating costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials,
energy and related utilities, freight, and cost of labor. In order to remain competitive, we may not be able to
recuperate all or a portion of these higher costs from our customers through product price increases. Further, our
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ability to realize financial benefits from Six Sigma and Lean projects may not be able to mitigate fully or in part these
manufacturing and operating cost increases and, as a result, could negatively impact our profitability.
Product defects and unanticipated use or inadequate disclosure with respect to our products could
adversely affect our business, reputation and financial statements.
Manufacturing or design defects in (including in products or components that we source from third parties),
unanticipated use of, or inadequate disclosure of risks relating to the use of products that we make or sell can lead
to personal injury, death or property damage. These events could lead to recalls or safety alerts relating to our
products, result in the removal of a product from the market and result in product liability claims being brought
against us. Although we have liability insurance, we cannot be certain that this insurance coverage will continue to
be available to us at a reasonable cost or will be adequate to cover any product liability claims. Recalls, removals
and product liability claims can result in significant costs, as well as negative publicity and damage to our reputation
that could reduce demand for our products.
Our indebtedness may affect our business and may restrict our operational flexibility.
As of December 31, 2013, our total outstanding indebtedness was $1,241 million including our 3.55% Senior Notes
of $600 million aggregate principal amount due September 2016 and 4.875% Senior Notes of $600 million
aggregate principal amount due October 2021. We have an existing Four Year Competitive Advance and Revolving
Credit Facility (the “Credit Facility”), which provides for an aggregate principal amount of up to $600 million. We
have a Risk Sharing Finance Facility Agreement (the "R&D Facility Agreement") with The European Investment
Bank ("EIB") in an aggregate principal amount of up to €120 million (approximately $165 million).
Our indebtedness could:
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increase our vulnerability to general adverse economic and industry conditions;
limit our ability to obtain additional financing or borrow additional funds;
limit our ability to pay future dividends;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
require that a substantial portion of our cash flow from operations be used for the payment of interest on our
indebtedness instead of funding working capital, capital expenditures, acquisitions or other general corporate
purposes; and
increase the amount of interest expense that we must pay because some of our borrowings are at variable
interest rates, which, as interest rates increase, would result in higher interest expense.
In addition, there can be no assurance that future borrowings or equity financing will be available to us on favorable
terms or at all for the payment or refinancing of our indebtedness. If we incur additional debt or raise equity through
the issuance of preferred stock, the terms of the debt or preferred stock issued may give the holders rights,
preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation.
The terms of the debt may also impose additional and more stringent restrictions on our operations than we
currently have. Also, regardless of the terms of our debt or equity financing, the amount of our stock that we can
issue may be limited because the issuance of our stock may cause the distribution to be a taxable event for ITT
under Section 355(e) of the Internal Revenue Code of 1986, as amended (the “Code”), and under the Tax Matters
Agreement entered into by ITT in connection with the Spin-off (the “Tax Matters Agreement”), we could be required
to indemnify ITT for that tax.
Our ability to make scheduled principal payments of, to pay interest on, or to refinance our indebtedness and to
satisfy our other debt obligations will depend on our future operating performance, which may be affected by factors
beyond our control. If we are unable to service our indebtedness, our business, financial condition and results of
operations would be materially adversely affected.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation
could result in fines, criminal penalties and an adverse effect on our business.
We operate in a number of countries throughout the world, including countries considered to have a high risk of
corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject,
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however, to the risk that we or our affiliated entities or our representatives or their respective officers, directors,
employees and agents, may take action determined to be in violation of such anti-corruption laws or regulations,
including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act of 2010 and others. Any such
violation could result in substantial fines, sanctions, civil and/or criminal penalties, and curtailment of operations in
certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition,
actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting,
investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention
of our senior management.
We may be negatively impacted by litigation and regulatory proceedings.
We are subject to laws, regulations and potential liability relating to claims, complaints and proceedings, including
those related to antitrust, environmental, product, and other matters.
We are subject to various laws, ordinances, regulations and other requirements of government authorities in foreign
countries and in the United States, any violation of which could potentially create substantial liability for us and also
damage to our reputation. Changes in laws, ordinances, regulations or other government policies, the nature,
timing, and effect of which are uncertain, may significantly increase our expenses and liabilities.
From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses,
including acquisitions and divestitures. Some of these proceedings seek remedies relating to environmental
matters, intellectual property matters, product liability and personal injury claims, employment, labor and pension
matters, and government and commercial or contract issues, sometimes related to acquisitions or divestitures. We
may become subject to significant claims of which we are currently unaware, or the claims of which we are aware
may result in our incurring a significantly greater liability than we anticipate or can estimate. Additionally, we may
receive fines or penalties or be required to change or cease operations at one or more facilities if a regulatory
agency determines that we have failed to comply with laws, regulations or orders applicable to our business.
Our business could be adversely affected by interruptions in information technology, communications
networks and operations.
Our business operations rely on information technology and communications networks, and operations that are
vulnerable to damage or disturbance from a variety of sources. Regardless of protection measures, essentially all
systems are susceptible to disruption due to failure, vandalism, computer viruses, security breaches, natural
disasters, power outages and other events. In addition, cybersecurity threats are evolving and include, among
others, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches
that could lead to disruptions in our systems, unauthorized release of confidential or otherwise protected information
and corruption of data. We also have a concentration of operations on certain sites, e.g. production and shared
services centers, where business interruptions could cause material damage and costs. Transport of goods from
suppliers, and to customers, could also be hampered for the reasons stated above. Although we continue to assess
these risks, implement controls, and perform business continuity planning, we cannot be sure that interruptions with
material adverse effects will not occur.
Failure to retain our existing senior management, engineering, sales and other key personnel or the
inability to attract and retain new qualified personnel could negatively impact our ability to operate or grow
our business.
Our success will continue to depend to a significant extent on our ability to retain or attract a significant number of
employees in senior management, engineering, sales and other key personnel. The ability to attract
or retain employees will depend on our ability to offer competitive compensation, training and cultural benefits. We
will need to continue to develop a roster of qualified talent to support business growth and replace departing
employees. Effective succession planning is also important to our long-term success. Failure to ensure effective
transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and
execution. A failure to retain or attract highly skilled personnel could adversely affect our operating results or ability
to operate or grow our business.
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If we do not or cannot adequately protect our intellectual property, if third parties infringe our intellectual
property rights, or if third parties claim that we are infringing or misappropriating their intellectual property
rights, we may suffer competitive injury, expend significant resources enforcing our rights or defending
against such claims, or be prevented from selling products or services.
We own numerous patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to
intellectual property owned by others, which in aggregate are important to our business. The intellectual property
rights that we obtain, however, may not provide us with a significant competitive advantage because they may not
be sufficiently broad or may be challenged, invalidated, circumvented, independently developed, or designed-
around, particularly in countries where intellectual property rights laws are not highly developed or protected. Our
failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our
intellectual property or detect or prevent circumvention or unauthorized use of such property and the cost of
enforcing our intellectual property rights could adversely impact our business, financial condition and results of
operations.
From time to time, we receive notices from third parties alleging intellectual property infringement or
misappropriation. Any dispute or litigation regarding intellectual property could be costly and time-consuming due to
the complexity and the uncertainty of intellectual property litigation. Our intellectual property portfolio may not be
useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or
misappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights
to critical technology, be unable to license critical technology or sell critical products and services, be required to
pay substantial damages or license fees with respect to the infringed rights or be required to redesign our products
at substantial cost, any of which could adversely impact our competitive position and financial statements. Even if
we successfully defend against claims of infringement or misappropriation, we may incur significant costs and
diversion of management attention and resources, which could adversely affect our business, financial condition
and results of operations.
We cannot make assurances that we will pay dividends on our common stock or continue to repurchase
our common stock under Board approved share repurchase plans, and likewise our indebtedness could
limit our ability to pay dividends or make share repurchases.
The timing, declaration, amount and payment of future dividends to our shareholders fall within the discretion of our
Board of Directors and will depend on many factors, including our financial condition, results of operations and
capital requirements, as well as applicable law, regulatory constraints, industry practice and other business
considerations that our Board of Directors considers relevant. There can be no assurance that we will pay a
dividend in the future or continue to pay dividends.
Further, the timing and amount of the repurchase of our common stock under Board approved share repurchase
plans has similar dependencies as the payment of dividends and accordingly, there can be no assurances that we
will continue to repurchase our common stock.
Additionally, if we cannot generate sufficient cash flow from operations to meet our debt-payment obligations, then
our ability to pay dividends, if so determined by the Board of Directors, or make share repurchases will be impaired
and we may be required to attempt to restructure or refinance our debt, raise additional capital or take other actions
such as selling assets, reducing or delaying capital expenditures, reducing our dividend or delaying or curtailing
share repurchases. There can be no assurance, however, that any such actions could be effected on satisfactory
terms, if at all, or would be permitted by the terms of our debt or our other credit and contractual arrangements.
The level of returns on postretirement benefit plan assets, changes in interest rates and other factors could
affect our earnings and cash flows in future periods.
Certain members of our current and retired employee population are covered by pension and other employee-
related defined benefit plans (collectively, postretirement benefit plans). We may experience significant fluctuations
in costs related to our postretirement benefit plans as a result of macro-economic factors, such as interest rates,
that are beyond our control. The cost of our postretirement plans is incurred over long periods of time and involves
factors and uncertainties during those periods which can be volatile and unpredictable, including rates of return on
postretirement benefit plan assets, discount rates used to calculate liabilities and expenses and rates of future
compensation increases. Management develops each assumption using relevant plan and Company experience
and expectations in conjunction with market-related data. Our liquidity, financial position (including shareholders’
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equity) and results of operations could be materially affected by significant changes in key economic indicators,
actuarial experience, financial market volatility, future legislation and other governmental regulatory actions.
We make contributions to fund our postretirement benefit plans when considered necessary or advantageous to do
so. The macro-economic factors discussed above, including the return on postretirement benefit plan assets and
the minimum funding requirements established by local government funding or taxing authorities, or established by
other agreement, may influence future funding requirements. A significant decline in the fair value of our plan
assets, or other adverse changes to our overall pension and other employee-related benefit plans, could require us
to make significant funding contributions and affect cash flows in future periods.
Unforeseen environmental issues could impact our financial position or results of operations.
Our operations are subject to and affected by many federal, state, local and foreign environmental laws and
regulations. In addition, we could be affected by future environmental laws or regulations, including, for example,
those imposed in response to climate change concerns. Compliance with current and future environmental laws
and regulations currently requires and is expected to continue to require operating and capital expenditures.
Environmental laws and regulations may authorize substantial fines and criminal sanctions as well as facility
shutdowns to address violations, and may require the installation of costly pollution control equipment or operational
changes to limit emissions or discharges. We also incur, and expect to continue to incur, costs to comply with
current environmental laws and regulations.
Developments such as the adoption of new environmental laws and regulations, stricter enforcement of existing
laws and regulations, violations by us of such laws and regulations, discovery of previously unknown or more
extensive contamination, litigation involving environmental impacts, our inability to recover costs associated with
any such developments, or financial insolvency of other responsible parties could in the future have a material
adverse effect on our financial position and results of operations.
The market price of our common stock may fluctuate significantly.
We cannot predict the prices at which our common stock may trade. The market price of our common stock may
fluctuate widely, depending on many factors, some of which may be beyond our control, including:
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•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results due to factors related to our business;
success or failure of our business strategy;
our quarterly or annual earnings, or those of other companies in our industry;
our ability to obtain financing as needed;
announcements by us or our competitors of significant new business awards;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
natural or environmental disasters that investors believe may affect us;
overall market fluctuations;
fluctuations in the budgets of federal, state and local governmental entities around the world;
results from any material litigation or government investigation;
changes in laws and regulations affecting our business; and
general economic conditions and other external factors.
23
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of
a particular company. These broad market fluctuations could adversely affect the trading price of our common
stock.
Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change
in control.
Certain provisions of our second amended and restated articles of incorporation and our amended and restated by-
laws may delay or prevent a merger or acquisition part or all of our business operations. For example, the second
amended and restated articles of incorporation and the amended and restated by-laws, among other things, require
advance notice for shareholder proposals and nominations, do not permit shareholders to convene special
meetings and do not permit action by written consent of the shareholders, unless unanimous. In addition, the
amended and restated articles of incorporation authorize our Board of Directors to issue one or more series of
preferred stock. These provisions may also discourage acquisition proposals of our business operations or delay or
prevent a change in control, which could harm our stock price. Indiana law also imposes some restrictions on
mergers and other business combinations between any holder of 10% or more of our outstanding common stock
and us.
Risks Related to our 2011 Separation from ITT Corporation
If the Spin-off were to fail to qualify as a tax-free transaction under the Internal Revenue Code, then we and/
or our former parent and our stockholders could be subject to significant tax liability.
In connection with the Spin-off, we and our former parent, ITT Corporation, received an IRS ruling (the “IRS Ruling”)
stating that ITT and its shareholders will not recognize any taxable income, gain or loss for U.S. Federal income tax
purposes as a result of the Spin-off. In addition, ITT received an opinion of tax counsel as to the satisfaction of
certain requirements necessary for the Spin-off to receive tax-free treatment upon which the IRS did not rule. The
IRS Ruling, while generally binding upon the IRS, was based on certain factual statements and representations. If
any such factual statements or representations were incomplete or untrue in any material respect, or if the facts on
which the IRS Ruling were based were materially different from the facts at the time of the Spin-off, the IRS could
modify or revoke the IRS Ruling retroactively.
As discussed above, certain requirements for tax-free treatment that are not covered in the IRS Ruling were
addressed in the opinion of counsel. The opinion of counsel is not binding on the IRS. Accordingly, the IRS may
reach conclusions with respect to the Spin-off that are different from the conclusions reached in the opinion. Like
the IRS Ruling, the opinion was based on certain factual statements and representations, which, if incomplete or
untrue in any material respect, could alter counsel’s conclusions.
If all or a portion of the Spin-off does not qualify as a tax-free transaction because any of the factual statements or
representations in the IRS Ruling or the legal opinion are incomplete or untrue, or because the facts upon which the
IRS Ruling is based were materially different from the facts at the time of the Spin-off, ITT would recognize a
substantial gain for U.S. Federal income tax purposes. In such case, under U.S. Treasury regulations each member
of the ITT consolidated group at the time of the Spin-off (including us and our subsidiaries), would be jointly and
severally liable for the entire amount of any resulting U.S. Federal income tax liability.
Notwithstanding the foregoing, the Spin-off will be taxable to ITT (but not to ITT shareholders) pursuant to
Section 355(e) of the Internal Revenue Code if there are one or more acquisitions (including issuances) of the stock
of either us or ITT, representing 50% or more, measured by vote or value, of the then-outstanding stock of either
corporation and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that
include the Spin-off. Any acquisition of our common stock within two years before or after the Spin-off (with
exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances)
generally will be presumed to be part of such a plan unless that presumption is rebutted. The tax liability resulting
from the application of Section 355(e) would be substantial. In addition, under U.S. Treasury regulations, each
member of the ITT consolidated group at the time of the Spin-off (including us and our subsidiaries) would be
severally liable for the resulting U.S. Federal income tax liability.
We have agreed not to enter into any transaction that could cause any portion of the Spin-off to be taxable to ITT,
including under Section 355(e). Pursuant to the Tax Matters Agreement, dated as of October 25, 2011 among ITT,
Exelis and Xylem, we have also agreed to indemnify ITT and Exelis for any tax liabilities resulting from such
transactions, and ITT and Exelis have agreed to indemnify us for any tax liabilities resulting from such transactions
24
entered into by ITT or Exelis. These obligations may discourage, delay or prevent a change of control of our
Company.
The Spin-off may expose us to potential liabilities arising out of state and federal fraudulent conveyance
laws and legal distribution requirements.
The Spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or
an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could
claim that the Spin-off left us, ITT and/or Exelis insolvent or with unreasonably small capital or that we, ITT and/or
Exelis intended or believed it would incur debts beyond its ability to pay as they mature and that ITT did not receive
fair consideration or reasonably equivalent value in the Spin-off. If a court were to agree with such a plaintiff, then
such court could void the Spin-off as a fraudulent transfer and could impose a number of different remedies, which
could adversely affect our financial condition and our results of operations. Among other things, the court could
require the return of assets or our shares to ITT, voiding the liens of Xylem and claims against ITT, or providing ITT
with a claim for money damages against us.
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which
jurisdiction’s law is applied. Generally, however, an entity would be considered insolvent if either the fair saleable
value of its assets is less than the amount of its liabilities (including the probable amount of contingent liabilities), or
it is unlikely to be able to pay its liabilities as they become due. No assurance can be given as to what standard a
court would apply to determine insolvency or that a court would determine that we, ITT or Exelis were solvent at the
time of or after giving effect to the Spin-off.
The Spin-off could also be challenged under state corporate distribution statutes. Under the Indiana Business
Corporation Law, a corporation may not make distributions to its shareholders if, after giving effect to the
distribution, (i) the corporation would not be able to pay its debts as they become due in the usual course of
business; or (ii) the corporation’s total assets would be less than the sum of its total liabilities. No assurance can be
given that a court will not later determine that the distribution of our shares in connection with the Spin-off was
unlawful.
Under the Distribution Agreement, from and after the Spin-off, we will be responsible for the debts, liabilities and
other obligations related to the business or businesses which we own and operate following the consummation of
the Spin-off. Although we do not expect to be liable for any of these or other obligations not expressly assumed by
us pursuant to the Distribution Agreement, it is possible that we could be required to assume responsibility for
certain obligations retained by ITT or Exelis should ITT or Exelis fail to pay or perform its retained obligations (for
example, tax, asbestos and/or environmental liabilities).
In connection with our separation, ITT and Exelis will indemnify us for certain liabilities and we will
indemnify ITT or Exelis for certain liabilities. If we are required to indemnify ITT or Exelis, we may need to
divert cash to meet those obligations and our financial results could be negatively impacted. In the case of
ITT’s or Exelis’s indemnity, there can be no assurance that those indemnities will be sufficient to insure us
against the full amount of such liabilities, or as to ITT’s or Exelis’s ability to satisfy its indemnification
obligations in the future.
Pursuant to the Distribution Agreement and certain other agreements with ITT and Exelis, ITT and Exelis agreed to
indemnify us from certain liabilities, and we agreed to indemnify ITT and Exelis for certain liabilities. Indemnities that
we may be required to provide ITT and Exelis may be significant and could negatively impact our business,
particularly indemnities relating to our actions that could impact the tax-free nature of the Spin-off. Third parties
could also seek to hold us responsible for any of the liabilities that ITT or Exelis has agreed to retain. Further, there
can be no assurance that the indemnities from ITT and Exelis will be sufficient to protect us against the full amount
of such liabilities, or that ITT and Exelis will be able to fully satisfy their indemnification obligations. Moreover, even
if we ultimately were to succeed in recovering from ITT and Exelis any amounts for which we are held liable, we
may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our
business, results of operations and financial condition.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
25
ITEM 2.
PROPERTIES
We have more than 350 locations in more than 40 countries. These properties total approximately 10.4 million
square feet, of which more than 300 locations, or approximately 6.0 million square feet, are leased. We consider the
many offices, plants, warehouses, and other properties that we own or lease to be in good condition and generally
suitable for the purposes for which they are used. The following table shows the significant locations by segment.
Location
Emmaboda
Stockholm
Shenyang
Yellow Springs
Morton Grove
Montecchio
Nanjing
Auburn
Lubbock
Cheektowaga
Rye Brook
State or
Country
Sweden
Sweden
China
OH
IL
Italy
Principal Business Activity
Water Infrastructure
Administration and Manufacturing
Administration and Research &
Development
Manufacturing
Administration and Manufacturing
Applied Water
Administration and Manufacturing
Administration and Manufacturing
China
Manufacturing
Manufacturing
Manufacturing
Manufacturing
NY
TX
NY
NY
Approx.
Square
Feet
1,156,000
172,000
125,000
108,000
530,000
379,000
363,000
273,000
229,000
145,000
Owned or
Expiration
Date
of Lease
Owned
2019
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Corporate Headquarters
Administration
67,000
2023
In December 2013, we completed the move of our corporate headquarters to 1 International Drive, Rye Brook, NY.
The new headquarters consists of approximately 67,000 square feet of office space for a lease period ending in
December 2023.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses,
including acquisitions and divestitures, environmental matters, intellectual property matters, product liability and
personal injury claims, employment and pension matters, government and commercial contract disputes. Although
we cannot predict the outcome of these and other proceedings, including the cases below, with certainty, we believe
that they will not have a material adverse effect on our consolidated financial position and results of operations.
On or about February 17, 2009, following a statement submitted to the Spanish Competition Authority (Comision
Nacional de la Competencia, "CNC") by Grupo Industrial Ercole Marelli, S.A. regarding an anti-competitive
agreement in which it said it had been participating, the CNC conducted an investigation at ITT Water &
Wastewater España S.A. (now named Xylem Water Solutions España S.A.), at the Spanish Association of Fluid
Pump Manufacturers (the "Association"), and at the offices of other members of the Association. On September 16,
2009, the Directorate of Investigation of the CNC commenced formal proceedings for alleged restrictive practices,
such as several exchanges of information and a recommendation on general terms and conditions of sale, allegedly
prohibited under applicable law. Following the conclusion of the formal proceedings, the CNC Council imposed fines
on the Association and nineteen Spanish manufacturers and distributors of fluid pumps, including a fine of Euro
2,373,675 applied to ITT Water & Wastewater España S.A. and ITT Corporation. In March 2012, the Company
appealed the CNC's decision to the Audiencia Nacional (the "High Court"), and vigorously defended the case. In
March 2013, the High Court upheld the determination of the CNC and the fine previously assessed. In April 2013,
the Company filed a notice of appeal before the Tribunal Supremo, the Supreme Court of Spain and in June 2013,
the Company filed an appellate brief with the Supreme Court, which was admitted. These appellate proceedings
are expected to last one to two years.
On October 4, 2013, the Company and Xylem Group LLC entered into a settlement agreement with respect to the
proceedings in the U.S. District Court for the Northern District of Georgia originally commenced on October 26,
2011 regarding the Company's use of the "XYLEM" mark. Pursant to the settelment agreement, both parties
26
released each other from all extisting claims, and all claims have been dismissed by the U.S. District Court for the
Northern District of Georgia with prejudice.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
27
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided regarding the executive officers of Xylem:
NAME
Steven R. Loranger
AGE
61
CURRENT TITLE
President and Chief Executive
Officer (2013)
OTHER BUSINESS EXPERIENCE DURING
PAST 5 YEARS
• Chairman Emeritus of Xylem Inc.
Board of Directors (2011)
• Chairman, President and Chief
Executive Officer, ITT
Corporation (2004)
Michael T. Speetzen
Christopher R. McIntire
44
50
Senior VP and Chief Financial
Officer (2011)
• VP of Finance, ITT Fluid and
Motion Control (2009)
Senior VP and President, Global
Analytics and Treatment (2013)
• Senior VP and President,
Analytics (2011)
• President and Chief Operating
Officer, Nova Analytics (2006)
Kenneth Napolitano
52
Senior VP and President, Global
Applied Water Systems (2013)
• Senior VP and President, Applied
Water Systems (2012)
• Senior VP and President,
Residential and Commercial
Water (2011)
• President, Residential and
Commercial Water (2009)
Angela A. Buonocore
Nicholas R. Colisto
Robyn T. Mingle
Colin R. Sabol
56
47
48
46
Senior VP and Chief
Communications Officer (2011)
• Senior VP and Chief
Communications Officer, ITT
Corporation (2008)
Senior VP and Chief Information
Officer (2012)
• VP and Chief Information Officer,
Hovnanian Enterprises, Inc.
(2008)
Senior VP and Chief Human
Resources Officer (2011)
• Senior VP of Human Resources,
Hovnanian Enterprises, Inc.
(2003)
Senior VP and President, Global
Dewatering (2013)
• Senior VP and Chief Strategy and
Growth Officer (2011)
• VP of Marketing and Business
Development, ITT Fluid and
Motion Control (2009)
Note: Date in parentheses indicates the year in which the position was assumed.
28
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
2013 and 2012 Market Price and Dividends
Our common stock trades publicly on the New York Stock Exchange under the trading symbol “XYL”. The following
table shows the high and low prices per share of our common stock as reported by the New York Stock Exchange
and the dividends declared per share for the periods indicated.
Fiscal Year ended December 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year ended December 31, 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
29.49 $
29.19
29.79
34.93
28.87 $
28.54
26.00
27.67
26.39 $
25.56
23.61
26.99
24.82 $
23.02
22.43
23.41
0.1164
0.1164
0.1164
0.1164
0.1012
0.1012
0.1012
0.1012
The closing price of our common stock on the NYSE on January 31, 2014 was $33.36 per share. As of January 31,
2014, there were 16,626 holders of record of our common stock.
Dividends are declared and paid on the common stock at the discretion of our Board of Directors and depend on
our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our Board.
Therefore, there can be no assurance as to what level of dividends, if any, will be paid in the future. In the first
quarter of 2014, we declared a dividend of $0.128 per share to be paid on March 19, 2014 for shareholders of
record on February 19, 2014.
There have been no unregistered offerings of our common stock during 2013.
Fourth Quarter 2013 Share Repurchase Activity
The following table summarizes our purchases of our common stock for the quarter ended December 31, 2013:
(in millions, except per share amounts)
Period
10/1/13 - 10/31/13
11/1/13 - 11/30/13
12/1/13 - 12/31/13
Total Number of Shares
Purchased
—
Average Price Paid per
Share (a)
—
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (b)
—
Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the Plans or
Programs (b)
$259.5
0.6
0.1
$34.03
$33.56
0.6
0.1
$239.1
$234.6
(a)
(b)
Average price paid per share is calculated on a settlement basis.
On August 18, 2012, the Board of Directors authorized the repurchase of up to two million shares of common stock with
no expiration date. The program's objective is to offset dilution associated with various Xylem employee stock plans by
acquiring shares in the open market from time to time. There were no shares purchased under this program during the
three months ended December 31, 2013 and there are 1.0 million shares (approximately $35 million based on a share
price of $34.60 per share) that may still be purchased under this plan.
On August 20, 2013, the Board of Directors authorized the repurchase of shares up to $250 million with no expiration
date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our
focus on growth. During the three months ended December 31, 2013, 0.7 million shares were repurchased at an
29
average price of $33.94 per share for a total cost of $25 million. There are up to $200 million in shares that may still be
purchased under this plan.
PERFORMANCE GRAPH
CUMULATIVE TOTAL RETURN
The following graph compares the relative performance of our common stock, the S&P 500 Index and the S&P 500
Industrials Index. This graph covers the period from October 13, 2011 (the first day our common stock began
“when-issued” trading on the NYSE) through December 31, 2013. Our common stock began “regular-way” trading
following the Spin-off on November 1, 2011.
October 13, 2011
October 31, 2011
December 31, 2011
December 31, 2012
December 31, 2013
$
XYL
S&P 500
S&P 1500
Industrials
Index
100 $
110
106
114
148
100 $
104
105
121
161
100
106
108
124
175
The graph is not, and is not intended to be, indicative of future performance of our common stock.
This performance graph shall not be deemed “filed” with the SEC or subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934, and should not be deemed incorporated by reference into any of our prior or
subsequent filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be
expressly set forth by specific reference in such filing.
30
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated and combined financial data for the five years ended
December 31, 2013. This selected consolidated financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated and combined
financial statements and the notes thereto included in this Report.
(in millions, except per share data)
Results of Operations Data:
Revenue
Gross profit
Gross margin
Operating income
Operating margin
Net income
Per Share Data:
Earnings per share:
Basic
Diluted
Basic shares outstanding (a)
Diluted shares outstanding (a)
Cash dividends per share
Balance Sheet Data (at period end):
Cash and cash equivalents
Working capital*
Total assets
Total debt
2013
2012
Year Ended
December 31,
2011 (c)
2010 (b)
2009
$ 3,837
1,499
$ 3,791
1,502
$ 3,803
1,461
$ 3,202
1,214
$ 2,849
1,037
39.1%
363
9.5%
228
39.6%
443
11.7%
297
38.4%
395
10.4%
279
37.9%
388
12.1%
329
36.4%
276
9.7%
263
$
1.23
1.22
185.2
186.0
$0.4656
$
533
930
4,896
1,241
$
1.60
1.59
185.8
186.2
$0.4048
$
504
859
4,679
1,205
$
1.51
1.50
185.1
185.3
$0.1012
$
318
834
4,400
1,206
$
$
$
$
1.78
1.78
184.6
184.6
— $
$
131
759
3,742
4
1.42
1.42
184.6
184.6
—
81
636
2,542
4
*
The Company calculates Working Capital as follows: Net Accounts Receivable + Net Inventory - Accounts Payable -
Customer Advances.
(a) On October 31, 2011, the Spin-off from ITT was completed through a tax-free stock dividend to ITT’s shareholders. ITT
shareholders received one share of Xylem common stock for each share of ITT common stock. As a result on
October 31, 2011, we had 184.6 million shares of common stock outstanding and this share amount is being utilized to
calculate earnings per share and diluted earnings per share for all prior periods presented.
(b) In 2010, we acquired Godwin Pumps of America, Inc. and Nova Analytics Corporation. These businesses in the
aggregate contributed revenue of $247 million in 2010 and $1,070 million of total assets on date of acquisition.
(c)
In 2011, we acquired YSI Incorporated, which contributed revenue of $35 million in 2011 and $371 million of total assets
on date of acquisition.
31
ITEM 7.
OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
The following discussion should be read in conjunction with our consolidated and combined financial statements
and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the
financial condition of our business during each of the fiscal years in the three-year period ended December 31,
2013. Except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and “the
Company” refer to Xylem Inc. and its subsidiaries. References in the consolidated and combined financial
statements to “ITT” or “parent” refer to ITT Corporation (former parent of Xylem) and its consolidated subsidiaries
(other than Xylem).
On and prior to October 31, 2011 (the "Distribution Date"), our financial position and results of operations consisted
of the water equipment and services businesses of ITT Corporation (“WaterCo”). The Spin-off (the "Spin-off") was
completed pursuant to the Distribution Agreement, dated as of October 25, 2011, among ITT, Exelis Inc. and Xylem.
After the Distribution Date, ITT did not beneficially own any shares of Xylem common stock and, following such
date, financial results of Xylem are not consolidated in ITT’s financial reporting. Xylem's financial position and
results of operations have been derived from ITT’s historical accounting records and are presented on a carve-out
basis through our Distribution Date, while our financial results for Xylem post Spin-off are prepared on a stand-
alone basis. In addition, financial information for the twelve months ended December 31, 2011 consists of the
consolidated results of Xylem on a stand-alone basis for the two months of November and December and the
combined results of operations of WaterCo for the first ten months on a carve-out basis.
Overview
Xylem 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. Our business focuses on providing technology-intensive equipment and services. Our product
and service offerings are organized into two segments: Water Infrastructure and Applied Water. Our segments are
aligned with each of the sectors in the cycle of water, water infrastructure and usage applications. The Water
Infrastructure segment focuses on the transportation, treatment and testing of water, offering a range of products
including water and wastewater pumps, treatment and testing equipment, and controls and systems. The Applied
Water segment serves many of the primary uses of water and focuses on the residential, commercial, industrial and
agricultural markets. The segment’s major products include pumps, valves, heat exchangers, controls and
dispensing equipment.
• Water Infrastructure serves the water infrastructure sector with pump systems that transport water from
aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making
the water fit to use; and pumping solutions that move the wastewater to treatment facilities where our mixers,
biological treatment, monitoring, and control systems provide the primary functions in the treatment process.
We provide analytical instrumentation used to measure water quality, flow, and level in wastewater, surface
water, and coastal environments.
• Applied Water serves the usage applications sector with water pressure boosting systems for heating,
ventilation and air conditioning and for fire protection systems to the residential and commercial building
services markets. In addition, our pumps, heat exchangers, valves and controls provide cooling to power
plants and manufacturing facilities, as well as circulation for food and beverage processing. We also provide
boosting systems for farming irrigation, pumps for dairy operations, and rainwater reuse systems for small
scale crop and turf irrigation.
We sell our equipment and services through direct and indirect channels that serve the needs of each customer
type. In the Water Infrastructure segment for the year ended 2013, we provided the majority of our sales direct to
customers with strong application expertise, while the remaining amount was through distribution partners. In the
Applied Water segment, we provided the majority of our sales in 2013 through long-standing relationships with the
world’s leading distributors, with the remainder going direct to customers.
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margin, segment operating income and
margins, earnings per share, orders growth, working capital, free cash flow and backlog, among others. In addition,
we consider certain measures to be useful to management and investors evaluating our operating performance for
the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of
32
assets. This information can assist investors in assessing our financial performance and measures our ability to
generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to,
dividends, acquisitions, share repurchases and debt repayment. These metrics, however, are not measures of
financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and
should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and
diluted) or net cash from operations as determined in accordance with GAAP. We consider the following non-GAAP
measures, which may not be comparable to similarly titled measures reported by other companies, to be key
performance indicators:
•
•
•
•
•
•
•
•
"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of
foreign currency fluctuations, intercompany transactions and contributions from acquisitions and divestitures.
Divestitures include sales of insignificant portions of our business that did not meet the criteria for
classification as a discontinued operation. The period-over-period change resulting from foreign currency
fluctuations assumes no change in exchange rates from the prior period.
"constant currency" defined as financial results adjusted for currency translation impacts by translating current
period and prior period activity using the same currency conversion rate. This approach is used for countries
whose functional currency is not the U.S. dollar.
"adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share,
respectively, adjusted to exclude non-recurring separation costs from the Spin-off (not excluded in 2013),
restructuring and realignment costs, special charges and tax-related special items. A reconciliation of adjusted
net income is provided below.
(in millions, except per share data)
Net income
Separation costs, net of tax (a)
Restructuring and realignment, net of tax
Special charges, net of tax
Tax-related special items
Adjusted net income
Weighted average number of shares - Diluted
Adjusted earnings per share
2013
2012
$
$
$
228 $
—
46
23
14
311 $
186.0
1.67 $
297
16
17
—
—
330
186.2
1.77
(a) Costs of $4 million ($2 million, net of tax) during 2013, associated with non-recurring separation activities are not
excluded from adjusted net income.
"operating expenses excluding separation, restructuring and realignment costs and special charges" defined
as operating expenses, adjusted to exclude non-recurring separation costs from the Spin-off (not excluded in
2013), restructuring and realignment costs and special charges.
"adjusted segment operating income" defined as segment operating income, adjusted to exclude non-
recurring separation costs from the Spin-off (not excluded in 2013), restructuring and realignment costs and
special charges, and "adjusted segment operating margin" defined as adjusted segment operating income
divided by total segment revenue.
“realignment costs” defined as non-recurring costs not included in restructuring costs that are incurred as
part of actions taken to reposition our business, including items such as professional fees, relocation, travel
and other costs.
“special charges" defined as costs incurred by the Company associated with the settlement of legal
proceedings with Xylem Group LLC and certain costs incurred for the change in chief executive officer made
during the third quarter of 2013, as well as costs incurred in the fourth quarter of 2013 for the contractual
indemnification of federal tax obligations to ITT and costs associated with a legal judgment arising from a
historical acquisition matter.
"free cash flow" defined as net cash provided by operating activities less capital expenditures, as well as
adjustments for other significant items that impact current results that management believes are not related
to our ongoing operations and performance. Our definition of free cash flow does not consider certain non-
discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.
33
(in millions)
Net cash provided by operating activities
Capital expenditures
Separation cash payments (a)
Free cash flow
2013
2012
$
$
324 $
(126)
—
198 $
396
(112)
28
312
(a) Separation cash payments associated with non-recurring separation activities are included in the 2013 free cash
flow. Separation cash payments are excluded from free cash flow in 2012 and include capital expenditures
associated with the Spin-off of $4 million.
Executive Summary
Xylem reported revenue for 2013 of $3,837 million, an increase of 1.2% from $3,791 million reported in 2012. The
2012 and 2013 acquisitions within our Water Infrastructure segment contributed $82 million of incremental revenue
during 2013 or 2.2%. Continued challenging market conditions in Europe drove a decrease in revenue while the
United States and emerging markets held flat. Operating income for the year ended 2013 was $363 million,
reflecting a decrease of $80 million or 18.1% compared to $443 million in 2012, which was primarily due to
increased restructuring costs, special charges in 2013 and geographic mix headwinds partially offset by the benefits
achieved from cost reductions and higher price realization.
Additional financial highlights for 2013 include the following:
• Net income of $228 million, or $1.22 per diluted share ($311 million or $1.67 on an adjusted basis)
• Free cash flow generation of $198 million, and net cash from operating activities of $324 million
• Orders of $3,912 million (a 3.4% increase from 2012 on a constant currency basis)
• We repurchased $67 million in shares under the $250 million share repurchase program approved by our
Board of Directors in 2013 and the previous share repurchase program implemented in 2012 as part of our
strategy to enhance shareholder return and offset the impact of employee stock plans
• Dividends paid to shareholders increased 15% in 2013
2014 Business Outlook
In 2014, we are expecting some of the trends that we saw in the second half of 2013 to continue. We expect a
continued slow recovery in the United States industrial markets combined with modest improved performance in our
European industrial end markets. Globally, while our industrial markets are improving in production and capital
outlay, continued weak performance in mining is expected. We expect public utilities to return to modest levels of
growth in 2014, with growth driven by operations and maintenance spending, partially offset by continued weakness
in capital expenditure spending by our customers. In general, we expect a slow recovery in most of the developed
country end markets and modestly higher levels of growth in emerging markets. We are continuing to execute
restructuring and realignment actions to reposition our European and North American business to optimize our cost
structure and improve our operational efficiency and effectiveness. During 2013, we incurred $40 million and $24
million in restructuring and realignment costs, respectively. As a result of the restructuring actions in 2013, we
realized $13 million of net savings. In 2014, we expect to incur approximately $30 to $35 million in restructuring
costs, and approximately $10 to $15 million in realignment costs. We expect to realize $25 million of incremental
net savings in 2014 from actions initiated in 2013, and an additional $10 million of net savings from our 2014
actions. Additional strategic actions we are taking include investing in a customer relationship management system,
growth platforms and new product development, as well as executing operating efficiencies through lean six sigma
and global sourcing initiatives. We also will refocus on the Xylem Management System which integrates our key
business processes.
34
Results of Operations
(in millions)
Revenue
Gross profit
Gross margin
Operating expenses excluding separation,
restructuring and realignment costs and
special charges (a)
Expense to revenue ratio
Restructuring and realignment costs
Separation costs (a)
Special charges
Total operating expenses
Operating income
Operating margin
Interest and other non-operating expense
(income), net
Income tax expense
Tax rate
Net income
$
2013
3,837
1,499
$
2012
3,791
1,502
$
2011
3,803
1,461
39.1%
39.6%
38.4%
1,048
27.3%
64
—
24
1,136
363
9.5%
1,013
26.7%
24
22
—
1,059
443
11.7%
65
70
23.5%
228
$
55
91
23.4%
297
$
$
979
25.7%
—
87
—
1,066
395
10.4%
12
104
27.4%
279
2013 v.
2012
2012 v.
2011
1.2 %
(0.2)%
(50)bp
3.5 %
60bp
166.7 %
NM
NM
7.3 %
(18.1)%
(220)bp
18.2 %
(23.1)%
10bp
(23.2)%
(0.3)%
2.8 %
120bp
3.5 %
100bp
NM
(74.7)%
NM
(0.7)%
12.2 %
130bp
358.3 %
(12.5)%
(400)bp
6.5 %
(a)
Separation costs of $4 million ($2 million, net of tax) during 2013 are included within the $1,048 million of operating
expenses.
NM Not Meaningful
2013 versus 2012
Revenue
Revenue generated for 2013 was $3,837 million, an increase of $46 million, or 1.2%, compared to $3,791 million in
2012. On a constant currency basis, revenue grew 1.1%. The following table illustrates the impact from organic
growth, recent acquisitions, and fluctuations in foreign currency, in relation to revenue during 2013.
(in millions)
2012 Revenue
Organic Growth
Acquisitions
Constant Currency
Foreign currency translation (a)
Total change in revenue
2013 Revenue
$ Change
% Change
$
$
3,791
(39)
82
43
3
46
3,837
(1.0)%
2.2 %
1.1 %
0.1 %
1.2 %
(a)
Foreign currency impact primarily due to fluctuations in the value of the Euro, Australian Dollar, South African Rand,
Swedish Krona, Canadian Dollar and British Pound against the US Dollar.
35
The following table summarizes revenue by segment for 2013 and 2012:
(in millions)
Water Infrastructure
Applied Water
Eliminations
Total
Water Infrastructure
2013
2012
2,457 $
1,444
(64)
3,837 $
2,425
1,424
(58)
3,791
$
$
As Reported
Change
Constant
Currency
Change
1.3%
1.4%
1.2%
1.5%
0.4%
1.1%
Water Infrastructure’s revenue increased $32 million, or 1.3% in 2013 (1.5% on a constant currency basis). Our
2012 and 2013 acquisitions contributed $82 million of incremental revenue in 2013.
Organic revenue decreased $46 million or 1.9% during the year which was substantially due to lower volumes
across the transport, treatment and test applications. The significant declines were primarily caused by weakness in
the Europe, Middle East and Africa treatment markets and declines in transport in the Asia Pacific markets from less
mining activity. Organic revenue performance improved year-over-year in the third and fourth quarters of 2013
driven by increases in transport revenue which reflected modest market recovery in northern and central Europe as
well as the United States. Treatment negatively impacted organic growth for the year as revenue decreased from
2012 substantially due to non-recurring large custom projects shipped in the prior year as well as project delays
from government funding uncertainties. Additionally, test applications, which had flat organic revenue in 2013,
experienced lower revenue for the year from delays in orders and the government sequestration in the United
States during the first half of 2013 which were offset by revenue growth in the second half of the year, specifically in
Europe, as well as incremental revenue from price increases, new products and cross-branding initiatives.
Foreign currency translation was unfavorable by $4 million for 2013 as compared to 2012.
Applied Water
Applied Water’s revenue increased $20 million, or 1.4% in 2013 (a 0.4% increase on a constant currency basis).
The growth on a constant currency basis was driven by organic revenue growth predominately due to irrigation and
industrial water applications.
Organic revenue increased $5 million or 0.4% for the year primarily due to irrigation application revenue caused by
drought conditions in the United States. Strength in the industrial water application also bolstered revenue,
particularly within China from large fire pump projects as well as in northern Europe from increased industrial
multistage pump revenue. These revenue increases were partially offset by weakness in Europe, particularly within
the residential and commercial building services markets of southern Europe, combined with sluggish industrial and
commercial building service markets in the United States and Latin America.
Foreign currency translation was favorable by $9 million for 2013 as compared to 2012.
Orders/Backlog
Orders received during 2013 increased by $130 million, or 3.4% to $3,912 million (a 3.4% increase on a constant
currency basis). These amounts include a benefit of $87 million from acquisitions. Organic order growth was $43
million for the year.
The Water Infrastructure segment orders increased $89 million, or 3.7% to $2,510 million (3.8% growth on a
constant currency basis), including $87 million from acquisitions. Organic orders increased slightly primarily due to
a strong second half of 2013 driven by higher transport volume from Europe public utilities and the dewatering
business combined with healthy growth in emerging markets. Orders increased in our Applied Water segment $45
million, or 3.2% to $1,468 million (2.7% growth on a constant currency basis), driven by strong performance in the
commercial building services and industrial water markets in China as well as orders within the residential building
services and agriculture markets in the United States during 2013, partially offset by weakness in Southern Europe
across all end markets.
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. Total backlog was $707 million at
36
December 31, 2013 and $647 million at December 31, 2012. We anticipate that more than 90% of the backlog at
December 31, 2013 will be recognized as revenue during 2014.
Gross Margin
Gross margins as a percentage of consolidated revenue declined to 39.1% in 2013 from 39.6% in 2012. The
decrease is attributable to negative price realization, geographic sales mix and additional costs associated with
recent acquisitions. These negative impacts were partially mitigated by benefits from restructuring savings and cost
saving initiatives such as lean six sigma and global sourcing.
Operating Expenses
(in millions)
Selling, General and Administrative (SG&A)
SG&A as a % of revenue
Research and Development (R&D)
R&D as a % of revenue
Restructuring and asset impairment charges
Separation Costs
Operating expenses
Expense to revenue ratio
Selling, General and Administrative Expenses
2013
2012
Change
$
$
$
$
986
25.7%
104
2.7%
42
4
1,136
29.6%
914
24.1%
106
2.8%
17
22
1,059
27.9%
7.9 %
160bp
(1.9)%
(10)bp
147.1 %
(81.8)%
7.3 %
170bp
SG&A increased by $72 million or 7.9% to $986 million or 25.7% of revenue in 2013, as compared to $914 million
or 24.1% of revenue in 2012. The increase in SG&A expenses as a percentage of revenue is primarily due to the
combined impacts from the legal settlement with Xylem Group LLC and costs incurred for the change in our chief
executive officer of $20 million. The increase was also driven by realignment costs of $17 million during 2013
incurred by the Company to reposition our European business in an effort to optimize our cost structure and
improve our operational efficiency and effectiveness. Acquisitions, increased pension costs and investments in
growth platforms also contributed to the increase.
Research and Development Expenses
R&D spending decreased $2 million or 1.9% to $104 million or 2.7% of revenue for 2013 as compared to $106
million or 2.8% of revenue in 2012.
Restructuring and Asset Impairment Charges
During 2013, we incurred restructuring costs of $31 million and $9 million in our Water Infrastructure and Applied
Water segments, respectively. These charges were incurred primarily in an effort to realign our organizational
structure in Europe and North America to address declines in sales volumes and optimize our cost structure. The
charges relate to the reduction in structural costs, including a decrease in headcount and consolidation of facilities.
During 2012, we recognized restructuring charges of $17 million related to restructuring related severance
payments for manufacturing reduction in force initiatives primarily within our Water Infrastructure segment.
Total expected costs associated with actions that commenced during 2013 are approximately $33 million for Water
Infrastructure and approximately $10 million for Applied Water. These costs primarily comprise severance charges.
These actions are expected to continue through 2014. As a result of actions initiated during 2013, we achieved net
savings of approximately $13 million in 2013 and estimate annual future net savings beginning in 2014 of
approximately $38 million.
Additionally, in the fourth quarter of 2013 we recorded a $2 million impairment charge related to three trade names
in our Water Infrastructure segment associated with acquired businesses within our Analytics operating unit,
reflecting a decline in their value since being acquired. Refer to Note 11, “Goodwill and Other Intangible Assets,” for
additional information.
37
Separation Costs
We had non-recurring separation costs of $4 million and $22 million, or $2 million and $16 million after tax during
2013 and 2012, respectively. The components of separation costs incurred during these periods are presented
below.
(in millions)
Rebranding and marketing costs
Advisory and professional fees
Information and technology costs
Employee retention and hiring costs
Lease termination and other real estate costs
Other
Total separation costs in operating income
Income tax benefit
Total separation costs, net of tax
Operating Income
2013
2012
— $
—
2
—
2
—
4
(2)
2 $
8
7
3
1
1
2
22
(6)
16
$
$
We generated operating income of $363 million during 2013, an $80 million or 18.1% decrease from the prior year
operating income of $443 million, primarily reflecting higher operating expenses as increased SG&A, and
restructuring and asset impairment charges more than offset reductions from lower separation costs and savings
from restructuring activities. The following table illustrates operating income results by business segments for 2013
and 2012.
(in millions)
Water Infrastructure
Applied Water
Segment operating income
Corporate and other
Total operating income
Operating margin
Water Infrastructure
Applied Water
Total Xylem
2013
2012
Change
$
$
271
167
438
(75)
363
$
$
11.0%
11.6%
9.5%
342
170
512
(69)
443
14.1%
11.9%
11.7%
(20.8)%
(1.8)%
(14.5)%
8.7 %
(18.1)%
(310)bp
(30)bp
(220)bp
38
The table included below provides a reconciliation from segment operating income to adjusted operating income,
and a calculation of the corresponding adjusted operating margin.
(in millions)
Water Infrastructure
Operating income
Separation costs
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Applied Water
Operating income
Separation costs
Restructuring and realignment costs
Adjusted operating income
Adjusted operating margin
Total Xylem
Operating income
Separation costs*
Restructuring and realignment costs
Special charges
Adjusted operating income*
Adjusted operating margin*
NM Not meaningful percentage change
2013
2012
Change
$
$
$
$
$
$
$
$
$
$
271
—
48
4
323
13.1%
167
—
16
183
12.7%
363
—
64
24
451
11.8%
342
4
19
—
365
15.1%
170
2
5
177
12.4%
443
22
24
—
489
12.9%
(20.8)%
NM
152.6 %
NM
(11.5)%
(200)bp
(1.8)%
NM
220.0 %
3.4 %
30bp
(18.1)%
NM
166.7 %
NM
(7.8)%
(110)bp
* Costs associated with non-recurring separation activities of $4 million ($2 million, net of tax) during 2013 are not
excluded from adjusted operating income.
Water Infrastructure
Operating income for our Water Infrastructure segment decreased $71 million or 20.8% (decreased $42 million or
11.5% on an adjusted basis) compared with the prior year. The 11.5% decrease was driven by lower volume,
inflation, unfavorable foreign exchange impacts, costs associated with the establishment of our European
headquarters and investments in growth platforms, specifically acquisitions and new product launches. The
decrease was partially offset by restructuring savings and cost reduction initiatives, such as global sourcing and
lean six sigma.
Applied Water
Operating income for our Applied Water segment decreased $3 million or 1.8% (increased $6 million or 3.4% on an
adjusted basis) compared to the prior year. The 3.4% increase was driven by lean initiatives, global sourcing and
price realization partially offset by inflation and new product development.
Interest Expense
Interest expense was $55 million for both 2013 and 2012, reflecting the same full year of interest expense related to
the issuance of $1.2 billion aggregate principal amount of senior notes issued in September 2011. Refer to Note 14,
“Credit Facilities and Long-Term Debt,” for further details.
Income Tax Expense
The income tax provision for 2013 was $70 million at an effective tax rate of 23.5% compared to $91 million at an
effective tax rate of 23.4% in 2012. The 2013 effective tax rate is higher than 2012 due to an increase in foreign
repatriations partially offset by mix of earnings.
39
Other Comprehensive Income/(Loss)
Other comprehensive income of $74 million in 2013 compared to a loss of $30 million in 2012, an improvement of
$104 million, was primarily due to a $34 million net gain in 2013 as compared to a net loss of $84 million in 2012
related to postretirement benefit plans. The net gain in 2013 was due to an increase in discount rates as well as
actual gains on plan assets in excess of the assumed long-term rate of return as compared to the net loss in 2012
which was due to a reduction in discount rates, partially mitigated by actual gains on plan assets in excess of the
assumed long-term rate of return. This year-over-year improvement was partially offset by a $33 million reduction in
foreign currency translation benefit primarily due to the Euro strengthening against the U.S. dollar. The effective tax
rate on other comprehensive income decreased as compared to 2012 due primarily to the shift in comprehensive
earnings from foreign currency translation, which is not taxable, as well as from a change in the jurisdictional mix of
net gains/losses from postretirement benefit plans.
2012 versus 2011
Revenue
Revenue generated for 2012 was $3,791 million, a decrease of $12 million, or 0.3%, compared to $3,803 million in
2011. On a constant currency basis, revenue grew 2.5%. The following table illustrates the impact from organic
growth, recent acquisitions, and fluctuations in foreign currency, in relation to revenue during the annual 2012
period.
(in millions)
2011 Revenue
Organic Growth
Acquisitions
Constant Currency
Foreign currency translation (a)
Total change in revenue
2012 Revenue
$ Change
% Change
$
$
3,803
2
94
96
(108)
(12)
3,791
0.1 %
2.4 %
2.5 %
(2.8)%
(0.3)%
(a)
Foreign currency impact primarily due to fluctuations of the Euro against the US Dollar.
The following table summarizes revenue by segment for 2012 and 2011:
(in millions)
Water Infrastructure
Applied Water
Eliminations
Total
Water Infrastructure
2012
2011
2,425 $
1,424
(58)
3,791 $
2,416
1,444
(57)
3,803
$
$
As Reported
Change
Constant
Currency
Change
0.4 %
(1.4)%
(0.3)%
3.7%
0.8%
2.5%
Water Infrastructure’s revenue increased $9 million, or 0.4% in 2012 (3.7% on a constant currency basis), including
incremental revenue of $94 million from acquisitions, consisting of YSI in 2011 and MJK and Heartland in 2012. The
acquisitions of YSI and MJK contributed $90 million of the incremental revenue as we continued our expansion in
the analytical instrumentation market.
Organic revenue decreased $6 million or 0.2% during the year which was primarily attributable to weakness in the
transport and treatment markets, as well as sustained drought conditions within the United States. Transport and
treatment decreased mostly due to a decline in the public utility sector of developed markets caused by a weak
capital project environment and delays on shipments. These declines were partially offset by strength in emerging
markets, specifically in the Latin America and Asia Pacific regions. The results also reflect decreases in the
dewatering rental and equipment sales as a result of the unfavorable dry weather conditions within North America
and lower coal and gas prices, offset slightly by a benefit from Super Storm Sandy. Overall growth was also muted
by continued weakness in Europe as a result of challenging economic conditions.
40
Foreign currency translation was unfavorable by $80 million for 2012 as compared to 2011.
Applied Water
Applied Water’s revenue decreased $20 million, or 1.4% in 2012 (a 0.8% increase on a constant currency basis).
The growth on a constant currency basis was driven by organic revenue growth.
Organic revenue grew $9 million or 0.6% for the year and was principally due to strength in the industrial water
sector from a favorable general industrial market across most regions, especially within the United States, Russia
and Asia Pacific markets. The residential and commercial pumps business increased slightly due to favorable
growth in the United States but was mostly eclipsed by declines from the weak economic conditions in Europe. The
warm, dry weather conditions in North America also drove an increase in the agriculture end market for the year.
Foreign currency translation was unfavorable by $32 million for 2012 as compared to 2011.
Orders/Backlog
Orders received during 2012 decreased by $65 million, or 1.7% to $3,782 million (a 1.3% increase on a constant
currency basis). These amounts include a benefit of $95 million from acquisitions. Organic order decline was $46
million for the year.
The Water Infrastructure segment orders decreased $33 million, or 1.3% to $2,421 million (2.2% growth on a
constant currency basis), including $95 million from acquisitions. Organic order volume decreased primarily due to
the delays in public utility capital expenditure orders coupled with reduced dewatering volumes from dry weather
conditions and slowdowns in the oil, gas and mining markets. Orders declined in our Applied Water segment $29
million, or 2.0% to $1,423 million (0.1% growth on a constant currency basis), driven by declining organic orders of
0.4%. The decline in organic order volume is primarily a result of the warm winter weather conditions in the United
States and Asia Pacific markets impacting the building services end markets, partially offset by strength in the
industrial and agriculture markets.
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. Total backlog was $647 million at
December 31, 2012 and $651 million at December 31, 2011.
Gross Margin
Gross margins as a percentage of consolidated revenue increased to 39.6% in 2012 from 38.4% in 2011. The
increase is attributable to benefits from price realization initiatives and cost improvements offset, in part, by an
unfavorable sales mix and inflation.
Operating Expenses
(in millions)
Selling, General and Administrative (SG&A)
SG&A as a % of revenue
Research and Development (R&D)
R&D as a % of revenue
Restructuring and asset impairment charges
Separation Costs
Operating expenses
Expense to revenue ratio
Selling, General and Administrative Expenses
2012
2011
Change
$
$
$
$
914
24.1%
106
2.8%
17
22
1,059
27.9%
877
23.1%
100
2.6%
2
87
1,066
28.0%
4.2 %
100bp
6.0 %
20bp
750 %
(74.7)%
0.7 %
(10)bp
SG&A increased by $37 million or 4.2% to $914 million or 24.1% of revenue in 2012, as compared to $877 million
or 23.1% of revenue in 2011. The increase in SG&A expenses is principally due to the impact of incremental costs
as a standalone Company and costs related to the MJK and Heartland acquisitions.
Additionally, in 2012 we incurred $7 million of realignment costs relating to realigning our European businesses to
improve our operational efficiencies.
41
Research and Development Expenses
R&D spending increased $6 million or 6.0% to $106 million or 2.8% of revenue for 2012 as compared to $100
million or 2.6% of revenue in 2011. These increases were primarily due to the impact from recent acquisitions, as
well as costs associated with the launching of new products.
Restructuring and Asset Impairment Charges
During 2012, we incurred restructuring costs of $17 million primarily related to restructuring-related severance
payments for reductions in force initiatives primarily within our Water Infrastructure segment. During 2011, we
incurred a $2 million charge related to the impairment of a facility in our Applied Water segment. As of
December 31, 2012, we consider those restructuring initiatives commenced to date to be substantially completed,
with a remaining liability of $9 million related to the 2012 restructuring actions.
Separation Costs
We had non-recurring pre-tax separation costs of $22 million and $87 million, or $16 million and $72 million after tax
during 2012 and 2011, respectively. The components of separation costs incurred during these periods are
presented below.
(in millions)
Rebranding and marketing costs
Advisory and professional fees
Information and technology costs
Employee retention and hiring costs
Lease termination and other real estate costs
Non-cash asset impairments (a)
Other
Total separation costs in operating income
Tax-related separation costs
Income tax benefit
Total separation costs, net of tax
2012
2011
8 $
7
3
1
1
—
2
22
—
(6)
16 $
13
18
19
14
10
8
5
87
6
(21)
72
$
$
(a)
During the third quarter of 2011, we recorded an impairment charge of $8 million on one of our facilities in China within
our Applied Water segment. Prior to the separation this was a shared facility among certain Xylem and ITT businesses
and in connection with the separation, the removal of certain ITT operations triggered an impairment evaluation. The
fair value of the applicable assets was calculated using the cost approach.
Operating Income
We generated operating income of $443 million during 2012, a 12.2% increase from the prior year, primarily
reflecting the benefits achieved from cost reductions and price improvements offset, in part, by an unfavorable sales
mix, acquisition costs and non-recurring separation costs. The following table illustrates operating income results by
business segments for 2012 and 2011.
(in millions)
Water Infrastructure
Applied Water
Segment operating income
Corporate and Other
Total operating income
Operating margin
Water Infrastructure
Applied Water
Total Xylem
2012
2011
Change
$
$
342
170
512
(69)
443
$
$
14.1%
11.9%
11.7%
343
160
503
(108)
395
14.2%
11.1%
10.4%
(0.3)%
6.3 %
1.8 %
12.2 %
(10)bp
80bp
130bp
42
The table included below provides a reconciliation from segment operating income to adjusted operating income,
and a calculation of the corresponding adjusted operating margin.
(in millions)
Water Infrastructure
Operating income
Separation costs
Restructuring and realignment costs
Adjusted operating income
Adjusted operating margin
Applied Water
Operating income
Separation costs
Restructuring and realignment costs
Adjusted operating income
Adjusted operating margin
Total Xylem
Operating income
Separation costs (a)
Restructuring and realignment costs
Adjusted operating income
Adjusted operating margin
2012
2011
Change
$
$
$
$
$
$
$
$
$
$
$
$
342
4
19
365
15.1%
170
2
5
177
12.4%
443
22
24
489
12.9%
343
16
—
359
14.9%
160
13
—
173
12.0%
395
87
—
482
12.7%
(0.3)%
1.7 %
20bp
6.3 %
2.3 %
40bp
12.2 %
1.5 %
20bp
(a)
Comprising non-recurring separation costs of $6 million and $29 million in our business segments and $16 million and
$58 million within Corporate for 2012 and 2011, respectively.
Water Infrastructure
Operating income for our Water Infrastructure segment decreased $1 million or 0.3% (increased $6 million or 1.7%
excluding separation, restructuring and realignment costs) compared with the prior year. The 1.7% increase was
predominately driven by incremental operating income of $20 million from the acquisitions of YSI, MJK and
Heartland combined with price realization efforts and operating cost reductions. These benefits were largely offset
by inflation costs on labor and material as well as unfavorable mix from lower dewatering revenue and higher
revenue in emerging markets.
Applied Water
Operating income for our Applied Water segment increased $10 million or 6.3% ($4 million or 2.3% excluding
separation, restructuring and realignment costs) compared to the prior year. The 2.3% increase is primarily
attributable to operating cost reductions put in place by the Company and savings achieved from restructuring
actions in the latter part of 2011. The increases were offset, in part, by lower sales volume, an unfavorable sales
mix and inflationary pressures on labor and materials.
Interest Expense
Interest expense was $55 million and $17 million for 2012 and 2011, respectively. The increase during the current
year reflected a full year of interest expense related to the issuance of $1.2 billion aggregate principal amount of
senior notes issued in September 2011. Refer to Note 14, “Credit Facilities and Long-Term Debt,” for further details.
Income Tax Expense
The income tax provision for 2012 was $91 million at an effective tax rate of 23.4% compared to $104 million at an
effective tax rate of 27.4% in 2011. The 2012 effective tax rate is lower than 2011 as a result of the decrease in non-
deductible separation costs and a change in the mix of earnings.
Effective January 1, 2013, the Swedish government enacted legislation that will increase the effective tax rate of the
Company. The Company has implemented strategies to address the impact of this legislation.
43
Other Comprehensive Income/(Loss)
Other comprehensive loss was $30 million in 2012 compared to a loss of $132 million in 2011, primarily due to the
favorable impact of foreign currency translation adjustments in 2012 versus the unfavorable impact in 2011. In
2012, foreign currency translation adjustment was a positive impact of $48 million as compared to 2011, which was
a negative impact of $61 million. The year-over-year change was primarily due to movements in the Euro against
the US Dollar. Other comprehensive loss was further impacted by a loss from postretirement benefit plans of $84
million loss in 2012 compared to $74 million loss in 2011. This was primarily due to net foreign exchange losses
experienced on the benefit obligations which more than offset net foreign exchange gains on plan assets. The
effective tax rate on other comprehensive income increased as compared to 2011 due primarily to the shift in
comprehensive earnings from foreign currency translation, which is not taxable, as well as from a change in the
jurisdictional mix of net gains/losses from postretirement benefit plans.
Liquidity and Capital Resources
The following table summarizes our sources and uses of cash:
(in millions)
Operating activities
Investing activities
Financing activities
Foreign exchange
Total
Sources and Uses of Liquidity
Operating Activities
Year Ended December 31,
2013
2012
2011
$
$
324 $
(199)
(100)
4
29 $
396 $
(147)
(74)
11
186 $
449
(423)
172
(11)
187
During 2013, net cash provided by operating activities was $324 million, compared to $396 million in 2012. The $72
million year-over-year decrease was driven by an increase in the use of working capital in both segments, due to
increased accounts receivable primarily from longer collection times in Europe, and increased inventories to support
a higher backlog as well as to be able to support shorter lead times. Additionally, revenue volume declines during
the first half of 2013 reduced cash inflow from income. Payments made for restructuring and realignment activities
in 2013 also contributed to the decline, largely offset by lower tax payments.
During 2012, net cash provided by operating activities was $396 million, compared to $449 million in 2011. The $53
million year-over-year decrease is primarily the result of interest payments on debt of $53 million in 2012, higher tax
payments of $40 million and additional contributions to postretirement benefit plans, partially offset by an increase
in receivable collections and a decline in payments for separation costs.
Investing Activities
Cash used in investing activities was $199 million for 2013, compared to $147 million in 2012 and $423 million in
2011. The changes in investing activities are driven almost entirely by cash used for acquisitions and, to a lesser
extent, from changes in spending on capital expenditures. We invested $81 million for the acquisitions during 2013
while $41 million was used in 2012 and $309 million in 2011. Capital expenditures for 2013 of $126 million were $14
million greater than in 2012 primarily due to information technology investments within both the Applied Water
segment and Corporate as a result of system requirements subsequent to the Spin-off from ITT in addition to capital
expenditures required for the relocation of our corporate headquarters as required by the Spin-off from ITT. In 2012
we spent $112 million on capital expenditures, a decrease of $14 million over 2011, primarily due to a reduction in
dewatering asset purchases to align with current rental demand.
Financing Activities
Cash used by financing activities was $100 million and $74 million during 2013 and 2012, respectively compared to
cash provided by financing activities of $172 million during 2011. The increase in cash used for financing activities
in 2013 compared to 2012 was primarily driven by an increase in share repurchase activity of $60 million and an
increase in dividend payments of $12 million. The 2013 share repurchase activity was impacted by $50 million of
44
repurchases under a new share repurchase program approved on August 20, 2013 by the Board of Directors to
repurchase up to $250 million in shares.
Additionally, there was an increase in short-term debt for borrowings under the European Investment Bank facility of
$38 million in 2013. The decrease in financing activities from 2011 to 2012 was primarily attributable to net
proceeds from the issuance of $1.2 billion in Senior Notes which funded a net cash transfer of $1 billion to our
former parent, ITT, in 2011. In general, the components of net transfers to ITT included: (i) cash transfers from the
Company to parent, (ii) cash investments from our parent used to fund operations, capital expenditures and
acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of the parent company’s corporate
expenses described in this Report.
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations, and access
to the bank and capital markets.
Our global funding requirements are continually monitored with appropriate strategies executed to ensure liquidity
needs are met cost effectively. Based on our current global cash positions, cash flows for operations and access to
the commercial paper markets, we believe there is sufficient liquidity to meet our funding requirements. In addition,
our existing committed credit facilities and access to the public debt markets would provide further liquidity if
required.
Historically, we have generated operating cash flow sufficient to fund our primary cash needs centered on operating
activities, working capital, capital expenditures, and strategic investments. If our cash flows from operations are less
than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term
and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable
terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a
credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be
no assurance that we will continue to have access to the capital markets on terms acceptable to us. We cannot
assure that such financing will be available to us on acceptable terms or that such financing will be available at all.
We anticipate that our present sources of funds, including funds from operations, will provide us with sufficient
liquidity and capital resources to meet our liquidity and capital needs in both the United States and outside of the
United States over the next twelve months.
Senior Notes
On September 20, 2011, we issued 3.550% Senior Notes of $600 million aggregate principal amount due
September 2016 (the "Senior Notes due 2016") and 4.875% Senior Notes of $600 million aggregate principal
amount due October 2021 (the "Senior Notes due 2021" and together with the Senior Notes due 2016, the "Senior
Notes").
The Senior Notes include covenants which restrict our ability, subject to exceptions, to incur debt secured by liens
and engage in sale and lease-back transactions, as well as provide for customary events of default (subject, in
certain cases, to receipt of notice of default and/or customary grace and cure periods). We may redeem the Senior
Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the
Senior Notes to be redeemed, plus a make-whole premium. As of December 31, 2013, we were in compliance with
all covenants. If a change of control triggering event (as defined in the Senior Notes indenture) occurs, we will be
required to make an offer to purchase the Senior Notes at a price equal to 101% of their principal amount plus
accrued and unpaid interest to the date of repurchase.
Interest on the Senior Notes due 2016 is payable on March 20 and September 20 of each year. Interest on the
Senior Notes due 2021 is payable on April 1 and October 1 of each year.
Four Year Competitive Advance and Revolving Credit Facility
Effective October 31, 2011, Xylem and its subsidiaries entered into a Four Year Competitive Advance and Revolving
Credit Facility (the "Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of
lenders. The Credit Facility provides for an aggregate principal amount of up to $600 million of (i) a competitive
advance borrowing option which will be provided on an uncommitted competitive advance basis through an auction
45
mechanism (the "competitive loans"), (ii) revolving extensions of credit (the "revolving loans") outstanding at any
time and (iii) the issuance of letters of credit in a face amount not in excess of $100 million outstanding at any time.
At our election, the interest rate per annum applicable to the competitive advances will be based on either (i) a
Eurodollar rate determined by reference to LIBOR, plus an applicable margin offered by the lender making such
loans and accepted by us or (ii) a fixed percentage rate per annum specified by the lender making such loans. At
our election, interest rate per annum applicable to the revolving loans will be based on either (i) a Eurodollar rate
determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin or (ii) a
fluctuating rate of interest determined by reference to the greatest of (a) the prime rate of JPMorgan Chase Bank,
N.A., (b) the U.S. Federal Funds effective rate plus half of 1% or (c) the Eurodollar rate determined by reference to
LIBOR, adjusted for statutory reserve requirements, in each case, plus an applicable margin.
In accordance with the terms, we may not exceed a maximum leverage ratio of 3.50 (based on a ratio of total debt
to earnings before interest, taxes, depreciation and amortization) throughout the term. As of December 31, 2013,
we were in compliance with all covenants. The Credit Facility also contains limitations on, among other things,
incurring debt, granting liens, and entering sale and leaseback transactions. In addition, the Credit Facility contains
other terms and conditions such as customary representations and warranties, additional covenants and customary
events of default.
As of December 31, 2013, this credit facility remains undrawn.
Research and Development Facility Agreement
On December 4, 2013, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D
Facility Agreement") with The European Investment Bank (the "EIB") to add an additional borrower under the
facility. The facility provides an aggregate principal amount of up to €120 million (approximately $165 million) to
finance research projects and infrastructure development in the European Union. The Company's wholly-owned
subsidiaries in Luxembourg, Xylem Holdings S.a.r.l. and Xylem International S.a.r.l., are the borrowers under the
R&D Facility Agreement. The obligations of the borrowers under the R&D Facility Agreement are guaranteed by the
Company under an Amended and Restated Deed of Guarantee, dated as of December 4, 2013, in favor of the EIB.
The funds are available to finance research and development projects during the period from 2013 through 2016 at
the Company's R&D facilities in Sweden, Germany, Italy, the United Kingdom, Austria, Norway and Hungary.
Under the R&D Facility Agreement, the borrower can draw loans with a maturity of no longer than 12 years. The
R&D Facility Agreement provides for Fixed Rate loans and Floating Rate loans. The interest rate per annum
applicable to Fixed Rate loans will be at a fixed percentage rate per annum specified by the EIB which includes the
applicable margin. The interest rate per annum applicable to Floating Rate loans will be at the rate determined by
reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in Pounds Sterling or U.S. Dollars, plus
an applicable spread specified by the EIB which includes the applicable margin. The applicable margin for both
Fixed Rate loans and Floating Rate loans shall be determined by reference to the credit rating of the Company.
In accordance with the terms of the R&D Facility Agreement, we may not exceed a maximum leverage ratio of 3.50
(based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) throughout the term.
As of December 31, 2013, we were in compliance with all covenants. The R&D Facility Agreement also contains
limitations on, among other things, incurring debt, granting liens, and entering sale and leaseback transactions. In
addition, the R&D Facility Agreement contains other terms and conditions such as customary representations and
warranties, additional covenants and customary events of default.
As of December 31, 2013, $38 million was outstanding under the R&D Facility Agreement. Although the borrowing
term for this arrangement is for five years, we have classified it as short-term debt on our Consolidated Balance
Sheet since we intend to repay this obligation in less than one year.
Non-U.S. Operations
For 2013 and 2012, we generated 62% and 63%, respectively, of our revenue from non-U.S. operations. As we
continue to grow our operations in the emerging markets and elsewhere outside of the United States, we expect to
continue to generate significant revenue from non-U.S. operations and we expect our cash will be predominately
held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available
funds among the many subsidiaries through which we conduct business and the cost effectiveness with which
those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other
international subsidiaries when it is cost effective to do so. Our intent is to indefinitely reinvest all but $84 million of
46
these funds outside of the United States. However, we continually review our domestic and foreign cash profile,
expected future cash generation and investment opportunities that support our current designation of these funds
as being indefinitely reinvested and reassess whether there is a demonstrated need to repatriate funds held
internationally to support our U.S. operations. If, as a result of our review, it is determined that all or a portion of the
funds may be needed for our operations in the United States, we would be required to accrue U.S. taxes related to
future tax payments associated with the repatriation of these funds. As of December 31, 2013, our foreign
subsidiaries were holding $423 million in cash or marketable securities.
As of December 31, 2013, our excess of financial reporting over the tax basis of investments in certain foreign
subsidiaries totaled $1.9 billion. We have not asserted that $84 million of our excess basis difference will be
indefinitely reinvested and have therefore provided for United States or additional foreign withholding taxes for that
portion. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under
certain other circumstances.
Contractual Obligations
The following table summarizes our contractual commitments as of December 31, 2013:
(in millions)
Debt and capital lease obligations (1)
Interest payments (2)
$
Operating lease obligations
Purchase obligations (3)
Other long-term obligations reflected on
the balance sheet
2014
2015 - 2016
2017 - 2018
Thereafter
Total
42 $
51
63
68
1
600 $
94
90
4
4
— $
59
46
—
2
600 $
78
26
—
13
1,242
282
225
72
20
Total commitments
$
225 $
792 $
107 $
717 $
1,841
In addition to the amounts presented in the table above, we have recorded liabilities for uncertain tax positions of $30 million.
These amounts have been excluded from the contractual obligations table due to an inability to reasonably estimate the timing of
such payments in individual years. Further, benefit payments which reflect expected future service related to the Company's
pension and other postretirement employee benefit obligations are presented in Note 15, “Postretirement Benefit Plans” and not
included in the above table. Finally, estimated environmental payments are excluded from the table above. We estimate, based
on historical experience, that we will spend between $1 million and $4 million per year on environmental investigation and
remediation. At December 31, 2013, we had estimated and accrued $8 million related to environmental matters.
(1) Refer to Note 14, “Credit Facilities and Long-Term Debt,” in the notes to the consolidated financial statements for
discussion of the use and availability of debt and revolving credit agreements. Amounts represent principal payments of
long-term debt including current maturities and exclude unamortized discounts.
(2) Amounts represent estimate of future interest payments on long-term debt outstanding as of December 31, 2013.
(3) Represents unconditional purchase agreements that are enforceable and legally binding and that specify all significant
terms to purchase goods or services, including fixed or minimum quantities to be purchased; fixed, minimum or variable
price provisions; and the approximate timing of the transaction. Purchase agreements that are cancellable without
penalty have been excluded.
Off-Balance Sheet Arrangements
As of December 31, 2013, we have issued guarantees for the debt and other obligations of consolidated
subsidiaries. We do not consider the maximum exposure to be material either individually or in the aggregate.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of
contingent liabilities. Management bases its estimates on historical experience and on various other assumptions
that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources.
Significant accounting policies used in the preparation of the Consolidated and Combined Financial Statements are
discussed in Note 1, “Summary of Significant Accounting Policies,” in the notes to the consolidated and combined
financial statements. Accounting estimates and assumptions discussed in this section are those that we consider
47
most critical to an understanding of our financial statements because they are inherently uncertain, involve
significant judgments, include areas where different estimates reasonably could have been used, and changes in
the estimate that are reasonably possible could materially impact the financial statements. Management believes
that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these
areas could differ from management’s estimates under different assumptions or conditions.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collectability of the sales price is reasonably assured. For
product sales, delivery does not occur until the products have been shipped, risk of loss has been transferred to the
customer and the contractual terms have been fulfilled. In instances where contractual terms include a provision for
customer acceptance, revenue is recognized when either (i) we have previously demonstrated that the product
meets the specified criteria based on either seller- or customer-specified objective criteria or (ii) upon formal
acceptance received from the customer where the product has not been previously demonstrated to meet
customer-specified objective criteria. Revenue on service and repair contracts is recognized after services have
been agreed to by the customer and rendered.
We enter into contracts to sell our products and services, and while the majority of our sales agreements contain
standard terms and conditions, certain agreements contain multiple elements or non-standard terms and conditions.
Where sales agreements contain multiple elements or non-standard terms and conditions, judgment is required to
determine the appropriate accounting, including whether the deliverables specified in these agreements should be
treated as separate units of accounting for revenue recognition purposes, and, if so, how the transaction price
should be allocated among the elements and when to recognize revenue for each element. When a sale involves
multiple deliverables, the total revenue from the arrangement is allocated to each unit of accounting based on the
relative selling price of the deliverable to all other deliverables in the contract. Revenue for multiple element
arrangements is recognized when the appropriate revenue recognition criteria for the individual deliverable have
been satisfied. The allocation of sales price between elements may impact the timing of revenue recognition, but
will not change the total revenue recognized on the arrangement. For delivered elements accounted for as separate
units of accounting in a multiple element arrangement, revenue is recognized only when the delivered elements
have standalone value, there are no uncertainties regarding customer acceptance and there are no customer-
negotiated refund or return rights affecting the sales recognized.
We record a reduction in revenue at the time of sale for estimated product returns, rebates and other allowances,
based on historical experience and known trends.
Warranty Accrual. Accruals for estimated expenses related to warranties are made at the time products are sold or
services are rendered and are recorded as a component of cost of revenue. These accruals are established using
historical information on the nature, frequency and average cost of warranty claims and consider any factors that
may cause differences in expected future warranty costs as compared to historical claim experience. While we
engage in extensive product quality programs and processes, we base our estimated warranty obligation on
product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery
costs incurred in correcting a product failure, as well as specific product class failures outside of our baseline
experience. We assess the adequacy of our recorded warranty liabilities quarterly and adjust amounts as
necessary.
Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the
financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which
we expect the differences will reverse. Based on the evaluation of available evidence, we recognize future tax
benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than not we will
realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets
and reflect any changes to our estimate of the amount we are more likely than not to realize in the valuation
allowance, with a corresponding adjustment to earnings or other comprehensive income, as appropriate.
In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary
differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future
taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and
changes to future taxable income estimates.
Our effective tax rate reflects the impact of certain undistributed foreign earnings for which we have not provided
U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan foreign
earnings remittance amounts based on projected cash flow needs, as well as the working capital and long-term
48
investment requirements of our foreign subsidiaries and our domestic operations. Based on these assumptions, we
estimate the amount we will distribute to the United States and provide the U.S. federal taxes due on these
amounts. Material changes in our estimates of cash, working capital and long-term investment requirements in the
various jurisdictions in which we do business could impact our effective tax rate.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations
in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities
for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and to the
extent to which, additional taxes will be due. Furthermore, we recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement.
We adjust our liability for uncertain tax positions in light of changing facts and circumstances; however, due to the
complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different
from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate
assessment, an additional tax expense would result. If a payment of these amounts ultimately proves to be less
than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period
when we determine the liabilities are no longer necessary.
Goodwill and Intangible Assets. We review goodwill and indefinite-lived intangible assets for impairment annually
and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.
We also review the carrying value of our finite-lived intangible assets for potential impairment when impairment
indicators arise. We conduct our annual impairment test as of the first day of the fourth quarter. We perform a two-
step impairment test for goodwill. In the first step, we compare the estimated fair value of each reporting unit to its
carrying value. If the estimated fair value of the reporting unit exceeds the carrying value of the net assets assigned
to that reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value
of the net assets assigned to the reporting unit exceeds its fair value, then we must perform the second step of the
impairment test in order to measure the impairment loss to be recorded, if any. If the carrying value of a reporting
unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. In our
annual impairment test for indefinite-lived intangible assets, we compare the fair value of those assets to their
carrying value. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible
asset is less than its carrying value. We estimate the fair value of our reporting units and intangible assets with
indefinite lives using an income approach. Under the income approach, we calculate fair value based on the
present value of estimated future cash flows.
Determining the fair value of a reporting unit or an indefinite-lived intangible asset is judgmental in nature and
involves the use of significant estimates and assumptions, particularly related to future operating results and cash
flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating
margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future
economic and market conditions and identification of appropriate market comparable data. In addition, the
identification of reporting units and the allocation of assets and liabilities to the reporting units when determining the
carrying value of each reporting unit also require judgment. Goodwill is tested for impairment at either the operating
segment identified in Note 21, “Industry Segment and Geographic Data,” of the consolidated and combined
financial statements, or one level below. The fair value of our reporting units and indefinite-lived intangible assets is
based on estimates and assumptions that are believed to be reasonable. Significant changes to these estimates
and assumptions could adversely impact our conclusions. Actual future results may differ from those estimates.
During the fourth quarter of 2013 we performed our annual impairment assessment and determined that that the
estimated fair values of our goodwill reporting units were substantially in excess of each of their carrying values with
the exception of our Analytics business within our Water Infrastructure segment. While the fair value of the Analytics
business initially increased over the first couple of years after acquisition, challenging economic conditions,
including reduced government spending in the U.S. and sluggish growth in European markets, have led to a
reduction in fair value during the past two years. Our 2013 impairment analysis indicated that the fair value of the
Analytics reporting unit exceeded its carrying value by approximately 18%. The goodwill associated with the
Analytics business was $439 million at December 31, 2013. However, future goodwill impairment tests could result
in a charge to earnings. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth
quarter and whenever events and changes in circumstances indicate there may be a potential impairment.
49
During the fourth quarter of 2013 we performed our annual impairment test of our indefinite-lived intangibles assets
which resulted in an impairment charge of $2 million related to trade names within our Water Infrastructure
segment. Refer to Note 11, “Goodwill and Other Intangible Assets,” for additional information.
Postretirement Plans. Company employees around the world participate in numerous defined benefit pension
plans. The determination of projected benefit obligations and the recognition of expenses related to these pension
plans are dependent on various assumptions. These major assumptions primarily relate to discount rates, expected
long-term rates of return on plan assets, rate of future compensation increases, mortality, health care inflation and
termination (some of which are disclosed in Note 15, “Postretirement Benefit Plans,” in the notes to the
consolidated and combined financial statements) and other factors. Actual results that differ from our assumptions
are accumulated and are amortized generally over the estimated future working life of the plan participants, or for
plans with all or substantially all inactive participants, over the average remaining life expectancy.
Significant Assumptions
Management develops each assumption using relevant Company experience, in conjunction with market-related
data for each individual country in which such plans exist. All assumptions are reviewed annually with third-party
consultants and adjusted as necessary. The table included below provides the weighted average assumptions used
to estimate our defined benefit pension obligations and costs as of and for the years ended 2013 and 2012.
Benefit Obligation Assumptions
Discount rate
Rate of future compensation increase
Net Periodic Benefit Cost Assumptions
Discount rate
Expected long-term return on plan assets
Rate of future compensation increase
2013
2012
U.S.
Int’l
U.S.
Int’l
4.79%
NM
4.13%
8.00%
4.50%
4.23%
3.48%
4.04%
7.33%
3.50%
4.13%
4.50%
4.87%
8.00%
4.50%
4.04%
3.50%
4.76%
7.35%
3.58%
NM Not meaningful. During 2013, an amendment to one of the Company's business unit's pension plans, the Xylem
Standard Hourly Bargaining Unit Pension Plan, modified the benefit formula. Similar to all other U.S. pension plans,
pension benefits for future service will be based on years of service and not impacted by future compensation
increases.
We determine the expected long-term rate of return on plan assets by evaluating both historical returns and
estimates of future returns. Specifically, the Company analyzes the estimated future returns based on independent
estimates of asset class returns and evaluates historical broad market returns over long-term timeframes based on
the strategic asset allocation, which is detailed in Note 15, “Postretirement Benefit Plans,” in the notes to the
consolidated financial statements.
Based on the approach described above, the chart below shows weighted average actual returns versus the
weighted average expected long-term rates of return for our pension plans that were utilized in the calculation of the
net periodic pension cost for each respective year.
Expected long-term rate of return on plan assets
Actual rate of return on plan assets
2013
2012
2011
7.40%
10.17%
7.42%
10.09%
7.52 %
(1.40)%
For the recognition of net periodic pension cost, the calculation of the expected long-term rate of return on plan
assets is generally derived using a market-related value of plan assets based on average asset values at the
measurement date over the last five years. The use of fair value, rather than a calculated value, could materially
affect net periodic pension cost. Our weighted average expected long-term rate of return on plan assets for all
pension plans, effective January 1, 2014 is 7.38%. We estimate that every 25 basis point change in the expected
return on plan assets impacts the expense by $1 million.
The discount rate reflects our expectation of the present value of expected future cash payments for benefits at the
measurement date. A decrease in the discount rate increases the present value of benefit obligations and increases
50
pension expense. We base the discount rate assumption on current investment yields of high-quality fixed income
investments during the retirement benefits maturity period. The pension discount rate was determined by
considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero and thirty years,
developed by the plan’s actuaries. Annual benefit payments are then discounted to present value using this yield
curve to develop a single-point discount rate matching the plan’s characteristics. Our weighted average discount
rate for all pension plans effective January 1, 2014, is 4.29%. We estimate that every 25 basis point change in the
discount rate impacts the expense by $1 million.
The rate of future compensation increase assumption reflects our long-term actual experience and future and near-
term outlook. Effective January 1, 2014, our expected rate of future compensation is 3.48% for all pension plans.
The estimated impact of a 25 basis point change in the expected rate of future compensation is less than $1 million.
The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.19% for
2014, decreasing ratably to 5.00% in 2020. An increase or decrease in the health care trend rates by one percent
per year would impact the aggregate annual service and interest components by less than $1 million, and impact
the benefit obligation by approximately $8 million. To the extent that actual experience differs from these
assumptions, the effect will be amortized over the average future service of the covered active employees.
We currently anticipate making contributions to our pension and postretirement benefit plans in the range of $40
million to $50 million during 2014, of which $11 million is expected to be made in the first quarter.
Funded Status
Funded status is derived by subtracting the respective year-end values of the projected benefit obligations from the
fair value of plan assets. We estimate that every 25 basis point change in the discount rate impacts the funded
status by approximately $25 million.
Fair Value of Plan Assets
The plan assets of our pension plans comprise a broad range of investments, including domestic and foreign equity
securities, interests in private equity and hedge funds, fixed income investments, insurance contracts, real estate,
and cash and cash equivalents.
A portion of our pension benefit plan assets portfolio comprises investments in private equity and hedge funds. The
private equity and hedge fund investments are generally measured at net asset value. However, in certain
instances, the values reported by the asset managers were not current at the measurement date. Accordingly, we
made estimate adjustments to the last reported value where necessary to measure the assets at fair value at the
measurement date. These adjustments consider information received from the asset managers, as well as general
market information. The adjustment recorded at December 31, 2013 and 2012 for these assets represented less
than one half of one percent of total plan assets in each respective year. Asset values for other positions were
generally measured using market observable prices. We estimate that a 5% change in asset values will impact
funded status by approximately $24 million.
New Accounting Pronouncements
See Note 2, “Recently Issued Accounting Pronouncements,” in the notes to the consolidated and combined
financial statements for a complete discussion of recent accounting pronouncements. There were no new
pronouncements which we expect to have a material impact on our financial condition and results of operations in
future periods.
51
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange and interest rates. These exposures
are actively monitored by management. Our exposure to foreign exchange rate risk is due to certain costs, revenue
and borrowings being denominated in currencies other than one of our subsidiaries functional currency. Similarly,
we are exposed to market risk as the result of changes in interest rates which may affect the cost of our financing. It
is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures.
Foreign Currency Exchange Rate Risk
Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and
intercompany transactions denominated in foreign currencies. We may use derivative financial instruments to offset
risk related to receipts from customers and payments to suppliers, when it is believed that the exposure will not be
limited by our normal operating and financing activities. In January 2012, we began to enter into currency forward
contracts periodically in order to manage the exchange rate fluctuation risk on certain intercompany transactions
associated with third party sales and purchases. Our principal currency exposures relate to the Euro, Swedish
Krona, British Pound, Australian Dollar, Canadian Dollar, Polish Zloty, and Hungarian Forint. We estimate that a
hypothetical 10% adverse movement in foreign currency exchange rates would not be material to Xylem’s financial
position and results of operations.
Interest Rate Risk
As of December 31, 2013, we do not have a material exposure to interest rate risk as our debt portfolio entirely
comprises long-term, fixed-rate instruments. We do not account for our long-term debt using the fair value option.
Commodity Price Exposures
Portions of our business are exposed to volatility in the prices of certain commodities, such as copper, nickel and
aluminum, among others. Our primary exposure to this volatility resides with the use of these materials in
purchased component parts. We generally maintain long-term fixed price contracts on raw materials and
component parts; however, we are prone to exposure as these contracts expire. We estimate that a hypothetical
10% adverse movement in prices for raw metal commodities would not be material to our financial position and
results of operations.
52
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Audited Consolidated and Combined Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Income Statements for the Years Ended December 31, 2013, 2012 and
2011
Consolidated and Combined Statements of Comprehensive Income for the Years Ended December 31,
2013, 2012 and 2011
Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2013, 2012
and 2011
Consolidated and Combined Statements of Changes in Stockholders’ Equity for the Years Ended
December 31, 2013, 2012 and 2011
Notes to Consolidated and Combined Financial Statements:
Note 1 Summary of Significant Accounting Policies
Note 2 Recently Issued Accounting Pronouncements
Note 3 Acquisitions
Note 4 Restructuring and Asset Impairment Charges
Note 5 Separation Costs
Note 6 Other Non-Operating Income, Net
Note 7 Income Taxes
Note 8 Earnings Per Share
Note 9 Inventories
Note 10 Property, Plant and Equipment
Note 11 Goodwill and Other Intangible Assets
Note 12 Derivative Financial Instruments
Note 13 Accrued and Other Current Liabilities
Note 14 Credit Facilities and Long-Term Debt
Note 15 Postretirement Benefit Plans
Note 16 Stock-Based Compensation
Note 17 Capital Stock
Note 18 Accumulated Other Comprehensive Income (Loss)
Note 19 Commitment and Contingencies
Note 20 Related Party Transactions
Note 21 Industry Segment and Geographic Data
Note 22 Supplemental Information
Note 23 Quarterly Financial Data
53
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55
56
57
58
59
60
66
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71
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76
76
77
77
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80
80
82
91
94
95
96
98
100
102
102
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Xylem Inc.
Rye Brook, New York
We have audited the accompanying consolidated balance sheets of Xylem Inc. and subsidiaries (the "Company")
as of December 31, 2013 and 2012, and the related consolidated and combined statements of income,
comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended
December 31, 2013. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Xylem Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 1 to the consolidated and combined financial statements, prior to October 31, 2011, the
accompanying financial statements were derived from the accounting records of the water equipment and services
businesses of ITT Corporation. For periods prior to October 31, 2011, the financial statements include expense
allocations for certain corporate functions historically provided by ITT Corporation. These allocations may not be
reflective of the actual expenses that would have been incurred had the Company operated as a separate entity
apart from ITT Corporation. Included in Note 20 to the consolidated and combined financial statements is a
summary of transactions with related parties.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of December 31, 2013, based on the
criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 27, 2014 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 27, 2014
54
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED INCOME STATEMENTS
(In Millions, except per share data)
Year Ended December 31,
Revenue
Cost of revenue
Gross profit
Selling, general and administrative expenses
Research and development expenses
Separation costs
Restructuring and asset impairment charges
Operating income
Interest expense
Other non-operating (expense) income, net
Income before taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Weighted average number of shares – Basic
Weighted average number of shares – Diluted
$
$
$
$
2013
2012
2011
3,837 $
2,338
1,499
986
104
4
42
363
55
(10)
298
70
228 $
1.23 $
1.22 $
185.2
186.0
3,791 $
2,289
1,502
914
106
22
17
443
55
—
388
91
297 $
1.60 $
1.59 $
185.8
186.2
3,803
2,342
1,461
877
100
87
2
395
17
5
383
104
279
1.51
1.50
185.1
185.3
See accompanying notes to consolidated and combined financial statements.
55
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
Year Ended December 31,
Net income
Other comprehensive income, before tax:
Foreign currency translation adjustment
Net change in cash flow hedges:
Unrealized gains
Amount of gain reclassified into net income
Net change in postretirement benefit plans:
Net gain (loss)
Prior service cost
Amortization of prior service cost
Amortization of net actuarial loss
Settlement
Foreign exchange
Other comprehensive income (loss), before tax
Income tax expense (benefits) related to other comprehensive loss
Other comprehensive income (loss), net of tax
Comprehensive income
2013
2012
2011
$
228 $
297 $
279
15
1
—
34
4
1
17
—
2
74
22
52
48
4
(3)
(84)
(1)
1
11
2
(8)
(30)
(23)
(7)
$
280 $
290 $
(61)
—
—
(74)
—
1
2
—
—
(132)
(14)
(118)
161
See accompanying notes to consolidated and combined financial statements.
56
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, except per share amounts)
December 31,
ASSETS
Current assets:
Cash and cash equivalents
Receivables, less allowances for discounts and doubtful accounts of $31 and $34
in 2013 and 2012, respectively
Inventories, net
Prepaid and other current assets
Deferred income tax assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Other non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued and other current liabilities
Short-term borrowings and current maturities of long-term debt
Total current liabilities
Long-term debt
Accrued postretirement benefits
Deferred income tax liabilities
Other non-current accrued liabilities
Total liabilities
Commitment and Contingencies (Note 19)
Stockholders’ equity:
Common Stock — par value $0.01 per share:
Authorized 750.0 shares, issued 187.6 and 186.2 shares in 2013 and 2012,
respectively
Capital in excess of par value
Retained earnings
Treasury stock – at cost 3.0 shares and 0.5 shares in 2013 and 2012,
respectively
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
2013
2012
$
533 $
504
817
475
143
41
2,009
488
1,718
488
193
4,896 $
332 $
479
42
853
1,199
348
191
64
2,655
2
1,753
405
(86)
167
2,241
4,896 $
776
443
110
41
1,874
487
1,647
484
187
4,679
332
443
6
781
1,199
400
173
52
2,605
2
1,706
264
(13)
115
2,074
4,679
$
$
$
See accompanying notes to consolidated and combined financial statements.
57
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In Millions)
Year Ended December 31,
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
2013
2012
2011
$
228 $
297 $
279
Depreciation
Amortization
Deferred income taxes
Share-based compensation
Non-cash separation costs
Restructuring and asset impairment charges, net
Other, net
Payments of restructuring
Contributions to postretirement benefit plans
Changes in assets and liabilities (net of acquisitions):
Changes in receivables
Changes in inventories
Changes in accounts payable
Changes in accrued liabilities
Changes in accrued taxes
Net changes in other assets and liabilities
Net Cash — Operating activities
Investing Activities
Capital expenditures
Proceeds from the sale of property, plant and equipment
Acquisitions of businesses and assets, net of cash acquired
Other, net
Net Cash — Investing activities
Financing Activities
Net transfer to former parent
Issuance of short-term debt
Issuance of senior notes, net of discount
Principal payments of debt and capital lease obligations
Purchase of Xylem common stock
Proceeds from exercise of employee stock options
Excess tax benefit from share based compensation
Payments of debt issuance costs
Dividends paid
Net Cash — Financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes (net of refunds received)
99
51
(14)
27
—
42
15
(35)
(43)
(47)
(39)
4
18
20
(2)
324
(126)
6
(81)
2
(199)
—
39
—
(2)
(73)
22
1
—
(87)
(100)
4
29
504
533 $
94
48
1
22
—
17
2
(9)
(46)
2
5
(4)
(28)
(17)
12
396
(112)
5
(41)
1
(147)
(9)
13
—
(14)
(13)
24
—
—
(75)
(74)
11
186
318
504 $
93
44
8
13
10
2
5
(7)
(16)
(61)
(18)
(9)
53
56
(3)
449
(126)
11
(309)
1
(423)
(995)
5
1,198
(8)
—
1
—
(10)
(19)
172
(11)
187
131
318
51 $
65 $
53 $
104 $
—
64
$
$
$
See accompanying notes to consolidated and combined financial statements.
58
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Millions, except per share amounts)
Common
Stock
Add'l
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Parent
Company
Investment
Balance at January 1, 2011
—
—
4
59
37
—
2,682
220
Net income to October 30, 2011
Net income from October 31, 2011
Other comprehensive loss, net
Assumption of accumulated
unrealized gains (losses) on
postretirement benefit plans
Contributed currency translation
adjustment
Change in parent company
investment
Conversion of net investment
Dividends declared ($0.1012 per
share)
Stock incentive plan activity
Balance at December 31, 2011
Net income
Other comprehensive loss, net
Dividends declared ($0.4048 per
share)
Stock incentive plan activity
Repurchase of common stock
Balance at December 31, 2012
Net income
Other comprehensive income, net
Dividends declared ($0.4656 per
share)
Stock incentive plan activity
Repurchase of common stock
Balance at December 31, 2013
2
2
1,660
3
1,663
43
$
2
$ 1,706
$
47
(19)
44
297
(77)
$
264
228
(87)
Total
2,723
220
59
(118)
(73)
276
(1,240)
—
(19)
3
1,831
297
(7)
(77)
43
(13)
(118)
(73)
276
(1,240)
(1,662)
122
—
—
(7)
(13)
115
$
(13) $
— $ 2,074
52
(73)
228
52
(87)
47
(73)
$
2
$ 1,753
$
405
$
167
$
(86) $
— $ 2,241
See accompanying notes to consolidated and combined financial statements.
59
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
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 two segments, Water Infrastructure
and Applied Water. The Water Infrastructure segment focuses on the transportation, treatment and testing of water,
offering a range of products including water and wastewater pumps, treatment and testing equipment, and controls
and systems. The Applied Water segment encompasses all the uses of water and focuses on the residential,
commercial, industrial and agricultural markets. The Applied Water segment’s major products include pumps,
valves, heat exchangers, controls and dispensing equipment. Xylem Inc. was incorporated in Indiana on May 4,
2011.
On October 31, 2011 (the "Distribution Date"), ITT Corporation (“ITT”) completed the Spin-off (the “Spin-off”) of
Xylem, formerly ITT’s water equipment and services businesses. The Spin-off was completed pursuant to the
Distribution Agreement, dated as of October 25, 2011 (the “Distribution Agreement”), among ITT, Exelis Inc.
(“Exelis”) and Xylem.
Hereinafter, except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and
“the Company” refer to Xylem Inc. and its subsidiaries. References in the notes to the consolidated and combined
financial statements to “ITT” or “parent” refers to ITT Corporation and its consolidated subsidiaries (other than
Xylem Inc.).
Basis of Presentation
The consolidated and combined 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
intracompany transactions between our businesses have been eliminated. On and prior to the Distribution Date, our
financial position and results of operations consisted of the water equipment and services businesses of ITT
Corporation (“WaterCo”) and have been derived from ITT’s historical accounting records and are presented on a
carve-out basis through our Distribution Date, while our financial results for Xylem post Spin-off are prepared on a
stand-alone basis. As such, our Consolidated Statements of Income, Comprehensive Income and Cash Flows for
the periods ended December 31, 2013 and 2012 consist of the consolidated results of Xylem on a stand-alone
basis. The Consolidated and Combined Statements of Income, Comprehensive Income and Cash Flows for the
twelve months ended December 31, 2011 consist of the consolidated results of Xylem on a stand-alone basis for
two months of November and December and the combined results of operations of WaterCo for ten months on a
carve-out basis.
For periods prior to the Spin-off, our consolidated and combined financial statements include expense allocations
for (i) certain corporate functions historically provided by ITT, including, but not limited to, finance, legal, information
technology, human resources, communications, ethics and compliance, and shared services, (ii) employee benefits
and incentives, and (iii) share-based compensation. These expenses have been allocated to us on the basis of
direct usage when identifiable, with the remainder allocated on the basis of revenue, headcount or other measures.
We consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of
services provided to or the benefit received by us during the periods presented. The allocations may not, however,
reflect the expense we would have incurred as an independent, publicly traded company for the periods presented
prior to the Distribution Date. Actual costs that may have been incurred if we had been a stand-alone company
would depend on a number of factors, including the chosen organizational structure, what functions were
outsourced or performed by employees and strategic decisions made in areas such as information technology and
infrastructure. Subsequent to the Spin-off, we have performed these functions using our own resources or
purchased services, certain of which have been provided by ITT or Exelis under the Transition Services Agreement
("TSA"). As of December 31, 2013, we have completed substantially all services under the TSA.
Certain prior year amounts have been reclassified to conform to the current year presentation.
60
Use of Estimates
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 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, postretirement obligations and assets, revenue recognition, income tax contingency
accruals and valuation allowances, goodwill and indefinite lived intangible impairment testing and contingent
liabilities. Actual results could differ from these estimates.
Consolidation Principles
We consolidate companies in which we have a controlling financial interest or when Xylem is considered the
primary beneficiary of a variable interest entity. We account for investments in companies over which we have the
ability to exercise significant influence but do not hold a controlling financial interest under the equity method, and
we record our proportionate share of income or losses in the Consolidated and Combined Income Statements.
Equity method investments are reviewed for impairment when events or circumstances indicate the investment may
be other than temporarily impaired. This requires significant judgment, including an assessment of the investee’s
financial condition, the possibility of subsequent rounds of financing, and the investee’s historical and projected
results of operations. If the actual results of operations for the investee are significantly different from projections,
we may incur future charges for the impairment of these investments.
Foreign Currency Translation
The national currencies of our foreign companies are generally the functional currencies. Balance sheet accounts
are translated at the exchange rate in effect at the end of each period; income statement accounts are translated at
the average rates of exchange prevailing during the period. Gains and losses on foreign currency translations are
reflected in the cumulative translation adjustments component of stockholders’ equity. Net gains or losses from
foreign currency transactions are reported currently in selling, general and administrative expenses.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable,
collectability is reasonably assured and delivery has occurred or services have been rendered. For product sales,
other than long-term construction-type contracts, we recognize revenue at the time title and risks and rewards of
ownership pass, which is generally when products are shipped. Certain contracts with customers require delivery,
installation, testing, certification or other acceptance provisions to be satisfied before revenue is recognized. We
recognize revenue on product sales to channel partners, including resellers, distributors or value-added solution
providers at the time of sale when the channel partners have economic substance apart from Xylem and Xylem has
completed its obligations related to the sale. Revenue from the rental of equipment is recognized over the rental
period. Service revenue is recognized as services are performed.
For agreements that contain multiple deliverables, we recognize revenue based on the relative selling price if the
deliverable has stand-alone value to the customer and, in arrangements that include a general right of return
relative to the delivered element, performance of the undelivered element is considered probable and substantially
in the Company’s control. The selling price for a deliverable is based on vendor-specific objective evidence of
selling price (“VSOE”), if available, third-party evidence of selling price (“TPE”), if VSOE is not available, or best
estimated selling price, if neither VSOE nor TPE is available.
The deliverables in our arrangements with multiple elements include various products and may include related
services, such as installation and start-up services. We allocate arrangement consideration based on the relative
selling prices of the separate units of accounting determined in accordance with the hierarchy described above. For
deliverables that are sold separately, we establish VSOE based on the price when the deliverable is sold
separately. We establish TPE, generally for services, based on prices similarly situated customers pay for similar
services from third-party vendors. For those deliverables for which we are unable to establish VSOE or TPE, we
estimate the selling price considering various factors including market and pricing trends, geography, product
customization, and profit objectives. Revenue for multiple element arrangements is recognized when the
appropriate revenue recognition criteria for the individual deliverable have been satisfied.
Certain businesses enter into long-term construction-type sales contracts for which revenue is recognized under the
percentage-of-completion method based upon percentage of costs incurred to total estimated costs.
61
Shipping and Handling Costs
Shipping and handling costs are recorded as a component of cost of revenue.
Share-Based Compensation
Share-based awards issued to employees and members of the Board of Directors include non-qualified stock
options, restricted stock awards and performance-based awards. Compensation costs resulting from share-based
payment transactions are recognized primarily within selling, general and administrative expenses, at fair value over
the requisite service period (typically three years) on a straight-line basis. The calculated compensation cost is
adjusted based on an estimate of awards ultimately expected to vest. For performance-based awards, the
calculated compensation cost is adjusted based on an estimate of awards ultimately expected to vest and our
assessment of the probable outcome of the performance condition.The fair value of a non-qualified stock option is
determined on the date of grant using a binomial lattice pricing model incorporating multiple and variable
assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and
changes in dividends. The fair value of restricted stock awards is determined using the closing price of our common
stock on date of grant. The fair value of performance-based share awards at 100% target is determined using the
closing price of our common stock on date of grant.
Research and Development
We conduct research and development activities, which consist primarily of the development of new products,
product applications, and manufacturing processes. These costs are charged to expense as incurred.
Exit and Disposal Costs
We periodically initiate management-approved restructuring activities to achieve cost savings through reduced
operational redundancies and to position ourselves strategically in the market in response to prevailing economic
conditions and associated customer demand. Costs associated with restructuring actions can include severance,
infrastructure charges to vacate facilities or consolidate operations, contract termination costs and other related
charges. For involuntary separation plans, a liability is recognized when it is probable and reasonably estimable.
For voluntary separation plans, a liability is recognized when the employee irrevocably accepts the voluntary
termination. For one-time termination benefits, such as additional severance pay or benefit payouts, and other exit
costs, such as lease termination costs, the liability is measured and recognized initially at fair value in the period in
which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of
change.
Deferred Financing Costs
Deferred financing costs represent costs incurred in conjunction with our debt financing activities and are
capitalized in other assets and amortized over the life of the related financing arrangements. If the debt is retired
early, the related unamortized deferred financing costs are written off in the period the debt is retired and are
recorded in the results of operations under the caption “interest expense.”
Income Taxes
Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are determined
based on the estimated future tax effects of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, as measured by the current enacted tax rates.
We maintain valuation allowances when it is more likely than not that all or a portion of a deferred asset will not be
realized. The valuation allowance is intended in part to provide for the uncertainty regarding the ultimate utilization
of our U.S. capital loss carryforwards, U.S. foreign tax credit carryovers, and foreign net operating loss
carryforwards. In determining whether a valuation allowance is warranted, we consider all positive and negative
evidence and all sources of taxable income such as prior earnings history, expected future earnings, carryback and
carryforward periods and tax strategies to estimate if sufficient future taxable income will be generated to realize the
deferred tax asset. The assessment of the adequacy of our valuation allowance is based on our estimates of
taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these estimates, or we adjust these estimates in future
periods for current trends or expected changes in our estimating assumptions, we may need to modify the level of
valuation allowance that could materially impact our business, financial condition and results of operations.
62
Our effective tax rate reflects the impact of certain undistributed foreign earnings for which we have not provided
U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan foreign
earnings remittance amounts based on projected cash flow needs, as well as the working capital and long-term
investment requirements of our foreign subsidiaries and our domestic operations. Based on these assumptions, we
estimate the amount we will distribute to the United States and provide the U.S. federal taxes due on these
amounts. Material changes in our estimates of cash, working capital and long-term investment requirements in the
various jurisdictions in which we do business could impact our effective tax rate.
Tax benefits are recognized for an uncertain tax position when, in management’s judgment, it is more likely than not
that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-
likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a
greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability
associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new
information becomes available. Such adjustments are recognized in the period in which they are identified. The
effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent
adjustments as considered appropriate by management. While it is often difficult to predict the final outcome or the
timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is adequate.
We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income,
net and tax penalties as a component of income tax expense in our Consolidated and Combined Income
Statements.
Earnings Per Share
We present two calculations of earnings per share (“EPS”). “Basic” EPS equals net income divided by weighted
average shares outstanding during the period. “Diluted” EPS equals net income divided by the sum of weighted
average common shares outstanding during the period plus potentially dilutive shares. Potentially dilutive common
shares that are anti-dilutive are excluded from diluted EPS.
Basic and Diluted EPS for all periods prior to the Spin-off reflect the number of distributed shares on the Distribution
Date, or 184.6 million shares. For our 2011 year to date calculations, these shares are treated as issued and
outstanding from January 1, 2011 for purposes of calculating historical basic EPS. At the time of the Spin-off, ITT
stock options and restricted stock awards were converted to awards of Xylem, and therefore there were no dilutive
securities outstanding for historical periods. For 2011, the Company determined our weighted average dilutive
shares outstanding assuming that the date of our separation from ITT was the beginning of the period.
Cash Equivalents
We consider all liquid investments purchased with an original maturity of three months or less to be cash
equivalents.
Receivables and Allowance for Doubtful Accounts and Cash Discounts
Trade receivables primarily comprise uncollected amounts owed to us from transactions with customers and are
presented net of allowances for doubtful accounts and cash discounts.
We determine our allowance for doubtful accounts using a combination of factors to reduce our trade receivable
balances to their estimated net realizable amount. We maintain an allowance for doubtful accounts based on a
variety of factors, including the length of time receivables are past due, macroeconomic trends and conditions,
significant one-time events, historical experience and the financial condition of customers. We record a specific
reserve for individual accounts when we become aware of specific customer circumstances, such as in the case of
bankruptcy filings or deterioration in the customer’s operating results or financial position. The past due or
delinquency status of a receivable is based on the contractual payment terms of the receivable. If circumstances
related to the specific customer change, we adjust estimates of the recoverability of receivables as appropriate. We
determine our allowance for cash discounts primarily based on historical experience with customers.
Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising
our customer base and their dispersion across many different geographical regions. We perform ongoing credit
evaluations of the financial condition of our third-party distributors, resellers and other customers and require
collateral, such as letters of credit and bank guarantees, in certain circumstances. As of December 31, 2013 and
2012 we do not believe we have any significant concentrations of credit risk.
63
Inventories
Inventories, which include the costs of material, labor and overhead, are stated at the lower of cost or market using
the first in, first out ("FIFO") method. Estimated losses from obsolete and slow-moving inventories are recorded to
reduce inventory values to their estimated net realizable value. Our manufacturing operations recognize costs of
sales using standard costs with full overhead absorption, which generally approximates actual cost.
Property, Plant and Equipment
These assets are recorded at historical cost and are depreciated using the straight-line method of depreciation over
the estimated useful lives as follows:
Buildings and improvements
Machinery and equipment
Furniture and fixtures
Equipment held for lease or rental
Estimated Life
5 to 40 years
2 to 10 years
3 to 7 years
2 to 10 years
Leasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease.
Costs related to maintenance and repairs that do not prolong the assets' useful lives are expensed as incurred.
Goodwill and Intangible Assets
Goodwill represents purchase consideration paid in a business combination that exceeds the values assigned to
the net assets of acquired businesses. Intangible assets include customer relationships, proprietary technology,
brands and trademarks, patents and other intangible assets. Intangible assets with a finite life are amortized on a
straight-line basis over an estimated economic useful life which ranges from 5 to 40 years and is included in selling,
general and administrative expense. Certain of our intangible assets, namely certain brands and trademarks, have
an indefinite life and are not amortized.
Long-Lived Asset Impairment
Long-lived assets, including intangible assets with finite lives, are amortized and tested for impairment whenever
events or changes in circumstances indicate their carrying value may not be recoverable. We assess the
recoverability of long-lived assets based on the undiscounted future cash flow the assets are expected to generate
and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use
of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the
asset. When an impairment is identified, we reduce the carrying amount of the asset to its estimated fair value
based on a discounted cash flow approach or, when available and appropriate, to comparable market values.
Goodwill and indefinite-lived intangible assets are not amortized, but rather are tested for impairment annually (or
more frequently if impairment indicators arise, such as changes to the reporting unit structure, significant adverse
changes in the business climate or an adverse action or assessment by a regulator). We conduct our annual
impairment testing on the first day of our fourth quarter. For goodwill, the impairment test is a two-step test. In the
first step, the estimated fair value of each reporting unit is compared to the carrying value of the net assets
assigned to that reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is
not impaired and the second step of the impairment test is not performed. If the carrying value of the reporting unit
exceeds its estimated fair value, then the second step of the impairment test is performed in order to measure the
impairment loss to be recorded, if any. If the carrying value of a reporting unit’s goodwill exceeds its implied fair
value, then we record an impairment loss equal to the difference. We estimate the fair value of our reporting units
and indefinite-lived intangible assets using an income approach. Under the income approach, we estimate fair value
based on the present value of estimated future cash flows.
Product Warranties
We accrue for the estimated cost of product warranties at the time revenue is recognized and record it as a
component of cost of revenue. Our product warranty liability reflects our best estimate of probable liability under the
terms and conditions of our product warranties offered to customers. We estimate the liability based on our
standard warranty terms, the historical frequency of claims and the cost to replace or repair our products under
64
warranty. Factors that impact our warranty liability include the number of units sold, the length of warranty term,
historical and anticipated rates of warranty claims and cost per claim. We assess the adequacy of our recorded
warranty liabilities quarterly and adjust amounts as necessary.
Postretirement Benefit Plans
The determination of defined benefit pension and postretirement plan obligations and their associated costs
requires the use of actuarial computations to estimate participant plan benefits to which the employees will be
entitled. The significant assumptions primarily relate to discount rates, expected long-term rates of return on plan
assets, rate of future compensation increases, mortality, termination, and other factors. We develop each
assumption using relevant company experience in conjunction with market-related data for each individual country
in which such plans exist. All actuarial assumptions are reviewed annually with third-party consultants and adjusted
as necessary. For the recognition of net periodic postretirement cost, the calculation of the expected long-term rate
of return on plan assets is generally derived using a market-related value of plan assets based on average asset
values at the measurement date over the last five years. Actual results that differ from our assumptions are
accumulated and amortized on a straight line basis only to the extent they exceed 10% of the higher of the market-
related value or the projected benefit obligation, over the estimated remaining service period of active participants,
or for plans with all or substantially all inactive participants, over the average remaining life expectancy. The fair
value of plan assets is determined based on market prices or estimated fair value at the measurement date.
We consider changes to a plan’s benefit formula that eliminate the accrual for future service but continue to allow
for future salary increases (i.e. “soft freeze”) a curtailment.
Business Combinations
We allocate the purchase price of acquisitions to the tangible and intangible assets acquired, liabilities assumed,
and non-controlling interests in the acquiree based on their estimated fair value at the acquisition date. Changes to
the acquisition date provisional fair values prior to the expiration of the measurement period, a period not to exceed
12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Changes to the
acquisition date fair values after expiration of the measurement period are recorded in earnings. The excess of the
acquisition price over those estimated fair values is recorded as goodwill. Acquisition-related expenses and
restructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.
Derivative Financial Instruments
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of
derivatives depends on whether we have elected to designate a derivative in a hedging relationship and apply
hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge
accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an
asset, liability, or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives
designated and qualifying as a hedge of the exposure to variability in expected future cash flows, including
forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the
foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the
matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in
the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the
earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts
that are intended to hedge certain risks economically, even though hedge accounting does not apply or we elect not
to apply hedge accounting.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of
foreign exchange risk is recorded in other comprehensive income ("OCI") and is subsequently reclassified into
either revenue or cost of revenue (hedge of sales classified into revenue and hedge of purchases classified into
cost of revenue) in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of the
change in fair value of the derivative is recognized directly in selling, general and administrative expenses. Our
policy is to de-designate cash flow hedges at the time forecasted transactions are recognized as assets or liabilities
on a business unit’s balance sheet and report subsequent changes in fair value through selling, general and
administrative expenses where the gain or loss due to movements in currency rates on the underlying asset or
liability is revalued. If it becomes probable that the originally forecasted transaction will not occur, the gain or loss
related to the hedge recorded within accumulated other comprehensive income is immediately recognized into net
income.
65
Commitments and Contingencies
We record accruals for commitments and loss contingencies for those which are both probable and for which the
amount can be reasonably estimated. In addition, legal fees are accrued for cases where a loss is probable and the
related fees can be reasonably estimated. Significant judgment is required to determine both probability and the
estimated amount of loss. We review these accruals quarterly and adjust the accruals to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel, and other current information.
Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on current law and existing
technologies. Our estimated liability is reduced to reflect the anticipated participation of other potentially responsible
parties in those instances where it is probable that such parties are legally responsible and financially capable of
paying their respective shares of the relevant costs. These accruals are reviewed quarterly and are adjusted as
assessment and remediation efforts progress or as additional technical or legal information becomes available.
Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent
uncertainties in evaluating environmental exposures. Accruals for environmental liabilities are primarily included in
other non-current liabilities at undiscounted amounts and exclude claims for recoveries from insurance companies
or other third parties.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash
and cash equivalents, and accounts receivable from trade customers. We maintain cash and cash equivalents and
derivative contracts with various financial institutions. These financial institutions are located in many different
geographical regions, and our policy is designed to limit exposure with any one institution. As part of our cash and
risk management processes, we perform periodic evaluations of the relative credit standing of the financial
institutions. We have not sustained any material credit losses during the previous three years from instruments held
at financial institutions. We may utilize forward contracts to protect against the effects of foreign currency
fluctuations. Such contracts involve the risk of non-performance by the counterparty. Credit risk with respect to
accounts receivable is generally diversified due to the large number of entities comprising our customer base and
their dispersion across many different industries and geographic regions. We perform ongoing credit evaluations of
the financial condition of our third-party distributors, resellers and other customers and require collateral, such as
letters of credit and bank guarantees, in certain circumstances.
Substantially all of the cash and cash equivalents, including foreign cash balances, at December 31, 2013 and
2012 were uninsured. Foreign cash balances at December 31, 2013 and 2012 were $423 million and $401 million,
respectively.
Fair Value Measurements
We determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We use a hierarchical structure to
prioritize the inputs to valuation techniques used to measure fair value into three broad levels. The fair value
hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), then
to quoted market prices for similar assets or liabilities in active markets (Level 2) and gives the lowest priority to
unobservable inputs (Level 3).
Note 2. Recently Issued Accounting Pronouncements
Pronouncements Not Yet Adopted
In January 2014, the Financial Accounting Standards Board (“FASB”) issued guidance related to service
concession arrangements. A service concession arrangement is an arrangement between a public-sector entity
grantor and an operating entity under which the operating entity operates the grantor's infrastructure (for example,
airports, roads and bridges). The guidance states that service concession arrangements should not be accounted
for under the guidance of Topic 840, Leases, but rather other guidance as deemed appropriate. This guidance is
effective for fiscal years beginning December 15, 2014. We are currently evaluating the impact of the guidance on
our financial condition and results of operations.
66
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit. The
guidance requires that an unrecognized tax benefit or a portion of an unrecognized tax benefit, be presented as a
reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable
deferred tax asset, the unrecognized tax benefit should be presented in an entity's financial statements as a liability
and should not be combined with a deferred tax asset. This guidance is effective for fiscal years beginning after
December 15, 2013. The adoption of this guidance is not expected to have a material impact on our financial
condition or results of operations.
In March 2013, the FASB issued guidance on the release of a cumulative translation adjustment ("CTA") related to
an entity's investment in a foreign entity into income. The guidance requires such CTA to be released when there
has been a: (1) sale of a subsidiary or group of net assets within a foreign entity and the sale represents the
substantially complete liquidation of the investment in the foreign entity, (2) loss of a controlling financial interest in
an investment in a foreign entity or (3) step acquisition for a foreign entity. This guidance is effective for fiscal years
beginning after December 15, 2013. The impact of the guidance on our financial condition and results of operations
will depend on the occurrence and the significance of transactions that meet the criteria described above.
In February 2013, the FASB issued guidance related to the measurement and disclosure of obligations resulting
from joint and several liability arrangements. The new guidance requires companies to measure obligations
resulting from joint and several liability arrangements as the sum of (1) the amount the company agreed to pay on
the basis of its arrangement among co-obligors and (2) any additional amount the company expects to pay on
behalf of its co-obligors. Additionally, the new guidance requires the disclosure of a description of the joint and
several arrangement and the total outstanding amount of the obligation for all joint parties. This guidance is
effective for fiscal years beginning after December 15, 2013. The adoption of this guidance is not expected to have
a material impact on our financial condition or results of operations.
Recently Adopted Pronouncements
In February 2013, the FASB issued guidance regarding new disclosures for items reclassified out of accumulated
other comprehensive income ("AOCI"). The guidance requires entities to present information about items
reclassified out of AOCI by component. Additionally, entities are required to present either on the face of the
statement where net income is presented or as a separate disclosure in the notes to the financial statements,
significant amounts reclassified out of AOCI by the respective line items of net income. This guidance is effective for
fiscal years beginning after December 15, 2012. The adoption of this guidance did not have a material impact on
our financial statement presentation and disclosures.
In July 2012, the FASB provided companies with the option to make an initial qualitative evaluation, based on
events and circumstances, to determine the likelihood of an impairment of an indefinite-lived intangible asset. The
results of this qualitative assessment determine whether it is necessary to perform the currently required
quantitative comparison of the indefinite-lived intangible asset's fair value to its carrying amount. If it is more likely
than not that the fair value of the intangible asset is less than its carrying amount, a company would be required to
perform the quantitative assessment. This guidance is effective for annual and interim impairment tests performed
for fiscal years beginning after September 15, 2012 with early adoption permitted. The adoption of the guidance did
not have a material impact on our financial condition and results of operations.
In September 2011, in conjunction with the assessment of the impairment of goodwill, the FASB provided
companies with the option to make an initial qualitative evaluation, based on the entity’s events and circumstances,
to determine the likelihood of goodwill impairment. The results of this qualitative assessment determine whether it is
necessary to perform the currently required two-step impairment test. If it is more likely than not that the fair value of
a reporting unit is less than its carrying amount, a company would be required to perform the two-step impairment
test. We adopted this new guidance effective January 1, 2012. The adoption of this guidance did not have a
material impact on our financial condition and results of operations.
In June 2011, the FASB issued authoritative guidance surrounding the presentation of comprehensive income, with
an objective of increasing the prominence of items reported in other comprehensive income (“OCI”). The guidance
requires most entities to present items of net income and other comprehensive income either in one continuous
statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements
of net income and other comprehensive income. We have adopted this guidance with retrospective application and
have presented total comprehensive income in our Consolidated and Combined Statements of Comprehensive
Income for all reported periods.
67
In May 2011, the FASB issued guidance intended to achieve common fair value measurements and related
disclosures between U.S. GAAP and international accounting standards. The amendments primarily clarify existing
fair value guidance and are not intended to change the application of existing fair value measurement guidance.
However, the amendments include certain instances where a particular principle or requirement for measuring fair
value or disclosing information about fair value measurements has changed. On January 1, 2012, we adopted this
guidance. The adoption of the guidance did not have a material impact on our financial condition and results of
operations.
Note 3. Acquisitions
2013 Acquisitions
During 2013, we spent $84 million ($81 million, net of cash acquired) on acquisitions. As the acquisitions were not
material, individually or in the aggregate, to results of operations, pro forma results of operations reflecting results
prior to the acquisitions and certain other disclosure items have not been presented.
MultiTrode
On March 1, 2013 we acquired MultiTrode Pty Ltd ("MultiTrode"), a water and wastewater technology and services
company based in Australia, for approximately $26 million. MultiTrode offers advanced monitoring and control
technologies to municipal and private water and waste water authorities as well as industrial clients. The company
had approximately 60 employees and generated revenue of approximately $13 million in its fiscal year ended June
30, 2012.
Our consolidated financial statements include MultiTrode's results of operations prospectively from March 1, 2013
within the Water Infrastructure segment.
PIMS
On February 5, 2013 we acquired PIMS Group ("PIMS"), a wastewater services company based in the United
Kingdom, for approximately $57 million, including a cash payment of $55 million and the assumption of certain
liabilities. PIMS is a supplier of wastewater installation and maintenance services for the private sector, municipal
and industrial markets. The company had approximately 220 employees and generated revenue of approximately
$38 million for its fiscal year ended April 30, 2012.
Our consolidated financial statements include PIMS' results of operations prospectively from February 5, 2013
within the Water Infrastructure segment.
2012 Acquisitions
Heartland and MJK
During 2012, we spent $41 million, net of cash acquired, on two acquisitions that were not material individually or in
the aggregate to our results of operations or financial position. On October 26, 2012, we acquired Heartland Pump
Rental & Sales, Inc. ("Heartland"), a dewatering pump sale and rental company, for approximately $29 million.
Heartland generated revenue of approximately $33 million for the fiscal year ended December 31, 2011. On
July 13, 2012, we acquired MJK Automation (“MJK”) for a purchase price of approximately $12 million. MJK, which
reported 2011 revenue of $11 million for the fiscal year ended June 30, 2012, is a leading manufacturer of flow and
level sensors, and measurement and control technology for water and wastewater applications. Our financial
statements include Heartland and MJK results of operations prospectively from October 26, 2012 and July 13,
2012, respectively, within the Water Infrastructure segment. As the acquisitions were not material to results of
operations, pro forma results of operations reflecting results prior to the acquisitions and certain other disclosure
items have not been presented.
68
2011 Acquisitions
YSI
On September 1, 2011, we acquired 100% of the outstanding shares of YSI Incorporated (“YSI”) for a purchase
price of $309 million, net of cash acquired. YSI, which reported 2010 revenue of $101 million, is a leading developer
and manufacturer of sensors, instruments, software, and data collection platforms for environmental water
monitoring. YSI employs 390 people at facilities in the United States, Europe and Asia. Our financial statements
include YSI’s results of operations prospectively from September 1, 2011 within the Water Infrastructure segment;
however, the acquisition was not material to results of operations and accordingly, pro forma results of operations
reflecting YSI’s results prior to acquisition have not been presented.
The purchase price for YSI was allocated to the net tangible and intangible assets acquired and liabilities assumed
based on their fair values as of September 1, 2011. The excess of the purchase price over the assets acquired and
liabilities assumed was recorded as goodwill. A charge in the amount of $3 million is included in selling, general and
administrative expense related to acquisition-related costs.
The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed,
based on their fair values (in millions):
Purchase Price
Assets acquired and liabilities assumed:
Accounts receivable
Inventory
Property, plant and equipment
Goodwill
Intangible assets
Other current and non-current assets
Other current and non-current liabilities
Net assets acquired
$
309
15
15
9
190
125
17
(62)
$
309
Goodwill of $190 million arising from the acquisition consists largely of the planned expansion of YSI to new
geographic markets, synergies and economies of scale. The goodwill related to this acquisition has been assigned
to our Water Infrastructure segment and is not expected to be deductible for income tax purposes. In addition, of
the $125 million that was allocated to intangible assets, $41 million was assigned to customer relationships and will
be amortized on a straight line basis over the estimated useful life of 16 years; $35 million was assigned to
proprietary technology and will be amortized on a straight line basis over the weighted average useful life of 16
years; and the remaining $49 million of acquired intangible assets was assigned to trademarks, which is not subject
to amortization as they were determined to have indefinite useful lives.
69
Note 4. Restructuring and Asset Impairment Charges
From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base
and more strategically position ourselves based on the economic environment and customer demand. During 2013,
the costs incurred primarily relate to the reduction in structural costs, including the elimination of headcount and
consolidation of facilities within both our Water Infrastructure and Applied Water segments. The components of
restructuring and asset impairment charges incurred during each of the previous three years ended are presented
below.
(in millions)
By component:
Severance and other charges
Lease related charges
Total restructuring charges
Asset impairment
Total restructuring and asset impairment charges
By segment:
Water Infrastructure
Applied Water
Restructuring
Year Ended December 31,
2013
2012
2011
$
$
$
38 $
17 $
2
40
2
—
17
—
42 $
17 $
33 $
9
14 $
3
The following table displays a rollforward of the restructuring accruals, presented on our Consolidated Balance
Sheet within accrued liabilities, for the years ended December 31, 2013 and 2012.
(in millions)
Restructuring accruals - January 1
Restructuring charges
Cash payments
Other
Restructuring accruals - December 31
By segment:
Water Infrastructure
Applied Water
2013
2012
$
$
$
9 $
40
(35)
(1)
13 $
10 $
3
—
—
—
2
2
—
2
1
17
(9)
—
9
6
3
The following is a rollforward of employee position eliminations associated with restructuring activities for the years
ended December 31, 2013 and 2012.
Planned reductions - January 1
Additional planned reductions
Actual reductions
Planned reductions - December 31
2013
2012
54
513
(516)
51
—
189
(135)
54
Total expected costs of approximately $33 million for Water Infrastructure associated with actions that commenced
during 2013 include $31 million incurred in 2013 and $2 million remaining to be incurred during 2014. Total
70
expected costs of approximately $10 million for Applied Water include $8 million incurred in 2013 and $2 million
remaining to be incurred during 2014. These costs primarily comprise severance charges. We currently expect
these actions to continue through the end of 2014.
Asset Impairment Charges
During the fourth quarter of 2013 we performed our annual impairment test of our indefinite-lived intangibles assets
which resulted in an impairment charge of $2 million related to trade names within our Water Infrastructure
segment. Refer to Note 11, “Goodwill and Other Intangible Assets,” for additional information.
Note 5. Separation Costs
We had non-recurring separation costs of $4 million and $22 million, or $2 million and $16 million after tax during
2013 and 2012, respectively. The components of separation costs incurred during these periods are presented
below.
(in millions)
Rebranding and marketing costs
Advisory and professional fees
Information and technology costs
Employee retention and hiring costs
Lease termination and other real estate costs
Other
Total separation costs in operating income
Income tax benefit
Total separation costs, net of tax
Year Ended December 31,
2013
2012
— $
—
2
—
2
—
4
(2)
2 $
8
7
3
1
1
2
22
(6)
16
$
$
Note 6. Other Non-Operating (Expense) Income, Net
The components of other non-operating (expense) income, net are as follows:
(in millions)
Interest income
Income from joint ventures
Other expense – net (a)
Total other non-operating (expense) income, net
Year Ended December 31,
2013
2012
2011
$
$
3 $
2
(15)
(10) $
4 $
4
(8)
— $
3
4
(2)
5
(a) 2013 includes $10 million of expense incurred under the tax matters agreement with ITT. Refer to Note 7 "Income
Taxes" for additional information regarding the tax matters agreement.
Note 7. Income Taxes
Prior to the Spin-off, Xylem was a member of ITT’s consolidated federal and state tax returns, and therefore current
and deferred tax expense has been computed for the Company on a separate return basis. Subsequent to the
Spin-off, the Company files its own consolidated federal and state tax returns.
71
The source of pre-tax income and the components of income tax expense are as follows:
(in millions)
Income components:
Domestic
Foreign
Total pre-tax income
Income tax expense components:
Current:
Domestic – federal
Domestic – state and local
Foreign
Total Current
Deferred:
Domestic – federal
Domestic – state and local
Foreign
Total Deferred
Total income tax provision
Effective income tax rate
Year Ended December 31,
2013
2012
2011
$
$
$
$
$
$
$
$
$
$
49
249
298
37
1
46
84
(6)
—
(8)
(14)
70
23.5%
$
$
$
$
$
106
282
388
27
7
56
90
10
(2)
(7)
1
91
23.4%
46
337
383
20
5
71
96
21
3
(16)
8
104
27.4%
Reconciliations between taxes at the U.S. federal income tax rate and taxes at our effective income tax rate on
earnings before income taxes are as follows:
Tax provision at U.S. statutory rate
Increase (decrease) in tax rate resulting from:
Foreign restructurings
State income taxes
Settlements of tax examinations
Valuation allowance
Tax exempt interest
Foreign tax rate differential
Repatriation of foreign earnings, net of foreign tax credits
Non-deductible separation costs
Tax incentives
Other – net
Effective income tax rate
Year Ended December 31,
2013
2012
2011
35.0%
35.0%
35.0%
—
0.7
—
39.4
(43.0)
(4.1)
5.1
—
(8.1)
(1.5)
23.5%
—
1.2
0.2
8.9
(18.2)
(3.4)
0.4
—
—
(0.7)
23.4%
1.5
1.3
(4.7)
4.7
(14.6)
(4.6)
3.7
2.6
—
2.5
27.4%
We operate under tax incentives, which are effective January 2013 through December 2023 and may be extended
if certain additional requirements are satisfied. The tax incentives are conditional upon our meeting certain
employment thresholds. The impact of these tax incentives decreased our tax provision by 8.1% in 2013.
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting
and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the
differences will reverse.
72
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the
Consolidated Balance Sheets:
(in millions)
Deferred tax assets:
Employee benefits
Accrued expenses
Loss carryforward
Inventory
Foreign tax credit carryforwards
Other
Valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Intangibles
Investment in foreign subsidiaries
Property, plant, and equipment
Other
Total deferred tax liabilities
December 31,
2013
2012
$
$
$
$
$
114 $
20
357
6
17
1
515 $
(349)
166 $
180 $
15
19
42
256 $
130
17
237
7
18
3
412
(229)
183
174
15
15
34
238
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income
will be generated to realize existing deferred tax assets. On the basis of this evaluation, as of December 31, 2013, a
valuation allowance of $349 million has been established to reduce the deferred income tax asset related to certain
U.S. and foreign net operating losses and U.S. and foreign capital loss carryforwards. During 2013, the valuation
allowance increased by $120 million primarily driven by losses from certain foreign operations.
Deferred taxes are classified in the Consolidated Balance Sheets as follows:
(in millions)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total net deferred tax liabilities
December 31,
2013
2012
$
$
41 $
64
(4)
(191)
(90) $
41
77
—
(173)
(55)
Tax attributes available to reduce future taxable income begin to expire as follows:
(in millions)
U.S. net operating loss
State net operating loss
U.S. tax credits
Foreign net operating loss
December 31, 2013
10
$
48
31
1,214
First Year of Expiration
December 31, 2023
December 31, 2014
December 31, 2020
December 31, 2014
The foreign tax credit for financial statement purposes differs from the amount for tax return purposes due to
unrecognized tax benefits.
As of December 31, 2013, we have provided a deferred tax liability of $16 million on the excess of $84 million of
financial reporting over the tax basis of investments in certain foreign subsidiaries that has not been indefinitely
reinvested. However, we have not provided for deferred taxes on the excess of financial reporting over the tax basis
of investments in certain foreign subsidiaries in the amount of $1.9 billion because we plan to reinvest such
73
amounts indefinitely outside the U.S. The determination of the amount of federal and state income taxes is not
practicable because of complexities of the hypothetical calculation.
Unrecognized Tax Benefits
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the consolidated financial statements from such positions are measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
(in millions)
Unrecognized tax benefits — January 1
Additions for:
Current year tax positions
Prior year tax positions
Reductions for:
Assumption by ITT
Settlements
2013
2012
2011
$
8 $
5 $
23
—
—
(1)
30 $
1
2
—
—
8 $
43
—
—
(24)
(14)
5
Unrecognized tax benefits — December 31
$
The amount of unrecognized tax benefits at December 31, 2013, was $30 million which, if ultimately recognized, will
reduce our annual effective tax rate. We do not believe that the unrecognized tax benefits will significantly change
within the next twelve months.
In many cases, unrecognized tax benefits are related to tax years that remain subject to examination by the
relevant taxing authorities. By virtue of previously filed separate company and consolidated tax returns with ITT, we
are routinely under audit by federal, state, local and foreign taxing authorities. These audits include questioning the
timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes
payable include amounts considered sufficient to pay assessments that may result from examination of prior year
returns; however, the amount paid upon resolution of issues raised may differ from the amount provided.
Differences between the reserves for tax contingencies and the amounts owed by the company are recorded in the
period they become known. Under the Tax Matters Agreement, as discussed below, ITT assumes all consolidated
tax liabilities and related interest and penalties for the pre-spin period. The following table summarizes the earliest
open tax years by major jurisdiction:
Jurisdiction
Canada
Germany
Italy
Luxembourg
Poland
Sweden
Switzerland
United Kingdom
United States
Earliest
Open Year
2008
2005
2008
2010
2006
2008
2013
2006
2009
We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income,
net and tax penalties as a component of income tax expense in our Consolidated and Combined Income
Statements. The amount of interest relating to unrecognized tax benefits as of December 31, 2013 was $1 million.
Tax Matters Agreement
In connection with the Spin-off, Xylem, ITT and Exelis entered into a Tax Matters Agreement. Under the agreement,
we may be obligated to make payments to ITT and Exelis under certain conditions. These conditions include a
74
payment to ITT in the event audit settlement payments exceed amounts specified in the agreement. We also may
be obligated to make payments in the event the Spin-off is determined to be taxable.
The Tax Matters Agreement governs the respective rights, responsibilities and obligations of ITT, Xylem and the
other Spincos (members of the ITT group that were spun-off, including Xylem are collectively referred to as
“Spincos”) with respect to taxes for periods ending on or before the Spin-off. In general, pursuant to the Tax Matters
Agreement, ITT will prepare and file the tax returns that include ITT (or any of its subsidiaries) and Xylem (or any of
its subsidiaries) for all taxable periods ending on or prior to, and including, October 31, 2011, with the appropriate
tax authorities, and, except as otherwise set forth below, ITT will pay any taxes relating thereto to the relevant tax
authority. In connection with any audit adjustments with respect to such returns, we have agreed to indemnify ITT
for a portion of such tax liability to the extent it exceeds an agreed-upon threshold.
We will file all tax returns that include solely Xylem and/or its subsidiaries and any separate company tax returns for
Xylem and/or its subsidiaries for all taxable periods ending on or prior to, and including, October 31, 2011, and will
pay all taxes due with respect to such tax returns (including any taxes attributable to an audit adjustment with
respect to such returns). In general, ITT controls all audits and administrative matters and other tax proceedings
relating to the consolidated U.S. federal income tax return of the ITT group and any other tax returns for which the
ITT group is responsible.
Under the Tax Matters Agreement, we have agreed not to enter into any transaction involving an acquisition
(including issuance) of Xylem common stock or any other transaction (or, to the extent we have the right to prohibit
it, to permit any such transaction) that could cause the Spin-off to be taxable to ITT. We have also agreed to
indemnify ITT for any tax resulting from any such transactions. Generally, ITT will recognize taxable gain on the
Spin-off if there are one or more acquisitions (including issuances) of our capital stock, directly or indirectly,
representing 50% or more, measured by vote or value, of our then-outstanding capital stock, and the acquisitions or
issuances are deemed to be part of a plan or series of related transactions that include the Spin-off. Any such
shares of our common stock acquired, directly or indirectly, within two years before or after the Spin-off (with
exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) will
generally be presumed to be part of such a plan unless that presumption is rebutted. As a result, our obligations
may discourage, delay or prevent a change of control of our company.
Notwithstanding the receipt of any such IRS ruling, tax opinion or officer’s certificate, generally Xylem and each
other Spinco must indemnify ITT and each other Spinco for any taxes and related losses resulting from (i) any act
or failure to act by such Spinco described in the covenants above, (ii) any acquisition of equity securities or assets
of such Spinco or any member of its group, and (iii) any breach by such Spinco or any member of its group of any
representation or covenant contained in the separation documents or the documents relating to the IRS private
letter ruling or tax opinion concerning the Spin-off of such Spinco.
Under U.S. federal income tax law, ITT and the Spincos are severally liable for all of ITT’s federal income taxes
attributable to periods prior to and including the year of the spin, which ended on December 31, 2011.
Thus, if ITT failed to pay the U.S. federal income taxes attributable to it under the Tax Matters Agreement for
periods prior to and including the current taxable year of ITT, the Spincos would be severally liable for such taxes. In
the event a Spinco is required to make a payment in respect of a Spin-off related tax liability of the ITT consolidated
U.S. federal income tax return group under these rules for which such Spinco is not responsible under the Tax
Matters Agreement and full indemnification cannot be obtained from the Spinco responsible for such payment under
the Tax Matters Agreement, ITT will indemnify the Spinco that was required to make the payment from and against
the portion of such liability for which full indemnification cannot be obtained from the Spinco responsible for such
payment under the Tax Matters Agreement.
The Tax Matters Agreement also contains provisions regarding the apportionment of tax attributes of the ITT
consolidated U.S. federal income tax return group, authority to make tax elections, cooperation, and other
customary matters.
As of December 31, 2013, the net amount Xylem owed ITT pursuant to the Tax Matters Agreement is $4 million.
75
Note 8. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share.
Net Income (in millions)
Shares (in thousands):
Weighted average common shares outstanding
Add: Participating securities (a)
Weighted average common shares outstanding — Basic
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options
Dilutive effect of restricted stock
Weighted average common shares outstanding — Diluted
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2013
2012
2011
$
228 $
297 $
279
185,082
134
185,216
264
558
186,038
185,459
325
185,784
213
233
186,230
$
$
1.23 $
1.22 $
1.60 $
1.59 $
184,574
485
185,059
202
63
185,324
1.51
1.50
(a) Restricted stock awards containing rights to non-forfeitable dividends which participate in undistributed earnings with
common shareholders are considered participating securities for purposes of computing earnings per share.
(b)
Incremental shares from stock options, restricted stock 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 and performance share awards, reduced by the repurchase of shares with the proceeds from
the assumed exercises, unrecognized compensation expense for outstanding awards and the estimated tax benefit of the
assumed exercises. Performance share units will be included in the treasury stock calculation of diluted earnings per
share upon achievement of underlying performance conditions. See Note 16, "Stock-Based Compensation Plans" for
further detail on the performance share units.
(in thousands)
Stock options
Restricted shares
Performance shares
Note 9. Inventories
(in millions)
Finished goods
Work in process
Raw materials
Total inventories, net
Year Ended December 31,
2013
2012
2011
4,126
703
80
4,285
870
—
4,445
788
—
December 31,
2013
2012
$
$
189 $
31
255
475 $
182
30
231
443
76
Note 10. Property, Plant and Equipment
(in millions)
Land, buildings and improvements
Machinery and equipment
Equipment held for lease or rental
Furniture and fixtures
Construction work in progress
Other
Total property, plant and equipment, gross
Less accumulated depreciation
Total property, plant and equipment, net
December 31,
2013
2012
$
$
263 $
685
192
93
49
22
1,304
816
488 $
255
653
183
90
40
19
1,240
753
487
Depreciation expense was $99 million, $94 million, and $93 million for 2013, 2012, and 2011, respectively.
Note 11. Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill by operating segment during the years ended December 31, 2013 and
2012 are as follows:
(in millions)
Balance as of December 31, 2011
Activity in 2012
Acquisitions
Foreign currency and other
Balance as of December 31, 2012
Activity in 2013
Acquisitions
Foreign currency and other
Balance as of December 31, 2013
Water
Infrastructure
Applied Water
Total
1,054 $
556 $
1,610
19
12
1,085 $
48
16
1,149 $
—
6
562 $
—
7
569 $
19
18
1,647
48
23
1,718
$
$
$
During the fourth quarter of 2013 we performed our annual impairment assessment and determined that that the
estimated fair values of our goodwill reporting units were substantially in excess of each of their carrying values with
the exception of our Analytics business within our Water Infrastructure segment. While the fair value of the Analytics
business initially increased over the first couple of years after acquisition, challenging economic conditions,
including reduced government spending in the U.S. and sluggish growth in European markets, have led to a
reduction in fair value during the past two years. Our 2013 impairment analysis indicated that the fair value of the
Analytics reporting unit exceeded its carrying value by approximately 18%. The goodwill associated with the
Analytics business was $439 million at December 31, 2013. However, future goodwill impairment tests could result
in a charge to earnings. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth
quarter and whenever events and changes in circumstances indicate there may be a potential impairment.
77
Other Intangible Assets
Information regarding our other intangible assets is as follows:
(in millions)
December 31, 2013
December 31, 2012
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor
relationships
$
Proprietary technology
Trademarks
Patents and other
Indefinite-lived
intangibles
Other intangibles
352 $
109
35
20
145
(104) $
(36)
(16)
(17)
—
(173) $
248 $
317 $
(75) $
73
19
3
145
488 $
105
33
21
143
(29)
(14)
(17)
—
619 $
(135) $
242
76
19
4
143
484
$
661 $
Based on the results of our annual impairment tests, we recorded a $2 million impairment charge related to three
trade names within our Water Infrastructure segment in the fourth quarter of 2013. The charge was calculated using
an income approach, which is considered a Level 3 input for fair value measurement, and is reflected in
“Restructuring and asset impairment charges” in our Consolidated and Combined Income Statements. The trade
names, related to acquired businesses within our Analytics operating unit, were classified as indefinite-lived assets
at time of acquisition as there was not a plan at that time to phase out the trade names. As a result of the decline in
value, we have decided to phase out two of the trade names over a period of time and thus they are no longer
classified as indefinite-lived assets. We determined that no impairment of the indefinite-lived intangibles existed as
of the measurement date in 2012. Future impairment tests could result in a charge to earnings. We will continue to
evaluate the indefinite-lived intangible assets on an annual basis as of the beginning of our fourth quarter and
whenever events and changes in circumstances indicate there may be a potential impairment.
Customer and distributor relationships, proprietary technology, trademarks, patents and other are amortized over
weighted average lives of approximately 14 years, 18 years, 16 years and 10 years, respectively.
Total amortization expense for intangible assets was $38 million, $34 million, and $31 million for 2013, 2012 and
2011, respectively.
Estimated amortization expense for each of the five succeeding years is as follows:
(in millions)
2014
2015
2016
2017
2018
$
36
35
35
34
34
Note 12. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions and principally
manage our exposures to these risks through management of our core business activities. Certain of our foreign
operations expose us to fluctuations of foreign interest rates and exchange rates that may impact revenue,
expenses, cash receipts and payments. We enter into derivative financial instruments to protect the value or fix the
amount of certain cash flows in terms of the functional currency of the business unit with that exposure.
78
Cash Flow Hedges of Foreign Exchange Risk
We are exposed to fluctuations in various foreign currencies against our functional currencies. We use foreign
currency derivatives, including currency forward agreements, to manage our exposure to fluctuations in the various
exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a
specified amount of foreign currency on a specified date.
Beginning in 2012, certain business units within our segments with exposure to foreign currency exchange risks
have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory
purchases and sales. Listed in the table below are the outstanding foreign currency derivatives that were used to
hedge foreign exchange risks as of December 31, 2013.
(in millions; except number of instruments)
Foreign Currency Derivative
Buy PLN/ Sell EUR forward
Number of
Instruments
22
Buy HUF/ Sell EUR forward
Buy SEK/ Sell EUR forward
Sell GBP/ Buy EUR forward
11
11
11
Notional
Sold
Sell Notional Currency
Notional
Purchased
Buy Notional
Currency
24 Euro (EUR)
11 Euro (EUR)
137 Euro (EUR)
22 British Pound
Sterling (GBP)
103 Polish Zloty
(PLN)
3,186 Hungarian
Forint (HUF)
1,233 Swedish Krona
(SEK)
27 Euro (EUR)
The table below presents the effect of our derivative financial instruments on the Consolidated and Combined
Income Statements and Statements of Comprehensive Income.
(in millions)
Derivatives in Cash Flow Hedges
Foreign Exchange Contracts
Amount of gain recognized in OCI (a)
Amount of (gain) reclassified from OCI into revenue (a)
Amount of loss (gain) reclassified from OCI into cost of revenue (a)
(a) Effective portion
Year Ended December 31,
2013
2012
2011
$
1 $
(2)
2
4 $
(2)
(1)
—
—
—
As of December 31, 2013, $2 million of the net unrealized gains on cash flow hedges is expected to be reclassified
into earnings in the next 12 months. Any ineffective portion of the change in fair value of a cash flow hedge is
recognized immediately in selling, general and administrative expenses in the Consolidated and Combined Income
Statements and, for the twelve months ended December 31, 2013 and 2012 was not material.
The fair values of our foreign exchange contracts currently included in our hedging program were as follows:
(in millions)
Derivatives designated as hedging instruments
Assets
Other current assets
December 31,
2013
2012
$
1 $
—
79
Note 13. Accrued and Other Current Liabilities
(in millions)
Compensation and other employee-benefits
Customer-related liabilities
Accrued warranty costs
Accrued income taxes
Other accrued liabilities
Total accrued and other current liabilities
Note 14. Credit Facilities and Long-Term Debt
Total debt outstanding is summarized as follows:
(in millions)
Short-term borrowings and current maturities of long-term debt
Long-term debt:
3.550% Senior Notes due 2016 (a)
4.875% Senior Notes due 2021 (a)
Unamortized discount (b)
Long-term debt
Total debt (c)
December 31,
2013
2012
215 $
63
36
45
120
479 $
201
60
40
50
92
443
December 31,
2013
2012
42 $
6
600
600
(1)
1,199
1,241 $
600
600
(1)
1,199
1,205
$
$
$
$
(a) The fair value of our Senior Notes (as defined below) was determined using quoted prices in active markets for identical
securities, which are considered Level 1 inputs. The fair value of our Senior Notes due 2016 (as defined below) was $635
million and $639 million as of December 31, 2013 and 2012, respectively. The fair value of our Senior Notes due 2021 (as
defined below) was $629 million and $680 million as of December 31, 2013 and 2012, respectively.
(b) The unamortized discount is recognized as a reduction in the carrying value of the Senior Notes in the Consolidated
Balance Sheets and is being amortized to interest expense in our Consolidated and Combined Income Statements over
the expected remaining terms of the Senior Notes.
Deferred Financing Costs
We had deferred financing costs of $7 million and $9 million as of December 31, 2013 and December 31, 2012,
respectively, related to our revolving credit facility and Senior Notes. Scheduled amortization for future years,
assuming no further prepayments of principal, is $2 million in 2014, $2 million in 2015, $1 million in 2016, less than
$1 million in 2017, less than $1 million in 2018 and $1 million thereafter.
Senior Notes
On September 20, 2011, we issued 3.550% Senior Notes of $600 million aggregate principal amount due
September 2016 (the "Senior Notes due 2016") and 4.875% Senior Notes of $600 million aggregate principal
amount due October 2021 (the "Senior Notes due 2021" and together with the Senior Notes due 2016, the “Senior
Notes”).
The Senior Notes include covenants which restrict our ability, subject to exceptions, to incur debt secured by liens
and engage in sale and lease-back transactions, as well as provide for customary events of default (subject, in
certain cases, to receipt of notice of default and/or customary grace and cure periods). We may redeem the Senior
Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the
Senior Notes to be redeemed, plus a make-whole premium. As of December 31, 2013, we were in compliance with
all covenants. If a change of control triggering event (as defined in the Senior Notes indenture) occurs, we will be
80
required to make an offer to purchase the Senior Notes at a price equal to 101% of their principal amount plus
accrued and unpaid interest to the date of repurchase.
Interest on the Senior Notes due 2016 is payable on March 20 and September 20 of each year. Interest on the
Senior Notes due 2021 is payable on April 1 and October 1 of each year.
Four Year Competitive Advance and Revolving Credit Facility
Effective October 31, 2011, Xylem and its subsidiaries entered into a Four Year Competitive Advance and Revolving
Credit Facility (the "Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of
lenders. The Credit Facility provides for an aggregate principal amount of up to $600 million of (i) a competitive
advance borrowing option which will be provided on an uncommitted competitive advance basis through an auction
mechanism (the "competitive loans"), (ii) revolving extensions of credit (the "revolving loans") outstanding at any
time and (iii) the issuance of letters of credit in a face amount not in excess of $100 million outstanding at any time.
At our election, the interest rate per annum applicable to the competitive advances will be based on either (i) a
Eurodollar rate determined by reference to LIBOR, plus an applicable margin offered by the lender making such
loans and accepted by us or (ii) a fixed percentage rate per annum specified by the lender making such loans. At
our election, the interest rate per annum applicable to the revolving loans will be based on either (i) a Eurodollar
rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin or
(ii) a fluctuating rate of interest determined by reference to the greatest of (a) the prime rate of JPMorgan Chase
Bank, N.A., (b) the U.S. Federal Funds effective rate plus half of 1% or (c) the Eurodollar rate determined by
reference to LIBOR, adjusted for statutory reserve requirements, in each case, plus an applicable margin.
In accordance with the terms, we may not exceed a maximum leverage ratio of 3.50 (based on a ratio of total debt
to earnings before interest, taxes, depreciation and amortization) throughout the term. As of December 31, 2013,
we were in compliance with all covenants. The Credit Facility also contains limitations on, among other things,
incurring debt, granting liens, and entering sale and leaseback transactions. In addition, the Credit Facility contains
other terms and conditions such as customary representations and warranties, additional covenants and customary
events of default.
As of December 31, 2013, the Credit Facility remains undrawn.
Research and Development Facility Agreement
On December 4, 2013, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D
Facility Agreement") with The European Investment Bank (the "EIB") to add an additional borrower under the
facility. The facility provides an aggregate principal amount of up to €120 million (approximately $165 million) to
finance research projects and infrastructure development in the European Union. The Company's wholly-owned
subsidiaries in Luxembourg, Xylem Holdings S.a.r.l. and Xylem International S.a.r.l., are the borrowers under the
R&D Facility Agreement. The obligations of the borrowers under the R&D Facility Agreement are guaranteed by the
Company under an Amended and Restated Deed of Guarantee, dated as of December 4, 2013, in favor of the EIB.
The funds are available to finance research and development projects during the period from 2013 through 2016 at
the Company's R&D facilities in Sweden, Germany, Italy, the United Kingdom, Austria, Norway and Hungary.
Under the R&D Facility Agreement, the borrower can draw loans with a maturity of no longer than 12 years. The
R&D Facility Agreement provides for Fixed Rate loans and Floating Rate loans. The interest rate per annum
applicable to Fixed Rate loans will be at a fixed percentage rate per annum specified by the EIB which includes the
applicable margin. The interest rate per annum applicable to Floating Rate loans will be at the rate determined by
reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in Pounds Sterling or U.S. Dollars, plus
an applicable spread specified by the EIB which includes the applicable margin. The applicable margin for both
Fixed Rate loans and Floating Rate loans shall be determined by reference to the credit rating of the Company.
In accordance with the terms of the R&D Facility Agreement, we may not exceed a maximum leverage ratio of 3.50
(based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) throughout the term.
As of December 31, 2013, we were in compliance with all covenants. The R&D Facility Agreement also contains
limitations on, among other things, incurring debt, granting liens, and entering sale and leaseback transactions. In
addition, the R&D Facility Agreement contains other terms and conditions such as customary representations and
warranties, additional covenants and customary events of default.
81
As of December 31, 2013, $38 million was outstanding under the R&D Facility Agreement. Although the borrowing
term for this arrangement is for five years, we have classified it as short-term debt on our Consolidated Balance
Sheet since we intend to repay this obligation in less than one year.
Note 15. Postretirement Benefit Plans
Defined contribution plans – Prior to the Spin-off, employees who met certain eligibility requirements participated
in various defined contribution plans administered by ITT. In connection with the Spin-off, we entered into a Benefit
and Compensation Matters Agreement with ITT whereby Xylem agreed to replicate certain ITT defined contribution
plans to allow for continuation of those benefits. Under this agreement, assets attributable to Xylem specific
employees were transferred from ITT to our domestic and international qualified defined contribution plans. The
assets transferred into Xylem were $144 million in 29 different investment options, including the Xylem Stock Fund.
Xylem’s U.S. plan also provides for transition credits for eligible U.S. employees for the first five years of the plan to
supplement retirement benefits in the absence of a defined benefit plan. Age plus years of eligible service greater
than or equal to 60, entitles an employee to transition credits. The liability for transition credits was approximately $3
million at December 31, 2013 and 2012.
Xylem and certain of our subsidiaries maintain various defined contribution savings plans, which allow employees to
contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. Several of the
plans require us to match a percentage of the employee contributions up to certain limits, generally between 3.0% –
7.0% of employee base pay. Matching obligations, the majority of which were funded in cash in connection with the
plans, along with transition credits and other company contributions are as follows:
(in millions)
2013
2012
2011
Defined Contribution
$
35
30
28
The Xylem Stock Fund, an investment option under the defined contribution plan in which Company employees
participate is considered an Employee Stock Ownership Plan. As a result, participants in the Xylem Stock Fund may
receive dividends in cash or may reinvest such dividends into the Xylem Stock Fund. Company employees held
approximately 453 thousand and 528 thousand shares of Xylem Inc. common stock in the Xylem Stock Fund at
December 31, 2013 and 2012, respectively.
Defined benefit pension plans and other postretirement plans – We historically have maintained qualified and
nonqualified defined benefit retirement plans covering certain current and former employees, including hourly and
union plans as well as salaried plans, which generally require up to 5 years of service to be vested and for which
the benefits are determined based on years of credited service and either specified rates, final pay, or final average
pay. The other postretirement benefit plans are all unfunded plans in the U.S. and Canada.
Prior to the Spin-off, employees who met certain eligibility requirements participated in various defined benefit
pension plans and other postretirement benefit plans administered and sponsored by ITT. These plans were
accounted for under a multi-employer plan and as such, we recorded expense of $49 million in 2011 to reflect our
allocation of pension and other postretirement benefit costs related to shared plans.
Pursuant to the Benefit and Compensation Matters Agreement, the assets and liabilities of certain defined benefit
plans and other post retirement benefit plans, allocable to Xylem employees, were transferred to Xylem. Assets of
$337 million, projected obligation of $400 million and $105 million of other comprehensive income ($73 million net of
tax) were recorded for the plans transferred by ITT. In the U.S., the new Xylem Investment Master Trust (U.S.
Master Trust) was created at the time of the Spin-off and $45 million of assets were transferred from the ITT Master
Trust related to the Xylem U.S. defined benefit pension plans for hourly employees.
Benefits accrued for Xylem specific participants under the ITT Salaried Retirement Plan ceased on October 31,
2011. As a result, a curtailment was recorded by ITT during the third quarter of 2011, of which we were allocated a
charge of $1 million. As of December 31, 2011, there were no required contributions outstanding. The Company
does not offer a defined benefit plan for salaried employees in the United States.
The ITT Industries General Pension Plan in the UK ("the UK Plan") for salaried employees was amended, effective
December 31, 2011, to eliminate the crediting of future benefits relating to service. A curtailment was recorded
82
during the quarter ended September 30, 2011. As a result the applicable plan assets and obligations were re-
measured. The re-measurement included a $9 million ($6 million net of tax) increase in deferred losses within
accumulated other comprehensive income and a corresponding decrease to the funded status of the plan, as well
as updated asset values, and a change in the discount rate from 6.00% to 5.75%. In addition, all participants were
reclassified as inactive for benefit plan purposes and actuarial gains and losses will be amortized over 27 years
which represents the expected weighted-average remaining lives of plan participants.
During the first quarter of 2012, an annuity was purchased to wind up five pension plans in Canada. This resulted in
a settlement change of $2 million. The Company has no further obligation for these plans.
Effective October 1, 2013, the Xylem Canada Company Pension Plan for Salaried Employees was amended to
close the plan to new entrants and a soft freeze, where benefits earned to date are based on frozen service but the
future average earnings will continue to be recognized. The impact of the curtailment on the Company’s financial
statements was immaterial. However, the participants are now considered inactive and actuarial gains and losses
will be amortized over 25 years which represents the expected weighted-average remaining lives of the plan
participants.
Effective October 14, 2013, an amendment to one of the Company's business unit's pension plans for its hourly
workers, the Xylem Standard Hourly Bargaining Unit Pension Plan, modified the benefit formula. Pension benefits
for future service will be based only on years of service. The remeasurement at year end resulted in a $4 million
prior service credit, which will be amortized into net periodic pension cost over approximately 11 years.
Amounts recognized in the Consolidated Balance Sheets for pension and other employee-related benefit plans
(collectively, postretirement plans) reflect the funded status of the postretirement benefit plans. The following table
provides a summary of the funded status of our postretirement plans, the presentation of such balances and a
summary of amounts recorded within accumulated other comprehensive income.
(in millions)
December 31, 2013
December 31, 2012
Fair value of plan assets
Projected benefit obligation
Funded status
Amounts recognized in the
balance sheet
Other non-current assets
Accrued and other current
liabilities
Accrued postretirement benefits
Net amount recognized
Accumulated other
comprehensive income (loss):
Net actuarial losses
Prior service cost
Total
$
$
$
$
$
$
Pension
Other
Total
Pension
Other
Total
524 $
(777)
(253) $
— $
(63)
(63) $
524 $
(840)
(316) $
477 $
(790)
(313) $
— $
(65)
(65) $
477
(855)
(378)
46 $
— $
46 $
36 $
— $
36
(11)
(288)
(253) $
(228) $
—
(228) $
(3)
(60)
(63) $
(20) $
—
(20) $
(14)
(348)
(316) $
(11)
(338)
(3)
(62)
(313) $
(65) $
(248) $
—
(248) $
(277) $
(24) $
(5)
—
(282) $
(24) $
(14)
(400)
(378)
(301)
(5)
(306)
The unrecognized amounts recorded in accumulated other comprehensive income will be subsequently recognized
as expense on a straight line basis over the average remaining service period of active participants, or for plans
with all or substantially all inactive participants, over the average remaining life expectancy. Actuarial gains and
losses incurred in future periods and not recognized as expense in those periods will be recognized as increases or
decreases in other comprehensive income, net of tax.
83
The net actuarial loss included in accumulated other comprehensive income at the end of 2013 and expected to be
recognized in net periodic benefit cost during 2014 is $11 million ($8 million, net of tax). The prior service cost
included in accumulated other comprehensive income to be recognized in 2014 is less than $1 million.
The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated and
combined financial statements for our defined benefit domestic and international pension plans were:
(in millions)
Change in benefit obligation:
Domestic Plans
December 31,
International Plans
December 31,
2013
2012
2013
2012
Benefit obligation at beginning of year
$
83 $
71 $
707 $
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Plan amendments, settlements and curtailments
Foreign currency translation/other
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contributions
Actual return on plan assets
Benefits paid
Plan amendments, settlements and curtailments
Foreign currency translation/other
Fair value of plan assets at end of year
Funded (unfunded) status of the plans
$
$
$
$
3
3
(3)
(8)
(4)
—
74 $
51
4
6
(3)
—
—
58 $
(16) $
3
3
(3)
9
—
—
83 $
44 $
5
5
(3)
—
—
51 $
(32) $
14
28
(32)
(9)
(2)
(3)
703 $
426 $
36
42
(32)
(1)
(5)
466 $
(237) $
599
11
29
(33)
69
—
32
707
373
38
37
(33)
(1)
12
426
(281)
The following table provides a rollforward of the projected benefit obligation for the other postretirement employee
benefit plans:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Other
Benefit Obligation at the end of year
2013
2012
$
$
65 $
1
3
(3)
(2)
(1)
63 $
46
1
3
(3)
15
3
65
84
The accumulated benefit obligation (“ABO”) for all the defined benefit pension plans was $741 million and $740
million at December 31, 2013 and 2012, respectively. For defined benefit pension plans in which the accumulated
benefit obligation was in excess of the fair value of the plans’ assets, the projected benefit obligation (“PBO”), ABO
and fair value of the plans’ assets were as follows:
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31,
2013
2012
$
404 $
375
106
516
469
171
The components of net periodic benefit cost for our defined benefit pension plans are as follows:
(in millions)
Domestic defined benefit pension plans:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial loss
Net periodic benefit cost
International defined benefit pension plans:
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Settlement and special termination benefits
Net periodic benefit cost
Total net periodic benefit cost
Year Ended December 31,
2013
2012
2011
$
$
$
$
$
3 $
3
(4)
1
2
5 $
14 $
28
(31)
13
—
24 $
29 $
3 $
3
(4)
1
2
5 $
11 $
29
(30)
8
2
20 $
25 $
2
3
(4)
1
—
2
6
12
(6)
2
1
15
17
85
Other changes in plan assets and benefit obligations recognized in other comprehensive income, as they pertain to
our defined benefit pension plans are as follows:
(in millions)
Domestic defined benefit pension plans:
Net (gain) loss
Prior service (credit) cost
Amortization of prior service cost
Amortization of net actuarial loss
Change recognized in other comprehensive income
International defined benefit pension plans:
Net (gain) loss
Amortization of net actuarial loss
Settlement
Foreign exchange
Change recognized in other comprehensive (income) loss (a)
Total recognized in other comprehensive (income) loss
Total recognized in comprehensive (income) loss
Year Ended December 31,
2013
2012
2011
$
$
$
$
$
$
(11) $
(4)
(1)
(2)
(18) $
(21) $
(13)
—
(2)
(36) $
(54) $
(25) $
8 $
1
(1)
(2)
6 $
62 $
(8)
(2)
8
60 $
66 $
91 $
(a)
The 2011 amount excludes $97 million ($68 million net of tax) of deferred losses assumed upon Spin-off.
The components of net periodic benefit cost for other postretirement employee benefit plans are as follows:
(in millions)
Service cost
Interest cost
Amortization of net actuarial loss
Net periodic benefit cost
Year Ended December 31,
2013
2012
2011
$
$
1 $
3
2
6 $
1 $
3
1
5 $
14
—
(1)
—
13
57
(2)
—
—
55
68
85
1
1
—
2
Other changes in plan assets and benefit obligations recognized in other comprehensive income, as they pertain to
other postretirement employee benefit plans are as follows:
(in millions)
Net (gain) loss
Amortization of net actuarial loss
Change recognized in other comprehensive (income) loss (a)
Total recognized in comprehensive loss
Year Ended December 31,
2013
2012
2011
$
$
$
(2) $
(2)
(4) $
2 $
14 $
(1)
13 $
18 $
3
—
3
5
(a)
The 2011 amount excludes $8 million ($5 million net of tax) of deferred losses assumed upon Spin-off.
86
Assumptions
The following table provides the weighted-average assumptions used to determine projected benefit obligations and
net periodic benefit cost, as they pertain to our pension plans.
Benefit Obligation Assumptions
Discount rate
Rate of future compensation
increase
Net Periodic Benefit Cost
Assumptions
Discount rate
Expected long-term return on plan
assets
Rate of future compensation
increase
2013
2012
2011
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
4.79%
4.23%
4.13%
4.04%
4.87%
4.76%
NM
3.48%
4.50%
3.50%
4.50%
3.58%
4.13%
4.04%
4.87%
4.76%
5.83%
5.53%
8.00%
7.33%
8.00%
7.35%
9.00%
7.34%
4.50%
3.50%
4.50%
3.58%
4.50%
3.37%
NM Not meaningful. During 2013, an amendment to one of the Company's business unit's pension plans, the Xylem
Standard Hourly Bargaining Unit Pension Plan, modified the benefit formula. Similar to all other U.S. pension plans,
pension benefits for future service will be based on years of service and not impacted by future compensation
increases.
Management develops each assumption using relevant company experience in conjunction with market-related
data for each individual country in which plans exist. Assumptions are reviewed annually and adjusted as
necessary.
The expected long-term rate of return on assets reflects the expected returns for each major asset class in which
the plans hold investments, the weight of each asset class in the target mix, the correlations among asset classes
and their expected volatilities. The assets of the pension plans are held by a number of independent trustees,
managed by several investment institutions and are accounted for separately in the Company’s pension funds.
Our expected return on plan assets is estimated by evaluating both historical returns and estimates of future
returns. Specifically, we analyze the plans’ actual historical annual return on assets, net of fees, over the past 15, 20
and 25 years; estimate future returns based on independent estimates of asset class returns; and evaluate
historical broad market returns over long-term timeframes based on our asset allocation range. For the new U.S.
Master Trust, historical returns were estimated using a constructed portfolio that reflects the Company’s strategic
asset allocation and the historical compound geometric returns of each asset class for the longest time period
available. Based on this approach, the weighted average expected long-term rate of return on assets for all plan
assets effective January 1, 2014 is estimated at 7.38%.
The table below provides the weighted average actual rate of return generated on plan assets during each of the
years presented as compared to the weighted average expected long-term rates of return utilized in calculating the
net periodic benefit costs.
Expected long-term rate of return on plan assets
Actual rate of return on plan assets
2013
2012
2011
7.40%
10.17%
7.42%
10.09%
7.52 %
(1.40)%
The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.19% for
2014, decreasing ratably to 5.00% in 2020. An increase or decrease in the health care trend rates by one percent
per year would impact the aggregate annual service and interest components by less than $1 million, and impact
the benefit obligation by approximately $8 million. To the extent that actual experience differs from these
assumptions, the effect will be amortized over the average future service of the covered active employees.
87
The determination of the assumptions related to postretirement benefit plans are based on the provisions of the
applicable accounting pronouncements, the review of various market data and discussion with our actuaries.
Investment Policy
The investment strategy for managing worldwide postretirement benefit plan assets is to seek an optimal rate of
return relative to an appropriate level of risk for each plan. Investment strategies vary by plan, depending on the
specific characteristics of the plan, such as plan size and design, funded status, liability profile and legal
requirements. In general, the plans are managed closely to their strategic allocations.
The following table provides the actual asset allocations of plan assets as of December 31, 2013 and 2012, and the
related asset target allocation ranges by asset category.
Equity securities
Fixed income
Hedge funds
Private equity
Insurance contracts and other
2013
2012
31.7%
24.7%
23.5%
4.2%
15.9%
29.2%
26.4%
29.4%
5.1%
9.9%
Target
Allocation
Ranges
20-40%
20-50%
20-60%
0-15%
0-30%
During the fourth quarter of 2012, the investment strategy for the plan assets within our UK Plan was adjusted with
the objective of reducing risk to market and economic volatility as well as helping to maintain the fully funded status
and enhance portfolio liquidity. Since at the time the UK Plan held 58% of the Company's postretirement plan
assets, this change reduced the overall Company target allocations in equity securities, fixed income and private
equity, while increasing the allocation to hedge funds.
Fair Value of Plan Assets
In measuring plan assets at fair value, a fair value hierarchy is applied which categorizes and prioritizes the inputs
used to estimate fair value into three levels. The fair value hierarchy is based on maximizing the use of observable
inputs and minimizing the use of unobservable inputs when measuring fair value. Classification within the fair value
hierarchy is based on the lowest level input that is significant to the fair value measurement. The three levels of the
fair value hierarchy are defined as follows:
•
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are other than quoted prices included within level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs include quoted prices (in non-active markets or in active markets for
similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
•
Level 3 inputs are unobservable inputs for the assets or liabilities.
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In
obtaining such data from the pricing service, we have evaluated the methodologies used to develop the estimate of
fair value in order to assess whether such valuations are representative of fair value, including net asset value
(NAV). Additionally, in certain circumstances, the NAV reported by an asset manager may be adjusted when
sufficient evidence indicates NAV is not representative of fair value.
The following is a description of the valuation methodologies and inputs used to measure fair value for major
categories of investments.
• Equity securities — Equities (including common and preferred shares, domestic listed and foreign listed, closed
end mutual funds and exchange traded funds) are generally valued at the closing price reported on the major
market on which the individual securities are traded at the measurement date. Equity securities held by the
Company that are publicly traded in active markets are classified within Level 1 of the fair value hierarchy.
88
Those equities that are held in proprietary funds pooled with other investor accounts are generally classified
within Level 2 of the hierarchy.
• Fixed income — United States government securities are generally valued using quoted prices of securities
with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g.
discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income
securities are generally classified in Level 2 of the fair value hierarchy, however, bond funds listed on active
markets are classified in Level 1.
• Hedge funds — Hedge funds are pooled funds that employ a range of investment strategies including equity
and fixed income, credit driven, macro and multi oriented strategies. The valuation of limited partnership
interests in hedge funds may require significant management judgment. The NAV reported by the asset
manager is adjusted when it is determined that NAV is not representative of fair value. In making such an
assessment, a variety of factors is reviewed, including, but not limited to, the timeliness of NAV as reported by
the asset manager and changes in general economic and market conditions subsequent to the last NAV
reported by the asset manager. Depending on how these investments can be redeemed and the extent of any
adjustments to NAV, hedge funds are classified within either Level 2 (redeemable within 90 days) or Level 3
(redeemable beyond 90 days) of the fair value hierarchy.
• Private equity — Private equity includes a diversified range of strategies, including buyout funds, distressed
funds, venture and growth equity funds and mezzanine funds. The valuation of limited partnership interests in
private equity funds may require significant management judgment. The NAV reported by the asset manager is
adjusted when it is determined that NAV is not representative of fair value. In making such an assessment, a
variety of factors is reviewed, including, but not limited to, the timeliness of NAV as reported by the asset
manager and changes in general economic and market conditions subsequent to the last NAV reported by the
asset manager. These funds are generally classified within Level 3 of the fair value hierarchy.
•
Insurance contracts and other — Primarily comprised of insurance contracts and cash. Insurance contracts are
valued at book value, which approximates fair value, and is calculated using the prior year balance adjusted for
investment returns and cash flows. Cash and cash equivalents are held in accounts with brokers or custodians
for liquidity and investment collateral.
89
The following table provides the fair value of plan assets held by our pension benefit plans by asset class.
2013
2012
December 31,
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
(in millions)
Asset Category
Equity securities
Global stock funds/
securities
Index funds
Emerging markets
funds
Fixed income
Corporate bonds
Government bonds
Hedge funds
Private equity
Insurance contracts and
other
$
123 $
40
3
95
35
123
22
83
108 $
3
3
40
35
9
—
62
11 $
37
—
48
—
95
—
4
4 $
—
—
7
—
19
22
17
69 $
93 $
79 $
11 $
46
—
100
26
140
24
48
3
—
32
23
44
—
44
43
—
59
3
76
—
—
477 $
225 $
192 $
3
—
—
9
—
20
24
4
60
Total
$
524 $
260 $
195 $
The following table presents a reconciliation of the beginning and ending balances of fair value measurement within
our pension plans using significant unobservable inputs (Level 3).
(in millions)
Balance, December 31, 2011
Purchases, sales, settlements
Unrealized loss
Realized gains
Net transfers
Currency impact
Balance, December 31, 2012
Purchases, sales, settlements
Unrealized gains
Realized gains
Net transfers
Currency impact
Balance, December 31, 2013
Equity
Securities
$
Fixed
Income
Hedge funds
Private
Equity
Other
Total
— $
8
1
—
—
—
9
(3)
1
—
—
—
7 $
37 $
8
1
1
(25)
(2)
20
10
1
—
(12)
—
19 $
24 $
(1)
1
—
—
—
24
(4)
1
—
—
1
22 $
4 $
—
—
—
—
—
4
12
1
—
—
—
17 $
67
15
3
2
(25)
(2)
60
15
4
1
(12)
1
69
2 $
—
—
1
—
—
3
—
—
1
—
—
4 $
$
Contributions and Estimated Future Benefit Payments
Funding requirements under governmental regulations are a major consideration in making contributions to our
postretirement plans. We made contributions of $43 million and $46 million to our pension and postretirement
benefit plans during 2013 and 2012, respectively. We currently anticipate making contributions to our pension and
postretirement benefit plans in the range of $40 million to $50 million during 2014, of which $11 million is expected
to be made in the first quarter.
90
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as
follows:
(in millions)
2014
2015
2016
2017
2018
Years 2019 – 2023
$
Pension
Other Benefits
3
3
3
3
3
20
35 $
36
37
38
39
222
Note 16. Stock-Based Compensation Plans
Our stock-based compensation program is a broad-based program designed to attract and retain employees while
also aligning employees’ interests with the interests of our shareholders. In addition, members of our Board of
Directors participate in our stock-based compensation program in connection with their service on our board.
Share-based awards issued to employees include non-qualified stock options, restricted stock awards and
performance-based awards. Compensation costs resulting from share-based payment transactions are recognized
primarily within selling, general and administrative expenses, at fair value over the requisite service period (typically
three years) on a straight-line basis. Under the 2011 Omnibus Incentive Plan, the number of shares initially
available for awards was 18 million. As of December 31, 2013, there were approximately 10 million shares of
common stock available for future grants.
We measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The calculated compensation cost is adjusted based on an estimate of awards
ultimately expected to vest. The fair value of a non-qualified stock option is determined on the date of grant using a
binomial lattice pricing model incorporating multiple and variable assumptions over time, including assumptions
such as employee exercise patterns, stock price volatility and changes in dividends. The fair value of restricted
stock and performance-based share awards are determined using the closing price on date of grant.
Total share-based compensation costs recognized for 2013, 2012 and 2011 were $27 million, $22 million, and $13
million, respectively. We recognized less than $1 million of share-based compensation costs within Restructuring
and asset impairment charges during 2013, which relates to the acceleration of certain unamortized compensation
expense for share-based compensation of restructured employees. A significant component of the charges in 2011
related to costs allocated to Xylem for ITT Corporate employees as well as other ITT employees not solely
dedicated to Xylem. These awards and related amounts are not necessarily indicative of awards and amounts that
would have been granted if we were an independent, publicly traded company for that period.
The unamortized compensation expense related to our stock options, restricted shares and performance-based
shares was $6 million, $17 million and $1 million, respectively, at December 31, 2013 and is expected to be
recognized over a weighted average period of 1.5, 1.7 and 2.2 years, respectively.
The amount of cash received from the exercise of stock options was $22 million for 2013 with a tax benefit of $8
million realized associated with stock option exercises and vesting of restricted stock. We classify as a financing
activity the cash flows attributable to excess tax benefits arising from stock option exercises and restricted stock
vestings.
91
Stock Option Grants
Options are awarded with a contractual term of ten years and generally vest over or at the conclusion of a three-
year period and are exercisable in seven to ten-year periods, except in certain instances of death, retirement or
disability. The exercise price per share is the fair market value of the underlying common stock on the date each
option is granted. At December 31, 2013, there were options to purchase an aggregate of 3.5 million shares of
common stock. The following is a summary of the changes in outstanding stock options for 2013:
(shares in thousands)
Outstanding at January 1, 2013
Granted
Exercised
Forfeited
Outstanding at December 31, 2013
Options exercisable at December 31, 2013
Vested and non-vested expected to vest at December 31. 2013
Shares
Weighted
Average
Exercise
Price / Share
26.46
27.43
25.01
27.86
26.80
26.71
26.79
Weighted Average
Remaining
Contractual
Term (Years)
6.4
10.0
3.4
6.1
6.4
4.9
6.4
4,083 $
817 $
(850) $
(546) $
3,504 $
1,994 $
3,438 $
The amount of non-vested options outstanding was 1.5 million and 2.2 million at a weighted average grant date fair
value of $26.90 and $27.14 as of December 31, 2013 and January 1, 2013, respectively. The aggregate intrinsic
value of the outstanding, exercisable and vested and non-vested stock options expected to vest at December 31,
2013 was $28 million, $16 million and $27 million respectively. The total intrinsic value of options exercised (which
is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during
2013 was $7 million.
Stock Option Fair Value
The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which
incorporates multiple and variable assumptions over time, including assumptions such as employee exercise
patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for 2013.
Dividend yield
Volatility
Risk-free interest rate
Expected term (in years)
Weighted-average fair value per share
2013
2012
2011
1.69%
31.10%
1.28%
6.62
1.52%
33.40%
1.42%
7.00
$
7.58
$
8.10
$
1.51%
36.30%
1.50%
6.40
7.88
Expected volatility is calculated based on an analysis of historic and implied volatility measures for a set of peer
companies. We use historical data to estimate option exercise and employee termination behavior within the
valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The
expected term represents an estimate of the period of time options are expected to remain outstanding. The
expected term provided above represents the weighted average of expected behavior for certain groups of
employees who have historically exhibited different behavior. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of option grant.
Restricted Stock Grants
As part of the 2011 Omnibus Incentive Plan, we are authorized to issue shares of restricted stock to eligible
employees and directors. Restricted shares granted to employees become fully vested upon the third anniversary of
the date of grant, and certain liability-based restricted shares to international employees settle in cash. Prior to the
time a restricted share becomes fully vested, the awardees cannot transfer, pledge, hypothecate or encumber such
shares. Prior to the time a restricted share is fully vested, the awardees have certain rights of a stockholder and
may include the right to vote and receive dividends. If an employee leaves prior to vesting, whether through
resignation or termination for cause, the restricted stock and related accrued dividends are forfeited. If an employee
retires or is terminated other than for cause, a pro rata portion of the restricted stock may vest in accordance with
92
the terms of the grant agreements. Restricted shares granted to Board members become fully vested upon the date
of the next annual meeting.
Our restricted stock activity was as follows for 2013:
(shares in thousands)
Outstanding at January 1, 2013
Granted
Vested
Forfeited
Outstanding at December 31, 2013
Performance-Based Share Grants
Shares
Weighted Average
Grant Date Fair
Value Per Share
1,588 $
568 $
(691) $
(190) $
1,275 $
26.92
28.18
26.44
28.84
27.67
As part of the annual March 2013 grant under the long-term incentive plan, performance-based shares were
granted to all executive officers of the Company. The performance-based shares vest based upon performance by
the Company over a three-year period against targets approved by the compensation committee of the Company's
Board of Directors prior to the grant date. For the 2013-2015 performance period, the performance-based shares
were granted at a target of 100% with actual payout contingent upon the achievement of a pre-set, three-year
adjusted Return on Invested Capital and cumulative adjusted net income performance target. Compensation costs
resulting from share-based payment transactions are recognized primarily within selling, general and administrative
expenses, at fair value over the requisite service period (typically three years) on a straight-line basis. The
calculated compensation cost is adjusted based on an estimate of awards ultimately expected to vest and our
assessment of the probable outcome of the performance condition. The fair value of performance-based share
awards at 100% target is determined using the closing price of our common stock on date of grant.
Our performance-based share activity was as follows for 2013:
(shares in thousands)
Outstanding at January 1, 2013
Granted
Vested
Forfeited
Outstanding at December 31, 2013
Shares
Weighted Average
Grant Date Fair
Value Per Share
— $
119 $
— $
(67) $
52 $
—
27.49
—
27.49
27.49
93
Note 17. Capital Stock
The Company has the authority to issue an aggregate of 750 million shares of Common Stock having a par value of
$0.01 per share. The stockholders of Xylem common stock are entitled to receive dividends as declared by the
Xylem Board of Directors. Dividends declared were $0.4656, $0.4048 and $0.1012 during 2013, 2012 and 2011,
respectively.
The changes in common stock outstanding for the three years ended December 31 are as follows:
(in thousands of shares)
Beginning Balance, January 1
Conversion of net investment
Stock incentive plan activity
Repurchase of common stock
Ending Balance, December 31
2013
2012
2011
185,658
—
1,203
(2,304)
184,557
184,641
—
1,367
(350)
—
184,578
63
—
185,658
184,641
On August 20, 2013, the Board of Directors authorized the repurchase up to $250 million in shares with no
expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and
maintains our focus on growth. During 2013, we repurchased 1.7 million shares for $50 million under this program.
There are up to $200 million in shares that may still be purchased under this plan.
On August 18, 2012, the Board of Directors authorized the repurchase of up to 2.0 million shares of common stock
with no expiration date. The program's objective is to offset dilution associated with various Xylem employee stock
plans by acquiring shares in the open market from time to time. We repurchased 0.6 million and 0.4 million shares
for $17 million and $9 million under this program during 2013 and 2012, respectively. There are up to 1.0 million
shares that may still be purchased under this plan.
Aside from the aforementioned repurchase programs, we repurchased 0.2 million and 0.1 million shares for $6
million and $4 million during 2013 and 2012, respectively in relation to settlement of employee tax withholding
obligations due as a result of the vesting of restricted stock.
94
Note 18. Accumulated Other Comprehensive Income (Loss)
The following table provides the components of accumulated other comprehensive income for 2013, 2012 and
2011:
Balance at December 31, 2011
$
(in millions)
Balance at January 1, 2011
Foreign currency translation adjustment
Contributed currency translation adjustment
Change in postretirement benefit plans
Change in tax on postretirement benefit plans
Amortization of prior service cost and net
actuarial loss on postretirement benefit plans
into:
Cost of revenue
Selling, general and administrative expenses
Tax on amortization of postretirement benefit
plan items
Assumption of accumulated unrealized gains
Assumption of tax on accumulated unrealized
gains
Foreign currency translation adjustment
Change in postretirement benefit plans
Change in tax on postretirement benefit plans
Amortization of prior service cost and net
actuarial loss on postretirement benefit plans
into:
Cost of revenue
Selling, general and administrative expenses
Other non-operating (expense) income, net
Tax on amortization of postretirement benefit
plan items
Unrealized gain on foreign exchange
agreements
Tax on unrealized gain on foreign exchange
agreements
Reclassification of unrealized gain on foreign
exchange agreements
Tax on reclassification of unrealized gain on
foreign exchange agreements
Balance at December 31, 2012
Foreign Currency
Translation
Postretirement
Benefit Plans
Derivative
Instruments
Total
$
73 $
(61)
276
(36) $
— $
(74)
15
2
1
(1)
(105)
32
(166) $
— $
288 $
48
(93)
27
5
5
4
(4)
4
(1)
(3)
37
(61)
276
(74)
15
2
1
(1)
(105)
32
122
48
(93)
27
5
5
4
(4)
4
(1)
(3)
$
336 $
(222) $
1
1 $
1
115
95
(in millions)
Balance at January 1, 2013
Foreign currency translation adjustment
Change in postretirement benefit plans
Change in tax on postretirement benefit plans
Amortization of prior service cost and net
actuarial loss on postretirement benefit plans
into:
Cost of revenue
Selling, general and administrative expenses
Research and development expenses
Other non-operating (expense) income, net
Tax on amortization of postretirement benefit
plan items
Unrealized gains on foreign exchange
agreements
Reclassification of unrealized gain on foreign
exchange agreements into revenue
Reclassification of unrealized loss on foreign
exchange agreements into cost of revenue
Foreign Currency
Translation
Postretirement
Benefit Plans
Derivative
Instruments
Total
$
336 $
(222) $
1 $
15
40
(17)
7
7
1
3
(5)
115
15
40
(17)
7
7
1
3
(5)
1
(2)
2
167
1
(2)
2
2 $
Balance at December 31, 2013
$
351 $
(186) $
Note 19. Commitments and Contingencies
General
From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses,
including acquisitions and divestitures, intellectual property matters, product liability and personal injury claims,
employment and pension matters, government and commercial contract disputes.
We are currently involved in litigation relating to a purchase price dispute with the minority shareholders arising from
one of our historical acquisitions. The court recently announced its decision to increase the purchase price to be
paid to such minority shareholders, and both sides are appealing that decision.
From time to time claims may be asserted against Xylem alleging injury caused by any our products resulting from
asbestos exposure. We believe there are numerous legal defenses available for such claims and would defend
ourselves vigorously. Pursuant to the Distribution Agreement ("Distribution Agreement") dated October 25, 2011
among ITT, Exelis and Xylem, ITT has an obligation to indemnify, defend and hold Xylem harmless for asbestos
product liability matters, including settlements, judgments, and legal defense costs associated with all pending and
future claims that may arise from past sales of ITT’s legacy products. We believe ITT remains a substantial entity
with sufficient financial resources to honor its obligations to us.
Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information,
including our assessment of the merits of the particular claims, we do not expect that any asserted or unasserted
legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of
operations, or financial condition. We have estimated and accrued $17 million and $8 million as of December 31,
2013 and 2012, respectively for these general legal matters.
Indemnifications
As part of the Spin-off, ITT, Exelis and Xylem agreed to indemnify, defend and hold harmless each of the other
parties with respect to such parties’ assumed or retained liabilities under the Distribution Agreement and breaches
of the Distribution Agreement or related spin agreements. ITT’s indemnification obligations include asserted and
unasserted asbestos and silica liability claims that relate to the presence or alleged presence of asbestos or silica in
products manufactured, repaired or sold prior to October 21, 2011, the Distribution Date, subject to limited
exceptions with respect to certain employee claims, or in the structure or material of any building or facility, subject
96
to exceptions with respect to employee claims relating to Xylem buildings or facilities. The indemnification
associated with pending and future asbestos claims does not expire. Xylem has not recorded a liability for material
matters for which we expect to be indemnified by ITT or Exelis through the Distribution Agreement and we are not
aware of any claims or other circumstances that would give rise to material payments from us under such
indemnifications.
Environmental
In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and
regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and
remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and
in many of these proceedings our liability is considered de minimis. We have received notification from the U.S.
Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites
formerly or currently owned and/or operated by Xylem, and other properties or water supplies that may be or have
been impacted from those operations, contain disposed or recycled materials or wastes and require environmental
investigation and/or remediation. These sites include instances where we have been identified as a potentially
responsible party under federal and state environmental laws and regulations.
Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on current law and existing
technologies. Our accrued liabilities for these environmental matters represent the best estimates related to the
investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as
related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of
investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these
environmental expenditures are recorded on an undiscounted basis. We have estimated and accrued $8 million and
$11 million as of December 31, 2013 and 2012, respectively, for environmental matters.
It is difficult to estimate the final costs of investigation and remediation due to various factors, including incomplete
information regarding particular sites and other potentially responsible parties, uncertainty regarding the extent of
investigation or remediation and our share, if any, of liability for such conditions, the selection of alternative remedial
approaches, and changes in environmental standards and regulatory requirements. In our opinion, the total amount
accrued is reasonable based on existing facts and circumstances.
As of December 31, 2013, our estimate of reasonably possible losses in excess of amounts accrued for
environmental and legal matters was approximately $26 million.
Operating Leases
We lease certain offices, manufacturing buildings, machinery, computers and other equipment. Such leases expire
at various dates through 2047 and may include renewal and payment escalation clauses. We often pay
maintenance, insurance and tax expense related to leased assets. Total rent expense for the three years ended
December 31, 2013 was as follows:
(in millions)
2013
2012
2011
Total
$
77
73
64
At December 31, 2013, we are obligated to make minimum rental payments under operating leases which are as
follows:
(in millions)
Minimum rental payments
2014
2015
2016
2017
$
63 $
51 $
39 $
24 $
2018
Thereafter
26
22 $
97
Warranties
We warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and
specific non-performance. Warranty expense was $34 million, $32 million, and $35 million for 2013, 2012 and 2011,
respectively. The table below provides changes in the product warranty accrual over each period.
(in millions)
Warranty accrual – January 1
Net changes for product warranties in the period
Settlement of warranty claims
Other
Warranty accrual – December 31
2013
2012
$
$
40 $
34
(37)
—
37 $
42
32
(33)
(1)
40
Note 20. Related Party Transactions and Parent Company Investment
Transactions with Unconsolidated Affiliates
We recorded sales to unconsolidated affiliates during 2013, 2012 and 2011 totaling $15 million, $12 million and $14
million, respectively. Additionally, we purchased $20 million, $20 million and $21 million of products from
unconsolidated affiliates during 2013, 2012 and 2011, respectively.
Transactions with Former Parent
Net transfers from/(to) parent are included within parent company investment on the Consolidated and Combined
Statements of Changes in Stockholders’ Equity representing activity with ITT, Xylem's former parent company, prior
to the Spin-off. The components of the net transfers from/(to) parent for 2011 are as follows:
(in millions)
Intercompany dividends
Cash pooling and general financing activities
Corporate allocations including income taxes
Contribution of assets and liabilities upon Spin-off
Total net transfers from/(to) parent
Year Ended
December 31,
2011
$
$
(87)
(1,355)
182
20
(1,240)
All significant intercompany transactions between us and ITT have been included in these consolidated and
combined financial statements and are considered to be effectively settled for cash at the time the transaction is
recorded, when the underlying transaction is to be settled in cash by ITT. The total net effect of the settlement of
these intercompany transactions is reflected in the Consolidated and Combined Statements of Cash Flow as a
financing activity.
During 2011, we sold inventory to other ITT business in the aggregate amount of $10 million, which is included in
revenue in our consolidated and combined financial statements. In addition, we recognized cost of revenue from the
inventory purchased from other ITT businesses of $10 million for 2011.
The consolidated and combined financial statements include expense allocations for certain functions provided by
ITT as well as other ITT employees not solely dedicated to Xylem, including, but not limited to, general corporate
expenses related to finance, legal, information technology, human resources, communications, ethics and
compliance, shared services, employee benefits and incentives, and share-based compensation. These expenses
have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on the basis
of revenue, headcount or other measure. We were allocated $129 million, which includes $44 million of separation
costs, of general corporate expenses incurred by ITT which is included within selling, general and administrative
expenses in the Consolidated and Combined Income Statements for 2011.
98
The expense allocations have been determined on a basis that we consider to be a reasonable reflection of the
utilization of services provided or the benefit received by us during the periods presented. The allocations may not,
however, reflect the expense we would have incurred as an independent, publicly traded company for the periods
presented. Actual costs that may have been incurred if we had been a standalone company would depend on a
number of factors, including the chosen organizational structure, what functions were outsourced or performed by
employees and strategic decisions made in areas such as information technology and infrastructure.
99
Note 21. Industry Segment and Geographic Data
Our business is organized into two segments: Water Infrastructure and Applied Water. The Water Infrastructure
segment, comprising our Water Solutions and Analytics operating units, focuses on the transportation, treatment
and testing of water, offering a range of products including water and wastewater pumps, treatment and testing
equipment, and controls and systems. The Applied Water segment, comprising our Residential & Commercial Water
and Flow Control operating units, encompasses the uses of water and focuses on the residential, commercial,
industrial and agricultural markets offering a wide range of products, including pumps, valves and heat exchangers.
Corporate and other consists of corporate office expenses including compensation, benefits, occupancy,
depreciation, and other administrative costs, as well as charges related to certain matters, such as the Spin-off
transaction and environmental matters that are managed at a corporate level and are not included in the business
segments in evaluating performance or allocating resources.
The accounting policies of each segment are the same as those described in the summary of significant accounting
policies (see Note 1). The following tables contain financial information for each reportable segment:
(in millions)
Revenue:
Water Infrastructure
Applied Water
Eliminations
Total
Operating income:
Water Infrastructure
Applied Water
Corporate and other
Total operating income
Other non-operating income
Interest expense
Income before taxes
Depreciation and amortization:
Water Infrastructure
Applied Water
Corporate and other
Total
Capital expenditures:
Water Infrastructure
Applied Water
Corporate and other
Total
Year Ended December 31,
2013
2012
2011
$
$
$
$
$
$
$
$
2,457 $
1,444
(64)
3,837 $
271 $
167
(75)
363
(10)
55
2,425 $
1,424
(58)
3,791 $
342 $
170
(69)
443
—
55
298 $
388 $
115 $
28
7
150 $
76 $
34
16
126 $
106 $
29
7
142 $
79 $
27
6
112 $
2,416
1,444
(57)
3,803
343
160
(108)
395
5
17
383
104
31
2
137
91
31
4
126
100
The following table illustrates revenue by product category, net of intercompany revenue.
(in millions)
Pumps, accessories, parts and service
Other (a)
Total
Year Ended December 31,
2013
2012
2011
$
$
3,076 $
761
3,837 $
3,054 $
737
3,791 $
3,093
710
3,803
(a) Other includes treatment equipment, analytical instrumentation, heat exchangers, valves and controls.
The following table contains the total assets for each reportable segment as of December 31, 2013 and 2012.
(in millions)
Water Infrastructure
Applied Water
Corporate and other (a)
Total
2013
Total Assets
2012
2011
$
$
2,989 $
1,340
567
4,896 $
2,844 $
1,253
582
4,679 $
2,745
1,241
414
4,400
(a) Corporate and other consists of items pertaining to our corporate headquarters function, which principally consist of
deferred tax assets and certain property, plant and equipment.
Geographical Information
Revenue is attributed to countries based upon the location of the customer. Property, Plant & Equipment is
attributed to countries based upon the location of the assets.
(in millions)
United States
Europe
Asia Pacific
Other
Total
(in millions)
United States
Europe
Asia Pacific
Other
Total
Revenue
Year Ended December 31,
2012
2011
2013
1,434 $
1,387
467
549
3,837 $
1,400 $
1,338
469
584
3,791 $
1,363
1,422
426
592
3,803
Property, Plant & Equipment
December 31,
2012
2011
2013
186 $
225
45
32
488 $
183 $
219
65
20
487 $
178
209
57
19
463
$
$
$
$
101
Note 22. Supplemental Information
The table below provides changes in the allowance for doubtful accounts over each period.
(in millions)
Balance at beginning of year
Additions charged to expense
Deductions/other
Balance at end of year
2013
2012
2011
$
$
25 $
8
(11)
22 $
29 $
4
(8)
25 $
The table below provides changes in the inventory valuation over each period.
(in millions)
Balance at beginning of year
Additions charged to cost of revenue
Deductions/other
Balance at end of year
2013
2012
2011
$
$
38 $
14
(11)
41 $
39 $
9
(10)
38 $
25
11
(7)
29
33
17
(11)
39
Note 23. Quarterly Financial Data (Unaudited)
(In millions, except per share amounts)
Revenue
Gross profit
Operating income
Net income
Earnings per share:
Basic
Diluted
(In millions, except per share amounts)
Revenue
Gross profit
Operating income
Net income
Earnings per share:
Basic
Diluted
Dec. 31
Sept. 30
June 30
Mar. 31
2013 Quarter Ended
1,033 $
410
129
68 $
0.37 $
0.37 $
965 $
384
98
73 $
0.39 $
0.39 $
960 $
371
70
46 $
0.25 $
0.25 $
879
334
66
41
0.22
0.22
Dec. 31
Sept. 30
June 30
Mar. 31
2012 Quarter Ended
969 $
382
104
73 $
0.39 $
0.39 $
931 $
374
111
72 $
0.39 $
0.38 $
966 $
383
129
89 $
0.48 $
0.48 $
925
363
99
63
0.34
0.34
$
$
$
$
$
$
$
$
102
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer ("CEO") and our Chief Financial Officer
("CFO"), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of
the end of the year ended December 31, 2013 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934
(“the Exchange Act”). Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls
and procedures were effective as of the year ended December 31, 2013 to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to
our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required
disclosures.
Management's Annual Report on Internal Control Over Financial Reporting
As required by the SEC's rules and regulations for the implementation of Section 404 of the Sarbanes-Oxley Act,
the Company's management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with GAAP.
The Company's management, including the CEO and CFO, conducted an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2013 based on the framework established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission
in 1992. This assessment included an evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of those controls. Based on our assessment, the Company's management
has concluded that our internal control over financial reporting was effective as of December 31, 2013.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2013 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which
appears following Item 9B of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the quarter
ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None
103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Xylem Inc.
Rye Brook, New York
We have audited the internal control over financial reporting of Xylem Inc. and subsidiaries (the "Company") as of
December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management's Annual Report on Internal
Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected
by the company's board of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended December 31, 2013 of the
Company and our report dated February 27, 2014 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 27, 2014
104
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the information in our Definitive Proxy
Statement to be filed with the SEC in connection with our 2014 Annual Meeting of Shareholders (the “2014 Proxy
Statement”) set forth under the captions “Proposal 1 - Election of Directors,” "Director Selection and Composition,"
"Committees of the Board of Directors -- Audit Committee" and “Section 16(a) Beneficial Ownership Reporting
Compliance.”
The information called for by Item 10 with respect to executive officers is set forth in Part I of this Report under the
caption “Executive Officers of the Registrant” and is incorporated by reference in this section.
We have adopted corporate governance principles and charters for each of our standing committees. The principles
address director qualification standards, responsibilities, access to management and independent advisors,
compensation, orientation and continuing education, management succession principles and board and committee
self-evaluation. The corporate governance principles and standing committee charters are available on the
Company’s website at www.investors.xyleminc.com. A copy of the corporate governance principles and standing
committee charters is also available to any shareholder who requests a copy from the Company’s Corporate
Secretary.
We have also adopted a written code of conduct which is applicable to all our directors, officers and employees,
including the Company’s Chief Executive Officer and Chief Financial Officer and other executive officers identified
pursuant to this Item 10. In accordance with the SEC’s rules and regulations, a copy of the code has been posted to
our website and a copy of the code of conduct is also available to any shareholder who requests it. We intend to
disclose any changes in our code of conduct by posting a revised version on our website at www.xyleminc.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information in our 2014 Proxy
Statement set forth under captions “Executive Compensation," "2013 Non-Management Director Compensation"
and “Report of the Leadership Development & Compensation Committee.”
ITEM 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information required by this Item is incorporated herein by reference to the information in our 2014 Proxy
Statement set forth under the captions “Stock Ownership of Directors, Executive Officers and Certain Beneficial
Owners” and "Equity Compensation Plan Information."
ITEM 13.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
The information required by this Item is incorporated herein by reference to the information in our 2014 Proxy
Statement set forth under the caption “Information About our Board of Directors.”
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the information in our 2014 Proxy
Statement set forth under the caption “Independent Registered Public Accounting Firm Fees.”
105
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
(1) The Index to Consolidated and Combined Financial Statements of the Registrant under Item 8 of this
Report is incorporated herein by reference as the list of Financial Statements required as part of this
Report.
(2) Financial Statement Schedules — All financial statement schedules have been omitted because they
are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits — The exhibit list in the Exhibit Index is incorporated by reference as the list of exhibits
required as part of this Report.
106
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
XYLEM INC.
(Registrant)
/s/ John P. Connolly
John P. Connolly
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
February 27, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
/s/ Steven R. Loranger
Steven R. Loranger
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael T. Speetzen
Michael T. Speetzen
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Markos I. Tambakeras
Markos I. Tambakeras, Chairman
/s/ Curtis J. Crawford
Curtis J. Crawford, Director
/s/ Robert F. Friel
Robert F. Friel, Director
/s/ Victoria D. Harker
Victoria D. Harker, Director
/s/ Sten E. Jakobsson
Sten E. Jakobsson, Director
/s/ Edward J. Ludwig
Edward J. Ludwig, Director
/s/ Surya N. Mohapatra
Surya N. Mohapatra, Director
February 27, 2014
/s/ Jerome A. Peribere
Jerome A. Peribere, Director
February 27, 2014
/s/ James P. Rogers
James P. Rogers, Director
107
Exhibit
Number
Description
Location
EXHIBIT INDEX
(3.1) Second Amended and Restated Articles of Incorporation of
Xylem Inc.
(3.2) Amended and Restated By-laws of Xylem Inc.
(4.1) Indenture, dated as of September 20, 2011, between Xylem
Inc., ITT Corporation, as initial guarantor, and Union Bank,
N.A., as trustee
(4.2) Form of Xylem Inc. 3.550% Senior Notes due 2016
(4.3) Form of Xylem Inc. 4.875% Senior Notes due 2021
(10.1) Distribution Agreement, dated as of October 25, 2011,
among ITT Corporation, Exelis Inc. and Xylem Inc.
(10.2) Benefits and Compensation Matters Agreement, dated as of
October 25, 2011, among ITT Corporation, Exelis Inc. and
Xylem Inc.
(10.3) Tax Matters Agreement, dated as of October 25, 2011,
among ITT Corporation, Exelis Inc. and Xylem Inc.
(10.4) Master Transition Services Agreement, dated as of October
25, 2011, among ITT Corporation, Exelis Inc. and Xylem Inc.
(10.5) Four-Year Competitive Advance and Revolving Credit
Facility Agreement, dated as of October 25, 2011, among
Xylem Inc., the Lenders Named Therein, J.P. Morgan Chase
Bank, N.A., as Administrative Agent and Citibank, N.A., as
Syndication Agent.
(10.6) Xylem 2011 Omnibus Incentive Plan
(10.7) Xylem 1997 Long-Term Incentive Plan
Incorporated by reference to Exhibit 3.1 of
Xylem Inc.’s Form 10-Q filed on
October 29, 2013 (CIK No. 131190969,
File No. 1-35229).
Incorporated by reference to Exhibit 3.1 of
Xylem Inc.’s Form 10-Q filed on
October 29, 2013 (CIK No. 131190969,
File No. 1-35229).
Incorporated by reference to Exhibit 4.2 of
ITT Corporation’s Form 8-K Current
Report filed on September 21, 2011 (CIK
No. 216228, File No. 1-5672).
Incorporated by reference to Exhibit 4.5 of
Xylem Inc.'s Form S-4 Registration
Statement filed on May 24, 2012 (CIK No.
1524472, File No. 333-181643).
Incorporated by reference to Exhibit 4.6 of
Xylem Inc.'s Form S-4 Registration
Statement filed on May 24, 2012 (CIK No.
1524472, File No. 333-181643).
Incorporated by reference to Exhibit 10.1
of ITT Corporation’s Form 10-Q Quarterly
Report filed on October 28, 2011 (CIK No.
216228, File No. 1-5672).
Incorporated by reference to Exhibit 10.2
of ITT Corporation’s Form 10-Q Quarterly
Report filed on October 28, 2011 (CIK No.
216228, File No. 1-5672).
Incorporated by reference to Exhibit 10.3
of ITT Corporation’s Form 10-Q Quarterly
Report filed on October 28, 2011 (CIK No.
216228, File No. 1-5672).
Incorporated by reference to Exhibit 10.4
of ITT Corporation’s Form 10-Q Quarterly
Report filed on October 28, 2011 (CIK No.
216228, File No. 1-5672).
Incorporated by reference to Exhibit 10.5
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 4.3 of
Xylem Inc.’s Registration Statement on
Form S-8 filed on October 28, 2011 (CIK
No. 1524472, File No. 333-177607).
Incorporated by reference to Exhibit 10.7
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
108
Exhibit
Number
Description
(10.8) Xylem 1997 Annual Incentive Plan
(10.9) Xylem Annual Incentive Plan for Executive Officers
(10.10) Xylem Retirement Savings Plan
(10.11) Xylem Supplemental Retirement Savings Plan
(10.12) Xylem Deferred Compensation Plan
(10.13) Xylem Deferred Compensation Plan for
Non-Employee Directors
(10.14) Xylem Enhanced Severance Pay Plan
(10.15) Xylem Special Senior Executive Severance Pay Plan
(10.16) Xylem Senior Executive Severance Pay Plan
(10.17) Form of Xylem 2011 Omnibus Incentive Plan 2011 Non-
Qualified Stock Option Award Agreement — Founders Grant
(10.18) Form of Xylem 2011 Omnibus Incentive Plan Non-Qualified
Stock Option Award Agreement — General Grant
(10.19) Letter agreement dated September 8, 2013 between Steven
R. Loranger and Xylem Inc.
(10.20) Form of Xylem 2011 Omnibus Incentive Plan-Performance
Share Unit Agreement
109
Location
Incorporated by reference to Exhibit 10.8
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.9
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.1
of Xylem Inc.’s Form 10-Q filed on July
30, 2013 (CIK No. 1524472, File
No. 1-35229).
Incorporated by reference to Exhibit 10.11
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 4.5 of
Xylem Inc.’s Registration Statement on
Form S-8 filed on October 28, 2011 (CIK
No. 1524472, File No. 333-177607).
Incorporated by reference to Exhibit 10.13
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.14
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.15
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.16
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.17
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.18
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.1
of Xylem Inc.'s Form 10-Q Quarterly
Report filed on October 29, 2013 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.3
of Xylem Inc.'s Form 10-Q Quarterly
Report filed on April 30, 2013 (CIK No.
1524472, File No. 1-35229).
Exhibit
Number
Description
(10.21) Form of Xylem 2011 Omnibus Incentive Plan Restricted
Stock Unit Agreement — Founders Grant
(10.22) Form of Xylem 2011 Omnibus Incentive Plan Restricted
Stock Unit Agreement — General Grant
(10.24) Form of Director’s Indemnification Agreement
(10.25) Form of Xylem 2011 Omnibus Incentive Plan 2012
Restricted Stock Unit Agreement
(10.27) Form of Xylem 2011 Omnibus Incentive Plan 2012 Non-
Qualified Stock Option Award Agreement
(10.28) Form of Xylem Special Senior Executive Severance Pay
Plan
(10.29) Form of Xylem Enhanced Severance Pay Plan
(10.30) Research and Development Facility Agreement - Xylem
Water Technologies Risk-Sharing Financing Facility First
Amended and Restated Finance Contract, dated December
4, 2013, among the European Investment Bank, Xylem
Holdings S.a.r.l. and Xylem International S.a.r.l., as
borrowers, and Xylem Inc., as guarantor.
(11.0) Statement re computation of per share earnings
Location
Incorporated by reference to Exhibit 10.21
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.22
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.24
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 11, 2011 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.2
of Xylem Inc.'s Form 10-Q Quarterly
Report filed on April 30, 2013 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.1
of Xylem Inc.'s Form 10-Q Quarterly
Report filed on April 30, 2013 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.28
of Xylem Inc.'s Form 10-Q Quarterly
Report filed on May 3, 2012 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.29
of Xylem Inc.'s Form 10-Q Quarterly
Report filed on May 3, 2012 (CIK No.
1524472, File No. 1-35229).
Filed herewith.
Information required to be presented in
Exhibit 11 is provided under "Earnings Per
Share" in Note 8 to the consolidated
financial statements in Part II, Item 8.
“Financial Statements and Supplementary
Data” of this Annual Report on Form 10-K
in accordance with the provisions of
Financial Accounting Standards Board
Accounting Standards Codification 260,
Earnings Per Share.
(12.0) Statements re computation of ratios
(21.0) Subsidiaries of the Registrant
Filed herewith.
Filed herewith.
(23.1) Consent of Independent Registered Public Accounting Firm Filed herewith.
(31.1) Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith.
Filed herewith.
110
Exhibit
Number
Description
(32.1) Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(32.2) Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Location
This Exhibit is intended to be furnished in
accordance with Regulation S-K Item 601
(b) (32) (ii) and shall not be deemed to be
filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or
incorporated by reference into any filing
under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except
as shall be expressly set forth by specific
reference.
This Exhibit is intended to be furnished in
accordance with Regulation S-K Item 601
(b) (32) (ii) and shall not be deemed to be
filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or
incorporated by reference into any filing
under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except
as shall be expressly set forth by specific
reference.
(101) The following materials from Xylem Inc.’s Annual Report on
Submitted electronically with this report.
Form 10-K for the year ended December 31, 2013,
formatted in XBRL (Extensible Business Reporting
Language): (i) Combined Condensed Income Statements,
(ii) Combined Condensed Statements of Comprehensive
Income, (iii) Combined Condensed Balance Sheets, (iv)
Combined Condensed Statements of Cash Flows and (v)
Notes to Combined Condensed Financial Statements
111
Ratio of Earnings to Fixed Charges
EXHIBIT 12
Years Ended December 31,
2013
2012
2011(a)
2010(a)
2009(a)
(In Millions Except Ratios)
Fixed Charges:
Interest Expense, Including Amortization of Deferred Finance
Fees
$
55 $
55 $
17 $ — $ —
Interest Portion of Rental Expense (b)
Total Fixed Charges
25
80
24
79
21
38
18
18
16
16
Earnings Before Income Taxes, Discontinued Operations and
Fixed Charges:
Pre-tax income (before income or loss from equity investees)
298
388
379
387
277
Fixed Charges
80
79
38
18
16
Total Earnings Available For Fixed Charges
$
378 $
467 $
417 $
405 $
293
Ratio of Earnings to Fixed Charges:
4.7
5.9
10.9
22.7
18.9
(a) For all comparative periods presented above, these periods are prior to the Spin-off from ITT and the issuance of $1.2
billion aggregate principal amount of senior notes which were issued in September 2011. Interest on the Senior Notes
accrues from September 20, 2011.
(b) Calculated as 33% of rent expense, which is a reasonable approximation of the interest factor.
SUBSIDIARIES OF THE REGISTRANT*
EXHIBIT 21
Name
138197 Canada Ltd.
Aanderaa Data Instruments AS
Anadolu Flygt Pompa Pazarlama Ve Ticaret AS
Arrow Rental Limited
ASE AS
Bellingham & Stanley Ltd.
Bombas Flygt de Venezuela S.A.
Brightbanner Limited
BS Pumps Limited
Clean Drains Limited
Cleghorn Wareing & Co. (Pumps) Ltd.
CMS Research Corporation
Comet Pump & Engineering Limited
Conrad Pollmann Pumpenbau GmbH
Design Analysis Associates, Inc.
Evolutionary Concepts, Inc.
Faradyne Motors (Suzhou) Co. Ltd.
Faradyne Motors LLC
Flow Control LLC
Flowtronex PSI, LLC
Fluid Handling, LLC
Flygt (Hong Kong) Limited
Flygt AS
Godwin Holdings Ltd.
Goulds Water Technology Philippines, Inc
Grindex AB
Grindex Pumps LLC
Heartland Pump Rental and Sales, Inc.
Jabsco Marine Italia s.r.l.
Jabsco S. de R.L. De C.V.
Jurisdiction of
Organization
Federally Chartered
Name Under Which
Doing Business
Norway
Turkey
Ireland
Norway
England & Wales
Venezuela
England & Wales
Northern Ireland
United Kingdom
United Kingdom
Alabama
United Kingdom
Germany
Utah
California
China
Delaware
Delaware
Nevada
Delaware
Hong Kong
Norway
England & Wales
Philippines
Sweden
Delaware
Illinois
Italy
Mexico
Laing Futstechnika Korltolt Felelossgu Trsasg (LFK)
Hungary
Lowara s.r.l.
Lowara UK Limited
Lowara Vogel Polska SP ZOO
MJK Automation A/S
MJK Automation AS
MJK Automation B. V.
MultiTrode Inc.
Multitrode Pty Ltd
Multitrode UK Limited
NHK Jabsco Co, Ltd.
Italy
United Kingdom
Lowara
Lowara
Poland
Denmark
Norway
Netherlands
Florida
Australia
England & Wales
Japan
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted because, considered in
the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.
Name
Nova Analytics Europe LLC
O.I. Corporation
PCI Membrane Systems, Inc.
Pension Trustee Management Ltd
Pims (Services) Holdings Limited
Pims (Services) Limited
Name Under Which
Doing Business
OI Analytical
Jurisdiction of
Organization
Delaware
Oklahoma
Delaware
England & Wales
England
England
Pims Environmental Services (Holdings) Limited
United Kingdom
Pims Environmental Services Limited
Pims Group Limited
Pims Pumps Limited
Pollmann Pumpenbau Landsberg GmbH
Portacel Inc.
Secomam S.A.S.
Sensortechnik Meinsberg GmbH
SI Analytics GmbH
TEC Electrical Componets
Texas Turbine LLC
Totton Holdings Limited
Totton Pumps Limited
Water Asset Management, Inc.
Water Company Ltd
Water Process Limited
Wedeco Limited
England
England
England
Germany
Pennsylvania
France
Germany
Germany
United Kingdom
Delaware
England & Wales
England & Wales
Delaware
England & Wales
United Kingdom
United Kingdom
Wissenschaftich Technische Werkstaetten GmbH
Germany
Xylem (China) Company Limited
Xylem (Hong Kong) Limited
Xylem (Nanjing) Co., Ltd
Xylem (Wuxi) Flow Control Equipment Co., Ltd.
Xylem Analytics Australia Pty Ltd.
Xylem Analytics Germany GmbH
Xylem Analytics LLC
Xylem Analytics UK LTD
Xylem ATI,LLC
China
Hong Kong
China
China
Australia
Germany
Delaware
England
Delaware
Xylem Australia Holdings PTY LTD
New South Wales
Xylem Brasil Soluções para Água Ltda
Xylem Canada Company
Xylem Delaware, Inc.
Xylem Denmark Holdings ApS
Xylem Dewatering Canada Ltd
Xylem Dewatering Solutions UK Ltd
Xylem Dewatering Solutions, Inc.
Xylem Europe GmbH
Xylem Financing S.àr.l.
Brazil
Nova Scotia
Delaware
Denmark
Federally Chartered
England & Wales
New Jersey
Switzerland
Luxembourg
Xylem Texas Turbine
LLC
Godwin Pumps of
America
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted because, considered in
the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.
Name
Xylem Flow Control Limited
Xylem Germany GmbH
Xylem Global Sarl
Xylem Holdings S.a.r.l.
Xylem Inc.
Xylem Industriebeteiligungen GmbH
Xylem Industries S.a.r.l.
Xylem Interim Kft
Xylem International S.a.r.l.
Xylem IP Holdings LLC
Xylem IP Management UK LP
Xylem IP Management s.a r.l.
Xylem Lowara Ltd
XYLEM JABSCO LIMITED
Xylem Luxembourg S.a r.l.
Xylem Management GmbH
Xylem Manufacturing Austria GmbH
Xylem PCI Membranes Polska S.P. Z.O.O.
Xylem Russia LLC
Xylem Sanitaire Limited
Xylem Service Hungary Kft
Xylem Service Italia Srl Luxemburg Branch
Xylem Services Austria GmbH
Xylem Services GmbH
Xylem Services Italia Srl
Xylem Technologies Austria GmbH
Xylem Technologies GmbH
Xylem Water Holdings Limited
Xylem Water Limited
Xylem Water Services Limited
Xylem Water Solutions (Hong Kong) Limited
Xylem Water Solutions Argentina S.A.
Jurisdiction of
Organization
England & Wales
Frankfurt am Main
Name Under Which
Doing Business
Luxembourg
Luxembourg
Indiana
Germany
Luxembourg
Hungary
Luxembourg
Delaware
United Kingdom
Luxembourg
United Kingdom
United Kingdom
Luxembourg
Germany
Austria
Poland
Russia
United Kingdom
Hungary
Italy
Austria
Germany
Italy
Austria
Frankfurt am Main
United Kingdom
England & Wales
United Kingdom
Hong Kong
Argentina
Xylem Water Solutions Australia Limited
New South Wales
Xylem Water Solutions Austria GmbH
Xylem Water Solutions Belgium
Xylem Water Solutions Chile S.A.
Xylem Water Solutions Colombia Ltda
Xylem Water Solutions Denmark ApS
Xylem Water Solutions Deutschland GmbH
Xylem Water Solutions España, S.A.
Xylem Water Solutions Florida LLC
Xylem Water Solutions France SAS
Xylem Water Solutions Global Services AB
Xylem Water Solutions Herford GmbH
Austria
Belgium
Chile
Colombia
Denmark
Germany
Spain
Delaware
France
Sweden
Germany
Flygt
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted because, considered in
the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.
Name
Xylem Water Solutions Holdings France SAS
Xylem Water Solutions India Private Limited
Xylem Water Solutions Ireland Ltd.
Xylem Water Solutions Italia S.R.L
Xylem Water Solutions Korea Co., Ltd.
Xylem Water Solutions Lietuva, UAB
Xylem Water Solutions Magyarorszag KRT
Xylem Water Solutions Malyasia SDN. BHD.
Xylem Water Solutions Manufacturing AB
Xylem Water Solutions Manufacturing AB Luxembourg
Branch
Xylem Water Solutions Metz SAS
Xylem Water Solutions Mexico S.de R.L. de C.V.
Xylem Water Solutions Middle East Region FZCO
Xylem Water Solutions Muscat LLC
Xylem Water Solutions Nederland BV
Xylem Water Solutions New Zealand Limited
Xylem Water Solutions Norge AS
Xylem Water Solutions Panama s.r.l.
Xylem Water Solutions Peru S.A.
Xylem Water Solutions Polska Sp.z.o.o.
Xylem Water Solutions Portugal Unipessoal Lda.
Jurisdiction of
Organization
France
Name Under Which
Doing Business
Flygt
India
Ireland
Italy
Korea
Lithuania
Hungary
Malaysia
Sweden
Sweden
France
Mexico
Dubai
Oman
Netherlands
New Zealand
Flygt
Norway
Panama
Peru
Poland
Portugal
Xylem Water Solutions Rugby Limited
United Kingdom
Xylem Water Solutions Schweiz GmbH
Xylem Water Solutions Singapore PTE Ltd.
Xylem Water Solutions South Africa (Pty) Ltd.
Switzerland
Singapore
South Africa
Xylem Water Solutions South Africa Holdings LLC
Delaware
Xylem Water Solutions Suomi Oy
Xylem Water Solutions Sweden AB
Xylem Water Solutions U.S.A., Inc.
Xylem Water Solutions UK Holdings Limited
Xylem Water Solutions UK Limited
Xylem Water Solutions Zelienople LLC
Xylem Water Solutions(Shenyang) CO., Ltd
Xylem Water Systems (California), Inc.
Finland
Sweden
Delaware
United Kingdom
United Kingdom
Delaware
China
California
Xylem Water Systems Australia PTY ltd.
New South Wales
Xylem Water Systems Hungary KFT
Xylem Water Systems International, Inc.
Xylem Water Systems Japan Corporation
Xylem Water Systems Mexico S. DE R.L. DE C.V.
Xylem Water Systems Philippines Holding, Inc.
Xylem Water Systems Texas Holdings LLC
Xylem Water Systems U.S.A., LLC
Yellow Springs Instrument LTD
YSI (Beijing) Co., Ltd.
Hungary
Delaware
Japan
Mexico
Delaware
Delaware
Delaware
Japan
China
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted because, considered in
the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.
Name Under Which
Doing Business
Name
YSI (China) Limited
YSI (Hong Kong) Ltd.
YSI (UK) Limited
YSI Environmental South Asia Private Ltd.
YSI Incorporated
YSI Instrumentos E Servicos Ambientais Ltda.
YSI International, Inc.
YSI Nanotech Limited
YSI Trading (Shanghai) Company, Ltd.
Jurisdiction of
Organization
Hong Kong
Hong Kong
England
India
Ohio
Brazil
Ohio
Japan
China
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Xylem Inc. are omitted because, considered in
the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-177607 on Form S-8 of our reports
dated February 27, 2014, relating to the financial statements of Xylem Inc. (which report expresses an unqualified
opinion and includes an explanatory paragraph regarding the fact that prior to October 31, 2011 the financial
statements were derived from the accounting records of the water equipment and services businesses of ITT
Corporation, and that for the period prior to October 31, 2011, the financial statements include expense allocations
for certain corporate functions historically provided by ITT Corporation and that these allocations may not be
reflective of the actual expenses which would have been incurred had the Company operated as a separate entity
apart from ITT Corporation and that included in Note 20 to the consolidated and combined financial statements is a
summary of transactions with related parties) and the effectiveness of Xylem Inc.'s internal control over financial
reporting, appearing in this Annual Report on Form 10-K of Xylem Inc. for the year ended December 31, 2013.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 27, 2014
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Steven R. Loranger, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Xylem Inc. for the period ended December 31, 2013;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 27, 2014
/s/ Steven R. Loranger
Steven R. Loranger
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Michael T. Speetzen, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Xylem Inc. for the period ended December 31, 2013;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 27, 2014
/s/ Michael T. Speetzen
Michael T. Speetzen
Senior Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Xylem Inc. (the “Company”) for the period ended
December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Steven R. Loranger, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Steven R. Loranger
Steven R. Loranger
President and Chief Executive Officer
February 27, 2014
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of Xylem Inc. (the “Company”) for the period ended
December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Michael T. Speetzen, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Michael T. Speetzen
Michael T. Speetzen
Senior Vice President and Chief Financial Officer
February 27, 2014
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The word xylem is derived from classical
Xylem Global Headquarters:
2014 Annual Meeting:
Greek and is the name for the tissue that
transports water in plants. Our name, Xylem,
highlights the engineering efficiency of
our water-centric business by linking it with
the best water transportation of all — that
which occurs in nature.
1 International Drive
Rye Brook, NY 10573
T: +1.914.323.5700
F: +1.914.323.5800
www.xylem.com
Tuesday, May 6, 2014
Xylem Global Headquarters
1 International Drive
Rye Brook, NY 10573
Independent Public
Transfer Agent and Registrar
Accountant:
for Common Stock:
Deloitte & Touche LLP
Wells Fargo Shareowner
Stamford Harbor Park
Services, a division
333 Ludlow Street
of Wells Fargo Bank, N.A.
Stamford, CT 06902
United States and Canada:
+1.203.708.4000
+1.866.416.8481
International Inquiries:
+1.651.450.4064
Investor Relations:
Phil De Sousa
+1.914.323.5930
Address shareowner
phil.desousa@xyleminc.com
inquiries to:
Wells Fargo
Dawn Powell
+1.914.323.5931
Shareowner Services
dawn.powell@xyleminc.com
P.O. Box 64854
St. Paul, MN 55164-0854
Xylem Inc.
1 International Drive
Rye Brook, NY 10573
T: +1-914-323-5700
www.xylem.com