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, 2015
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, 2015
was approximately $6.7 billion. As of January 29, 2016, there were 178,485,808 outstanding shares of the registrant’s common
stock, par value $0.01 per share.
Portions of the registrant’s definitive proxy statement for its 2016 Annual Meeting of Shareowners, to be held in May 2016, are
incorporated by reference into Part II and Part III of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
Xylem Inc.
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2015
Table of Contents
ITEM
PAGE
1
Business
1A. Risk Factors
1B. Unresolved Staff Comments
2
Properties
3
Legal Proceedings
4 Mine Safety Disclosures
*
Executive Officers of the Registrant
Board of Directors
PART I
PART II
5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
6
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
9
9A. Controls and Procedures
9B. Other Information
PART III
10 Directors, Executive Officers and Corporate Governance
11 Executive Compensation
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13 Certain Relationships and Related Transactions, and Director Independence
14 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
3
13
20
21
21
21
22
23
24
27
28
48
49
95
95
95
97
97
97
97
97
98
99
100
PART I
The following discussion should be read in conjunction with the consolidated 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 financial statements to
"ITT" or the "former parent" refer to ITT Corporation and its consolidated subsidiaries (other than Xylem Inc.).
Forward-Looking Statements
This Report contains information that may constitute “forward-looking statements" within the meaning of the Private
Securities Litigation Act of 1995. Forward-looking statements by their nature address matters that are, to different
degrees, uncertain. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,”
“believe,” “target,” “will,” “could,” “would,” “should” and similar expressions identify forward-looking statements.
However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.
These forward-looking statements include any statements that are not historical in nature, including any such
statements about the capitalization of the Company, the Company’s restructuring and realignment, future strategic
plans and other statements that describe the Company’s business strategy, outlook, objectives, plans, intentions or
goals. All statements that address operating or financial performance, events or developments that we expect or
anticipate will occur in the future including statements relating to orders, revenue, operating margins and earnings
per share growth, and statements expressing general views about future operating results are forward-looking
statements. Forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred
from, such forward-looking statements.
Factors that could cause results to differ materially from those anticipated include: overall economic and business
conditions, political and other risks associated with our international operations, including military actions, economic
sanctions or trade embargoes that could affect customer markets, and non-compliance with laws, including foreign
corrupt practice laws, export and import laws and competition laws; potential for unexpected cancellations or delays
of customer orders in our reported backlog; our exposure to fluctuations in foreign currency exchange rates;
competition and pricing pressures in the markets we serve; the strength of housing and related markets; weather
conditions; ability to retain and attract key members of management; our relationship with and the performance of
our channel partners; our ability to successfully identify, complete and integrate acquisitions; our ability to borrow or
to refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; changes in the value
of goodwill or intangible assets; risks relating to product defects, product liability and recalls; governmental
investigations; security breaches or other disruptions of our information technology systems; litigation and
contingent liabilities; and other factors set forth below under “Item 1A. Risk Factors” and those described from time
to time in subsequent reports filed with the Securities and Exchange Commission (“SEC”).
All forward-looking statements made herein are based on information available to the Company as of the date of
this Report. 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.
ITEM 1.
BUSINESS
Business Overview
Xylem, with 2015 revenue of $3.7 billion and approximately 12,700 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 approximately 150 countries through a balanced distribution network consisting of our direct sales force
and independent channel partners. In 2015, 59% of our revenue was generated outside the United States, with
21% of revenue generated in emerging markets.
3
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 clean water supply, existing infrastructure for water supply is aging and inadequately funded. 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. We estimate our total served market size to be
approximately $37 billion.
We view these challenges through the lens of water productivity, water quality and resilience. Water productivity
refers to the more efficient delivery and use of clean water. Water quality refers to the efficient and effective
management of wastewater. Resilience refers to the management of water-related risks and the resilience of water
infrastructure. The Company’s customers often face all three of these challenges, ranging from inefficient aging
water distribution networks (which require increases in “water productivity”); energy-intensive or unreliable
wastewater management systems (which require increases in “water quality”); or exposure to natural disasters such
as floods or droughts (which require increases in “resilience”). Delivering value in these areas creates significant
opportunity for the Company.
The water industry supply chain is comprised of Equipment and Services companies, Design and Build service
providers, and Utilities. Equipment and Service providers serve distinct customer types. The Utilities supply water
through an infrastructure network. Supply chain companies 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 Utilities and EPC customers are looking for
technology and application expertise from their Equipment and Services providers to address trends such as rising
pollution, stricter regulations, and the increased outsourcing of process knowledge. The end users of water consist
of 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, groundwater, 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 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 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, institutional buildings, restaurants, schools, hospitals and
hotels are examples of end users in the commercial market. The industrial market is wide ranging, involving OEMs,
exploration and production firms, and developers and managers of facilities operated by electrical power
generators, chemical manufacturers, machine shops, clothing manufacturers, beverage dispensing and food
processing 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 productivity, quality and resilience 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:
•
Accelerate Profitable Growth. To achieve our goal of accelerating growth, we have identified the following
five priorities:
•
•
•
Emerging Markets - We seek to accelerate our growth in priority emerging markets through
increased focus on product localization and channel development.
Innovation & Technology - We seek to enhance the Company’s innovation efforts with increased
focus on technologies and innovation that can significantly improve customers’ water productivity,
quality and resilience.
Commercial Leadership - We are strengthening our capabilities by focusing on simplifying our
commercial processes along with the supporting backend information technology systems.
Mergers and acquisitions - We continue to evaluate and, where appropriate, will act upon
attractive acquisition candidates to accelerate our growth, including into new markets.
•
•
•
Drive Continuous Improvement. We seek to embed continuous improvement into our culture and simplify
our organizational structure to make the Company more agile, more profitable, and create room to re-invest
in growth. To accomplish this, we will continue to strengthen our lean six sigma and global procurement
capabilities, and continue to optimize our cost structure through business simplification by eliminating
structural, process and product complexity.
Leadership and Talent Development. We seek to continue to invest in attracting, developing and retaining
world-class talent with an increased focus on leadership and talent development programs. We will
continue to align individual performance to the objectives of the Company and its shareholders.
Focus on Execution and Accountability. We seek to ensure the impact of these strategic focus areas by
holding our people accountable and streamlining our performance management and goal deployment
systems.
6
Business Segments
We have two reportable 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
20, “Segment and Geographic Data,” in our consolidated financial statements for financial information about
segments and geographic areas.
The table and descriptions below provide an overview of our business segments.
Water
Infrastructure
Market
Applications
Transport
Treatment
Test
2015
Revenue
(in millions)
1,624
$
316
291
%
Revenue
73%
14%
13%
$
2,231
100%
Major Products
Primary Brands
• Water and
wastewater pumps
• Filtration, disinfection
and biological
treatment equipment
• Test equipment
• Controls
• Flygt
• Wedeco
• Godwin
• WTW
• Sanitaire
• YSI
• Leopold
Applied
Water
Building Services $
Industrial Water
Irrigation
774
562
86
54%
40%
6%
$
1,422
100%
• Pumps
• Valves
• Heat exchangers
• Controls
• Dispensing
equipment systems
• Goulds Water
Technology
• Bell & Gossett
• A-C Fire Pump
• Standard
Xchange
• 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, aquifers, lakes, rivers and seas. From there, our filtration, ultraviolet
("UV") 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 the 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 $21
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, groundwater, aquifers, lakes, rivers and seas 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 groundwater and surface water from a riverbed, construction site or mine
shaft and bypass pumping for the repair of aging public utility infrastructure, as well as emergency water removal
during severe weather events. We offer a wide range of highly engineered products 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 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. 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. Our key brands for this application are Flygt and Godwin. Transport accounted for approximately 73%
of our Water Infrastructure segment revenue in both 2015 and 2014, and 74% in 2013.
7
Treatment
The Treatment application includes equipment and services that treat both water for consumption and wastewater
to be returned responsibly to the environment or reused. 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 systems, (ii) disinfection systems, (iii) biological treatment systems, including mixers.
Our key brands for this application are Leopold, Wedeco, Sanitaire and Flygt. Filtration uses gravity-based media
filters and clarifiers to clean both water and wastewater. Leopold, has been a worldwide leader in filtration for over
90 years. Wedeco offers chemical-free and environmentally friendly disinfection systems, both UV and ozone
oxidation, to treat public utility drinking water, wastewater and industrial process water. 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. Treatment accounted for approximately 14% of our Water Infrastructure segment revenue in 2015, 2014
and 2013.
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. Our key brands for this application are WTW and YSI. Test accounted for
approximately 13% of our Water Infrastructure segment revenue in both 2015 and 2014, and 12% in 2013.
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 applications and we
participate in all major areas of water demand. Residential and Commercial Building Services account for human
and building consumption, where we deliver water boosting systems for drinking, heating, ventilation and air
conditioning ("HVAC") and fire protection systems. Industrial Water applications account for water consumption
activities that use pumps, heat exchangers, valves and controls to 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 irrigation applications. 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.We
estimate our served market size in this sector to be approximately $16 billion.
Residential & Commercial Building Services
This business is defined by four primary 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, including drinking water and for
hygienic purposes . The Goulds Water Technology, Lowara and Bell & Gossett brands provide 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 A-C Fire Pump 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 and intelligent 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. Building Services accounted for
approximately 54% of our Applied Water segment revenue in 2015, 53% in 2014 and 50% in 2013.
Industrial Water
Water is used in most industrial facilities to provide processing steps such as cooling, heating, cleaning and mixing.
Our Goulds Water Technology and Lowara brands supply vertical multistage pumps to bring in source water or to
boost pressure for purposes, including water circulation through a manufacturing facility to cool machine tools. Our
Standard Xchange brand delivers heat exchangers for combined heat and power applications within power
generation plants. We also service niche applications such as wine processing with Jabsco brand flexible impeller
pumps, and water-based detergent dispensing and water circulation for car washes served by Flojet air-operated
8
diaphragm and Goulds Water Technology end suction pumps. Our boosting pumps are also increasingly being used
in hydraulic fracturing applications. We can support mines throughout exploration, development and operation. Our
wide range of durable pumps ensures reliability that minimizes risks, maximizes uptime and delivers superior total
cost of ownership. Across all these various end applications, we believe our business is the second largest player in
this served market based on management estimates. Industrial Water accounted for approximately 40% of our
Applied Water segment revenue in 2015 and 2014, and 43% in 2013.
Irrigation
The irrigation business consists of irrigation-related equipment and services associated with bringing water from a
source to a production plant or livestock facility, including hoses, sprinklers, center pivot and drip irrigation systems.
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 agricultural applications and irrigation for gardens and parks. We believe we have a
leading position in this served market based on management estimates. Irrigation accounted for approximately 6%
of our Applied Water segment revenue in 2015, and 7% in 2014 and 2013.
Geographic Profile
The table below illustrates the annual revenue and percentage of revenue by geographic area for each of the three
years ended December 31.
(in millions)
United States
Europe
Asia Pacific
Other
Total
2015
$ Amount
1,490
$
1,179
482
502
3,653
$
Revenue
2014
2013
% of Total
$ Amount
% of Total
$ Amount
% of Total
41% $
32%
13%
14%
$
1,477
1,379
478
582
3,916
38% $
35%
12%
15%
$
1,434
1,387
467
549
3,837
38%
36%
12%
14%
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. Revenue derived from emerging markets
comprised 21%, 21% and 19% of our revenue in 2015, 2014 and 2013, 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.
(in millions)
United States
Europe
Asia Pacific
Other
Total
2015
Property, Plant & Equipment
2014
2013
$ Amount
168
$
189
56
26
439
$
% of Total
$ Amount
% of Total
$ Amount
% of Total
38% $
43%
13%
6%
$
180
206
53
22
461
39% $
45%
11%
5%
$
186
225
45
32
488
38%
46%
9%
7%
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 to optimize energy
costs, (iv) the retirement of a largely aging water industry workforce not systematically replaced at utilities and other
end user customers, and (v) the build-out of water infrastructure in the emerging markets.
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 OEMs and after-market customers. Our products in the Applied Water segment are sold
9
through our global direct sales and strong indirect channels with the majority of revenue going through indirect
channels. We have long-standing relationships with many of the leading independent distributors in the markets we
serve, and we provide incentives to distributors, such as specialized loyalty and training programs.
Aftermarket Parts and Service
During their lifecycle, installed products require maintenance, repair services and parts due to the harsh
environments in which they operate. We have many service centers around the world, which employ service
employees to provide aftermarket parts and services to our large installed base of customers. 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.
Depending on the type of product, median lifecycles range from five 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. Our inventory management and distribution practices seek to minimize inventory holding periods by striving to
take delivery of the inventory and manufacturing as close as possible 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 procurement 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 our Water Infrastructure or Applied Water segments or on the Company as a whole. No individual
customer accounted for more than 10% of our consolidated 2015, 2014 or 2013 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 $716 million at
December 31, 2015 and $740 million at December 31, 2014. We anticipate that more than 81% of the backlog at
December 31, 2015 will be recognized as revenue during 2016.
Competition
Given the highly fragmented nature of the water industry, the Water Infrastructure segment competes with a large
number of businesses. Competition in the water transport and treatment technologies markets focuses on 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. 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
10
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 and Danaher Corporation.
Competition in the Applied Water segment focuses on brand equity, 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 foundation of our growth strategy and we focus 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 as well as improvement of existing products to increase
customer value. 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 $95 million, $104 million, and
$104 million in R&D in 2015, 2014 and 2013, respectively.
We have R&D and product development capabilities 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 and
robust development process. We have several global technical centers and local development teams around the
world where we are supporting global needs and accelerating the customization of our application expertise to local
needs. In some cases, our R&D activities are conducted at our piloting and testing facilities and at strategic
customer sites. These piloting and testing facilities enable us to serve our strategic markets in each region of the
world.
Intellectual Property
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.
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.
11
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 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, 2015, we had estimated and accrued $4 million related to environmental matters.
Employees
As of December 31, 2015, Xylem had approximately 12,700 employees worldwide. We have more than 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.
Company History and Certain Relationships
On October 31, 2011 (the "Distribution Date"), ITT completed the Spin-off (the “Spin-off”) of Xylem, formerly ITT’s
water equipment and services businesses ("WaterCo"). The Spin-off was completed pursuant to the Distribution
Agreement, dated as of October 25, 2011 (the “Distribution Agreement”), among ITT, Exelis Inc., acquired by Harris
Inc. on May 29, 2015, (“Exelis”) and Xylem.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements
and amendments to those reports are available free of charge on our website www.xyleminc.com as soon as
reasonably practicable after such reports are electronically filed with or furnished to the SEC. The information on
our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings
with the SEC.
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.
12
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 offer our products and services in 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 successful management of
these factors, including 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, which could adversely affect our financial performance. 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 2015, 41%, 32% and 21% of our total
revenue was from customers located in the United States, Europe and emerging markets, 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 prolonged downturn in financial or macro-economic
conditions in these areas or in the United States could have a material 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 2015, 59% of our total revenue was from customers outside the United States, with 21% of total revenue
generated in emerging markets. We expect our international operations sales and export sales to continue to be a
significant portion of our revenue. We have placed a particular emphasis on increasing our growth and presence in
emerging markets. 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:
•
•
•
•
•
•
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;
increased costs and risks of developing, staffing and simultaneously managing a number of global operations
as a result of distance as well as language and cultural differences; and
•
insurrection, armed conflict, terrorism 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
13
remittances and other payments to us, or the amount of any such taxes may increase; an outbreak or escalation of
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 difficulty of enforcing agreements, challenges collecting receivables,
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.
Failure to comply with laws, regulations and policies, including 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 are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and
policies, including laws related to anti-corruption, export and import compliance, anti-trust and money laundering,
due to our global operations. The U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act of 2010 and
similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making
improper payments to government officials or other persons for the purpose of obtaining or retaining business.
There has been an increase in anti-bribery law enforcement activity in recent years, with more frequent and
aggressive investigations and enforcement proceedings by both the Department of Justice ("DOJ") and the SEC,
increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought
against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We operate in
many parts of the world that are recognized as having governmental and commercial corruption and in certain
circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot
assure you that our internal control policies and procedures will always protect us from improper conduct of our
employees or business partners. In the event that we believe or have reason to believe that our employees or
agents have or may have violated applicable laws, including anti-corruption laws, we may be required to investigate
or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require
significant time and attention from senior management. Any such violation could result in substantial fines,
sanctions, civil and/or criminal penalties, and curtailment of operations in certain jurisdictions, and might materially
and 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.
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 conduct approximately 59% of our business in various locations outside the United States. We are exposed to
fluctuations in foreign currency transaction exchange rates, particularly with respect to the Euro, Swedish Krona,
Canadian Dollar, British Pound, Polish Zloty and Australian Dollar. 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. Additionally, we are subject to foreign exchange translation risk due to
changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. The translation risk is
primarily concentrated in the exchange rate between the U.S. Dollar and the Euro, British Pound, Chinese Yuan,
Swedish Krona, Canadian Dollar and Australian Dollar. As the U.S. Dollar fluctuates against other currencies in
which we transact business, revenue and income can be impacted. For instance, our 2015 revenue decreased by
8.0% due to unfavorable foreign currency impacts. Continued strengthening of the U.S. Dollar relative to the Euro
and the currencies of the other countries in which we do business, could materially and adversely affect our
revenue growth in future periods. Refer to Item 7A "Quantitative and Qualitative Disclosures about Market Risk" for
additional information on foreign exchange risk.
14
Weather conditions and climate changes may adversely affect, or cause volatility to/in, our financial
results.
Weather conditions, including heavy flooding, droughts and fluctuations in temperatures or shifting conditions as a
result of climate change, can positively or negatively impact portions of our business. Within the dewatering space,
our pumps provided through our Godwin and Flygt brands 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 and climate change, 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
financial reporting at an acquired entity that could impact us on a combined basis; the failure to realize expected
synergies; the possibility that we become exposed to substantial undisclosed liabilities or new material risks
associated with the acquired businesses; 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, 2015, 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.
We may not achieve some or all of the expected benefits of our restructuring plans and our restructuring
may adversely affect our business.
We have announced restructuring plans in an effort to reposition our European and North American businesses to
optimize our cost structure and improve our operational efficiency and effectiveness. We may not be able to obtain
the cost savings and benefits that were initially anticipated in connection with our restructuring. Additionally, as a
15
result of our restructuring, we may experience a loss of continuity, loss of accumulated knowledge or inefficiency
during transitional periods. Reorganization and restructuring can require a significant amount of management and
other employees' time and focus, which may divert attention from operating and growing our business.
The successful implementation and execution of our restructuring and realignment actions is critical to achieving
our expected cost savings as well as effectively competing in the marketplace. Factors that may impede a
successful implementation is retention of key employees, the impact of regulatory matters, and adverse economic
market conditions. If the restructuring and realignment actions are not executed successfully, it could have a
material adverse effect on our competitive position, business, financial condition and results of operations.
Changes in our effective tax rates may adversely affect our financial results.
We sell our products in more than 150 countries and 59% of our revenue was generated outside the United States
in 2015. Given the global nature of our business, a number of factors may increase our future effective tax rates,
including:
•
•
•
•
•
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, in a
declining price environment, our operating margins may contract because we account for inventory using the first-
in, first- out method. Actions we take to mitigate volatility in manufacturing and operating costs may not be
successful and, as a result, our business, financial condition and results of operation could be materially and
adversely affected.
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 there can be no assurance
that we or our customers or other third parties will not experience operational process failures or other problems
that could result in potential product safety, regulatory or environmental risk which 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, 2015, our total outstanding indebtedness was $1,274 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 Five-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 $132 million).
Our indebtedness could:
•
•
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to obtain additional financing or borrow additional funds;
16
•
•
•
•
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.
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.
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 or cybersecurity threats.
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, we, and some of our third party vendors, have experienced
cybersecurity attacks in the past and may experience them in the future, potentially with more frequency. To date,
none have resulted in any material adverse impact to our business or operations. We have adopted measures to
mitigate potential risks associated with information technology disruptions and cybersecurity threats, however, given
the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production
downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and
services to our customers, the compromising of confidential or otherwise protected information, destruction or
corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial
losses from remedial actions, loss of business or potential liability, regulatory enforcement actions, and/or damage
to our reputation, any of which could have a material adverse effect on our competitive position, results of
operations, cash flows or financial condition. 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.
17
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.
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, protected or
enforced. 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, financial condition and results of
operations. 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.
18
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’
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
our ability to execute restructuring and realignment actions;
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;
19
•
•
•
results from any material litigation or government investigation;
changes in laws and regulations affecting our business; and
general economic conditions and other external factors.
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 third amended and restated articles of incorporation and our amended and restated by-
laws may delay or prevent a merger or acquisition of part or all of our business operations. For example, the third
amended and restated articles of incorporation and the amended and restated by-laws, among other things, require
advance notice for shareholder proposals and nominations 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 Spin-off from ITT Corporation
In connection with our Spin-off, ITT and Exelis, acquired by Harris Inc. on May 29, 2015, 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.
20
ITEM 2.
PROPERTIES
We have approximately 350 locations in more than 40 countries. These properties total approximately 10.2 million
square feet, of which more than 300 locations, or approximately 5.5 million square feet, are leased. We consider the
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
Bridgeport
Yellow Springs
Quenington
Morton Grove
Montecchio
Nanjing
Auburn
Lubbock
Cheektowaga
Rye Brook
State or
Country
Sweden
Sweden
Principal Business Activity
Water Infrastructure
Administration and Manufacturing
Administration and Research &
Development
China
Manufacturing
NJ
OH
UK
IL
Italy
Administration and Manufacturing
Administration and Manufacturing
Manufacturing
Applied Water
Administration and Manufacturing
Administration and Manufacturing
China
Manufacturing
Manufacturing
Manufacturing
Manufacturing
NY
TX
NY
NY
Approx.
Square
Feet
1,194,000
172,000
125,000
136,000
112,000
86,000
530,000
379,000
363,000
273,000
229,000
147,000
Owned or
Expiration
Date
of Lease
Owned
2019
Owned
2020
Owned
2020
Owned
Owned
Owned
Owned
Owned
Owned
Corporate Headquarters
Administration
67,000
2023
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. Some
of these proceedings seek remedies relating to environmental matters, intellectual property matters, personal injury
claims, employment and pension matters, government contract issues and commercial or contractual disputes,
sometimes related to acquisitions or divestitures. See Note 18, "Commitments and Contingencies", of the
consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding certain legal
proceedings in which we are involved.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
21
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided regarding the executive officers of Xylem as of February 1, 2016:
NAME
Patrick K. Decker
AGE
51
CURRENT TITLE
President and Chief Executive
Officer (2014)
OTHER BUSINESS EXPERIENCE DURING PAST 5
YEARS
• President and Chief Executive Officer,
Harsco Corp. (diversified, worldwide
industrial company) (2012)
• President, Flow Control Segment, Tyco
International Ltd. (industrial products and
services company) (2003)
Shashank Patel
Tomas Brannemo
55
46
Interim Chief Financial Officer
(2015)
• VP, Finance, Applied Water Systems
(2010)
Senior VP and President,
Transport (2014)
• VP, Transport (2013)
• VP and Director of Business Unit
Aftermarket and Service (2010)
David Flinton
45
Senior VP and President,
Dewatering (2015)
• VP, Engineering and Marketing, Applied
Water Systems (2013)
Pak Steven Leung
55
Senior VP and President,
Emerging Markets (2015)
• VP, Global Product Management, Applied
Water Systems (2012)
• VP, Strategy and Integrated Management
System (former Water Solutions division)
(2010)
• VP, Global Sales, Valves and Controls,
Pentair Plc (diversified, worldwide
industrial manufacturing company) (2013)
• VP and General Manager, Global
Process, Tyco International Ltd.
(industrial products and services
company) (2010)
Kenneth Napolitano
53
Senior VP and President,
Applied Water Systems (2012)
• Senior VP and President, Residential and
Commercial Water (2011)
• President, Residential and Commercial
Water (2009)
Colin R. Sabol
48
Senior VP and President,
Analytics and Treatment (2015)
• Senior VP and President, Dewatering
(2013)
Kairus Tarapore
54
Senior VP and Chief Human
Resources Officer (2015)
• Senior VP and Chief Strategy and Growth
Officer (2011)
• Senior VP and Chief Administrative
Officer, Babcock & Wilcox Company
(2013)
• Executive VP, Human Resources,
Ceridian Corporation (2006)
22
NAME
Claudia S. Toussaint
AGE
52
CURRENT TITLE
Senior VP, General Counsel and
Corporate Secretary (2014)
OTHER BUSINESS EXPERIENCE DURING PAST 5
YEARS
• Senior VP, General Counsel and
Secretary, Barnes Group Inc.
(international industrial and aerospace
manufacturing) (2012)
• General Counsel, Flow Control Segment,
Tyco International Ltd. (industrial products
and services company) (2012)
• Senior VP, General Counsel and
Secretary, Barnes Group Inc.
(international industrial and aerospace
manufacturing) (2010)
Note: Date in parentheses indicates the year in which the position was assumed.
BOARD OF DIRECTORS
The following information is provided regarding the Board of Directors of Xylem:
NAME
Markos I. Tambakeras
TITLE
Chairman, Xylem Inc., Former Chairman, President and Chief Executive
Officer, Kennametal, Inc.
Curtis J. Crawford, Ph.D.
President and Chief Executive Officer, XCEO, Inc.
Patrick K. Decker
President and Chief Executive Officer, Xylem Inc.
Robert F. Friel
Chairman, President and Chief Executive Officer, PerkinElmer, Inc.
Victoria D. Harker
Chief Financial Officer, TEGNA Inc.
Sten E. Jakobsson
Former President and Chief Executive Officer, ABB AB
Steven R. Loranger
Former Chairman, President and Chief Executive Officer, ITT Corporation
Edward J. Ludwig
Former Chairman, President and Chief Executive Officer, Becton,
Dickinson and Company
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
23
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
2015 and 2014 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, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year ended December 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
38.59 $
37.70
37.32
38.00
39.79 $
40.00
39.43
39.23
33.54 $
34.80
29.90
32.16
32.62 $
34.50
34.77
31.80
0.1408
0.1408
0.1408
0.1408
0.1280
0.1280
0.1280
0.1280
The closing price of our common stock on the NYSE on January 29, 2016 was $35.95 per share. As of January 29,
2016, there were 13,784 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 2016, we declared a dividend of $0.1549 per share to be paid on March 16, 2016 for shareholders of
record on February 18, 2016.
There have been no unregistered offerings of our common stock during 2015.
24
Fourth Quarter 2015 Share Repurchase Activity
The following table summarizes our purchases of our common stock for the quarter ended December 31, 2015:
(in millions, except per share amounts)
Period
10/1/15 - 10/31/15
11/1/15 - 11/30/15
12/1/15 - 12/31/15
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)
$479
0.7
0.7
36.80
36.71
0.7
0.7
$454
$429
(a) Average price paid per share is calculated on a settlement basis.
(b) On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 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 the three months ended December 31, 2015, we repurchased 1.4 million shares for $50 million. There are up to $420
million in shares that may still be purchased under this plan as of December 31, 2015.
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. There were no shares purchased under this program during the three months
ended December 31, 2015 and there are 0.3 million shares (approximately $9 million based on the closing share price on
December 31, 2015) that may still be purchased under this plan.
25
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, 2015. 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
December 31, 2014
December 31, 2015
$
XYL
S&P 500
S&P 500
Industrials
Index
100 $
110
106
114
148
165
161
100 $
104
105
121
161
183
186
100
106
108
124
175
192
187
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.
26
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the five years ended December 31, 2015. 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 financial statements and the notes thereto
included in this Report.
On and prior to the Distribution Date, our financial position and results of operations consisted of WaterCo, the
water equipment and services businesses of ITT Corporation. The Spin-off was completed pursuant to the
Distribution Agreement among ITT, Exelis Inc., acquired by Harris Inc. on May 29, 2015, and Xylem. 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 the Distribution Date, while our financial results for Xylem post Spin-off are
prepared on a stand-alone basis. Further, 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.
(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
Diluted shares outstanding
Cash dividends per share
Balance Sheet Data (at period end):
Cash and cash equivalents
Working capital*
Total assets (b)(c)
Total debt (b)
2015
2014
Year Ended
December 31,
2013
2012
2011 (a)
$ 3,653
1,404
$ 3,916
1,513
$ 3,837
1,499
$ 3,791
1,502
$ 3,803
1,461
38.4%
449
12.3%
340
38.6%
463
11.8%
337
39.1%
363
9.5%
228
39.6%
443
11.7%
297
38.4%
395
10.4%
279
$
1.88
1.87
180.9
181.7
$0.5632
$
680
810
4,657
1,274
$
1.84
1.83
183.1
184.2
$0.5120
$
663
882
4,833
1,284
$
1.23
1.22
185.2
186.0
$0.4656
$
533
930
4,857
1,235
$
1.60
1.59
185.8
186.2
$ 0.4048
$
504
859
4,639
1,197
$
1.51
1.50
185.1
185.3
$0.1012
$
318
834
4,350
1,197
*
The Company calculates Working capital as follows: net accounts receivable + inventories - accounts payable -
customer advances.
(a) In 2011, we acquired YSI Incorporated, which contributed revenue of $35 million in 2011 and $371 million of total assets
on date of acquisition.
(b) Debt issuance costs of $6 million, $8 million and $9 million in 2013, 2012 and 2011, respectively, were reclassified to
long-term debt from other non-current assets within the Consolidated Balance Sheet. See Note 2, “Recently Issued
Accounting Pronouncements,” of the consolidated financial statements.
(c) Deferred tax assets of $33 million, $32 million and $41 million in 2013, 2012 and 2011, respectively, were reclassified to
deferred tax liabilities within the Consolidated Balance Sheet. See Note 2, “Recently Issued Accounting
Pronouncements,” of the consolidated financial statements.
27
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 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, 2015. Except
as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and “the Company” refer
to Xylem Inc. and its subsidiaries.
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 reportable 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.
• 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. In the Water Infrastructure segment, we provide the majority of our
sales directly to customers with strong application expertise, while the remaining amount is through
distribution partners.
• 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. In the Applied Water segment, we provide the majority of our sales
through long-standing relationships with the world’s leading distributors, with the remainder going directly to
customers.
We sell our equipment and services through direct and indirect channels that serve the needs of each customer
type. In the Water Infrastructure segment, we provide the majority of our sales direct to customers with strong
application expertise, while the remaining amount is through distribution partners. In the Applied Water segment, we
provide the majority of our sales 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
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 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
fluctuations in foreign currency translation, 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 translation assumes no change in exchange rates from the prior period.
"constant currency" defined as financial results adjusted for foreign 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.
28
•
"adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share,
respectively, adjusted to exclude restructuring and realignment costs, special charges, tax-related special
items and gain from sale of businesses. A reconciliation of adjusted net income is provided below.
(in millions, except per share data)
Net income
Restructuring and realignment, net of tax benefit of $5, $12 and
$18, respectively
Special charges, net of tax benefit of $0 and $9, respectively
Tax-related special items
Gain on sale of business, net of $0 tax in both years
Adjusted net income
Weighted average number of shares - Diluted
Adjusted earnings per share
2015
2014
2013
$
340 $
337 $
228
15
5
(15)
(9)
336 $
31
—
5
(11)
362 $
181.7
184.2
1.85 $
1.97 $
46
23
14
—
311
186.0
1.67
$
$
•
•
•
•
•
•
"operating expenses excluding restructuring and realignment costs and special charges" defined as
operating expenses, adjusted to exclude restructuring and realignment costs and special charges.
"adjusted operating income (loss)" defined as operating income (loss), adjusted to exclude restructuring and
realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating
income divided by total revenue.
“realignment costs” defined as costs not included in restructuring costs that are incurred as part of actions
taken to reposition our business, including items such as professional fees, severance, relocation, travel,
facility set-up and other costs.
“special charges" defined as costs incurred by the Company, such as legal and professional fees, associated
with the Korea matters, costs incurred for the contractual indemnification of tax obligations to ITT, certain
costs incurred during the third quarter of 2013 for the settlement of legal proceedings with Xylem Group LLC,
as well as the change in chief executive officer and other special non-operating items.
"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax
exam impacts, tax law change impacts and other discrete tax adjustments.
"free cash flow" defined as net cash from operating activities, as reported in the Statement of Cash Flow,
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.
(in millions)
Net cash provided by operating activities
Capital expenditures
Free cash flow
Executive Summary
2015
2014
2013
$
$
464 $
(117)
347 $
416 $
(119)
297 $
324
(126)
198
Xylem reported revenue of $3,653 million for 2015, a decrease of 6.7% from $3,916 million reported in 2014.
Revenue increased 1.3% on a constant currency basis due to strong organic growth in the public utility, commercial
and residential markets, partially offset by declines in industrial in the oil and gas market. Operating income for
2015 was $449 million, reflecting a decrease of $14 million or 3.0% compared to $463 million in 2014. Operating
income as a percentage of revenue was 12.3% for 2015 versus 11.8% for 2014, an increase of 50 basis points.
This increase in operating margin was primarily due to reduced restructuring and realignment costs as well as
incremental cost savings from continuous improvement initiatives and restructuring actions. Partially offsetting these
actions were cost inflation, unfavorable mix and unfavorable foreign exchange translation impacts.
29
Additional financial highlights for 2015 include the following:
• Net income of $340 million, or $1.87 per diluted share ($336 million or $1.85 per diluted share on an adjusted
basis)
• Free cash flow of $347 million, and net cash from operating activities of $464 million
• Orders of $3,711 million (a 0.5% increase from 2014 on an organic basis)
• We repurchased a total of $175 million in shares under our share repurchase programs approved by our
Board of Directors as part of our strategy to enhance shareholder return
• Dividends paid to shareholders increased 10% in 2015.
2016 Business Outlook
We continue to anticipate organic revenue growth in the low-to-mid single digits in 2016. The following is a
summary of our outlook by market.
•
Industrial was down 1% for 2015 as general industrial strength was more than offset by oil and gas declines
in Canada and the United States. For 2016, we expect growth to be flat to up in the low-single-digits. This
projection assumes low-single-digit growth in light industrial applications, and double-digit declines in oil
and gas, and mining applications.
• Public utilities increased 4% for 2015 driven by the United States recovery and continued emerging markets
investments. We expect growth in mid-single-digits for 2016 as we anticipate continued growth in the
United States and continued investments across emerging markets. We also anticipate that market
conditions in Europe will remain stable.
• Commercial experienced growth of 4% for 2015 driven by a recovering institutional building sector in the
United States. We expect continued growth in the mid-single-digit range for 2016. Our expectation is that
growth in the U.S. institutional building market will continue through the year, urbanization will continue to
drive growth in most emerging markets and that conditions in Europe will modestly improve.
• Residential markets grew 4% in 2015 with the strongest growth in the U.S. For 2016 we expect low-to-mid-
single digit growth driven by continued strength in the U.S. We also expect continued low-single-digit
growth in Europe.
• Our agriculture markets, which is our smallest end market, declined 8% in 2015 driven by unfavorable U.S.
weather conditions. We expect 2016 to grow low-single-digits as we will likely see a modest recovery from
the significant weather events in 2015.
We will continue to strategically execute restructuring and realignment actions primarily to reposition our European
and North American business in an effort to optimize our cost structure and improve our operational efficiency and
effectiveness. During 2015, we incurred $6 million and $14 million in restructuring and realignment costs,
respectively. As a result of the restructuring actions in 2015, we realized $2 million of net savings and expect to
realize approximately $1 million of incremental net savings in 2016. During 2016, we expect to incur approximately
$25 million in restructuring and realignment costs. We expect to realize approximately $8 million of savings from our
2016 actions.
Additional strategic actions we are taking include strategic initiatives to drive above-market growth, advance
continuous improvement activities to increase productivity, focus on improving cash performance and drive a
disciplined capital deployment strategy.
30
Results of Operations
(in millions)
Revenue
Gross profit
Gross margin
Operating expenses excluding
restructuring and realignment costs and
special charges
Expense to revenue ratio
Restructuring and realignment costs
Special charges
Total operating expenses
Operating income
Operating margin
Interest and other non-operating expense
(income), net
Gain on sale of business
Income tax expense
Tax rate
Net income
NM Not Meaningful
2015 versus 2014
Revenue
$
2015
3,653
1,404
$
2014
3,916
1,513
$
2013
3,837
1,499
38.4%
38.6%
39.1%
930
25.5%
20
5
955
449
12.3%
55
9
63
15.6%
340
1,007
25.7%
43
—
1,050
463
11.8%
53
11
84
19.8%
337
$
$
1,048
27.3%
64
24
1,136
363
9.5%
65
—
70
23.5%
228
$
2015 v. 2014
2014 v. 2013
(6.7 )%
(7.2 )%
(20)bp
(7.6 )%
(20)bp
(53.5 )%
NM
(9.0 )%
(3.0 )%
50bp
2.1 %
0.9 %
(50)bp
(3.9 )%
(160)bp
(32.8 )%
NM
(7.6 )%
27.5 %
230bp
3.8 %
(18.5 )%
(18.2 )%
(25.0 )%
(420)bp
0.9 %
NM
20.0 %
(370)bp
47.8 %
Revenue generated for 2015 was $3,653 million, a decrease of $263 million, or 6.7%, compared to $3,916 million in
2014. On a constant currency basis, revenue grew 1.3%. This increase was primarily driven by strong organic
growth within emerging markets, particularly in China and India. The United States and western Europe also grew
organically, which was partially offset by declines in Canada. In addition, the organic growth was partially offset by
the divestiture of the Wolverhampton valves business early in the third quarter of 2014.
The following table illustrates the impact on 2015 revenue from organic growth, recent acquisitions/divestitures, and
foreign currency translation in relation to revenue.
(in millions)
2014 Revenue
Organic Growth
Acquisitions/(Divestitures)
Constant Currency
Foreign currency translation (a)
Total change in revenue
2015 Revenue
$ Change
% Change
$
$
3,916
60
(10)
50
(313)
(263)
3,653
1.5 %
(0.3)%
1.3 %
(8.0)%
(6.7)%
(a)
Foreign currency translation impact primarily due to fluctuations in the value of the Euro, Swedish Krona, Australian
Dollar, British Pound, Canadian Dollar and Norwegian Krone against the U.S. Dollar.
The following table summarizes revenue by segment for 2015 and 2014:
(in millions)
Water Infrastructure
Applied Water
Total
2015
2014
$
$
2,231 $
1,422
3,653 $
2,442
1,474
3,916
As Reported
Change
Constant
Currency
Change
(8.6)%
(3.5)%
(6.7)%
0.9%
1.8%
1.3%
31
Water Infrastructure
Water Infrastructure’s revenue decreased $211 million, or 8.6% in 2015 (0.9% increase on a constant currency
basis) compared to 2014. The constant currency increase was driven by organic growth of $22 million or 0.9% due
to continued strength in the public utility end market partially offset by weakness in the industrial market. The
industrial market performance decline was due to decreases in dewatering applications in the oil and gas market
which more than offset increases in the balance of the industrial market.
From an application perspective, organic revenue grew in transport, treatment and test applications. The organic
revenue growth from transport applications was predominately due to public utility strength in the emerging
markets, the United States and in western Europe, partially offset by declines in industrial dewatering applications
from weakness in the oil and gas market in Canada and the United States. The organic revenue growth from
treatment applications was due to ozone and filtration projects in China and Australia which was somewhat offset by
the lapping of a large project in Latin America in 2014 and general weakness in Europe. Organic revenue growth
from test applications was driven by growth in China and India due to demand for new wastewater and river
monitoring products.
Applied Water
Applied Water’s revenue decreased $52 million, or 3.5% in 2015 (a 1.8% increase on a constant currency basis)
compared to 2014. The growth on a constant currency basis is driven primarily by organic revenue growth of $38
million or 2.6% due to strength in the commercial, industrial water and residential end markets, partially offset by
declines in the agriculture end market. This increase in the current year was partially offset by the absence of $11
million in revenue from the divested Wolverhampton valves business.
From an applications perspective, the increase in organic revenue was predominately due to continued growth in
commercial building services from a recovering institutional building sector in the United States and strength in Asia.
The industrial water application organic revenue grew from project strength in western Europe and the United
States, which was partially offset by the aforementioned Wolverhampton divestiture. Residential building services
organic revenue increased primarily in the United States due to improvements in the home construction market and
market share gain. Irrigation applications organic revenue decline was largely impacted by severe flooding
conditions in the southeast and southwest regions of the United States and the lapping of a strong fourth quarter in
2014.
Orders/Backlog
Orders received during 2015 decreased by $310 million, or 7.7% to $3,711 million (a 0.2% increase on a constant
currency basis). Organic order growth increased $19 million or 0.5% for the year.
Water Infrastructure segment orders decreased $215 million, or 8.6% to $2,296 million (1.0% growth on a constant
currency basis). Organic order growth of 1.0% was predominantly due to organic order increases for treatment
applications due to large projects in the Middle East and Greater Asia. The organic orders for test applications were
slightly up. Slightly offsetting these increases was a decline in organic orders for transport applications
predominately due to decreases in the dewatering transport application due to weakness in the oil and gas market,
which more than offset solid growth in the remainder of the transport applications.
Orders decreased in our Applied Water segment $95 million, or 6.3% to $1,415 million (1.0% decline on a constant
currency basis). The order decline on a constant currency basis was due to the organic order volume decrease of
0.3%, due to market softness in the oil and gas and agricultural markets, as well as the absence of orders from our
Wolverhampton valves divestiture.
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 $716 million at
December 31, 2015 and $740 million at December 31, 2014. This decrease is due to foreign currency translation
impacts. We anticipate that approximately 81% of the backlog at December 31, 2015 will be recognized as revenue
during 2016.
Gross Margin
Gross margins as a percentage of consolidated revenue declined to 38.4% in 2015 from 38.6% in 2014. The gross
margin decline was primarily due to negative currency translation impacts. Excluding the negative currency
translation impacts, gross margin was slightly higher as compared to 2014. Benefits realized from cost saving
initiatives through global sourcing and lean six sigma, as well as increased volume, more than offset material and
labor inflation headwinds and unfavorable sales mix, primarily due to higher volume sold to the emerging markets.
32
Operating Expenses
(in millions)
Selling, general and administrative expenses ("SG&A")
SG&A as a % of revenue
Research and development expenses ("R&D")
R&D as a % of revenue
Restructuring charges
Operating expenses
Expense to revenue ratio
2015
2014
Change
$
$
854
$
23.4%
95
2.6%
6
920
23.5%
104
2.7%
26
955
$
1,050
26.1%
26.8%
(7.2 )%
(10)bp
(8.7 )%
(10)bp
(76.9 )%
(9.0 )%
(70)bp
Selling, General and Administrative Expenses
SG&A decreased by $66 million or 7.2% to 23.4% of revenue in 2015, as compared to 23.5% of revenue in 2014.
The decrease in SG&A expenses as a percentage of revenue was primarily due to currency translation impacts.
Additionally, cost inflation was offset by cost savings from continuous improvement initiatives and restructuring
actions as well as reduced realignment costs.
Research and Development Expenses
R&D spending decreased $9 million or 8.7% to 2.6% of revenue in 2015 as compared to 2.7% of revenue in 2014
primarily due to currency translation impacts.
Restructuring Charges
During 2015, we incurred restructuring costs of $5 million and $1 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 optimize our cost structure. The charges relate to the reduction in
structural costs, including a decrease in headcount and consolidation of facilities. During 2014, we recognized
restructuring costs of $19 million, $6 million and $1 million in our Water Infrastructure and Applied Water segments,
and Corporate and other, respectively. These charges were incurred primarily in an effort to realign our
organizational structure in Europe and North America to optimize our cost structure. The charges relate to the
reduction in structural costs, including a decrease in headcount and consolidation of facilities.
Total expected costs associated with actions that commenced during 2015 are approximately $5 million for Water
Infrastructure and approximately $1 million for Applied Water. These costs primarily comprise severance charges.
The Water Infrastructure actions are expected to continue through the second quarter of 2016. Substantially all of
cost associated with the Applied Water actions have been incurred. As a result of these actions initiated in 2015,
we achieved savings of approximately $2 million in 2015 and estimate annual future net savings beginning in 2016
of approximately $3 million, resulting in $1 million of incremental savings in 2016 from the 2015 actions.
Operating Income
We generated operating income of $449 million during 2015, a $14 million or 3.0% decrease from the prior year.
Operating income as a percentage of revenue was 12.3% for 2015 versus 11.8% for 2014, an increase of 50 basis
points. This increase in operating margin was primarily due to reduced restructuring and realignment costs,
incremental cost savings from continuous improvement initiatives and slightly higher volume. Partially offsetting
these actions were cost inflation, unfavorable mix and unfavorable foreign exchange translation impacts.
33
The following table illustrates operating income results for our business segments:
(in millions)
Water Infrastructure
Applied Water
Segment operating income
Corporate and other
Total operating income
Operating margin
Water Infrastructure
Applied Water
Total Xylem
2015
2014
Change
$
$
303
190
493
(44)
449
$
$
13.6%
13.4%
12.3%
321
193
514
(51)
463
13.1%
13.1%
11.8%
(5.6)%
(1.6)%
(4.1)%
(13.7)%
(3.0)%
50bp
30bp
50bp
The table below provides a reconciliation of the total and each segment's operating income to adjusted operating
income, and a calculation of the corresponding adjusted operating margin:
(in millions)
Water Infrastructure
Operating income
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Applied Water
Operating income
Restructuring and realignment costs
Adjusted operating income
Adjusted operating margin
Corporate and other
Operating loss
Restructuring and realignment costs
Adjusted operating loss
Total Xylem
Operating income
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
NM Not Meaningful
Water Infrastructure
2015
2014
Change
$
$
$
$
$
$
$
$
303
13
1
317
14.2%
190
7
197
13.9%
(44)
—
(44)
449
20
1
470
12.9%
321
29
—
350
14.3%
193
13
206
14.0%
(51)
1
(50)
463
43
—
506
12.9%
(5.6 )%
(55.2 )%
NM
(9.4 )%
(10)bp
(1.6 )%
(46.2 )%
(4.4 )%
(10)bp
(13.7 )%
(100.0 )%
(12.0 )%
(3.0 )%
(53.5 )%
NM
(7.1 )%
—bp
$
$
$
$
$
$
$
$
Operating income for our Water Infrastructure segment decreased $18 million or 5.6% (decreased $33 million or
9.4% on an adjusted basis) compared to the prior year. On an adjusted basis the operating margin decreased from
14.3% to 14.2%. The reduction in operating margin was due to cost inflation and unfavorable mix resulting from the
declines in our dewatering business driven by oil and gas weakness, and lower emerging market margins. This
reduction was not quite offset by cost savings from procurement initiatives, lean six sigma initiatives and
restructuring actions.
Applied Water
Operating income for our Applied Water segment decreased $3 million or 1.6% (decreased $9 million or 4.4% on an
adjusted basis) compared to the prior year. On an adjusted basis the operating margin decreased from 14.0% to
13.9%. The reduction in operating margin was due to cost inflation, unfavorable mix and foreign exchange impacts,
partially offset by cost reductions from procurement and lean six sigma initiatives and higher volume.
34
Corporate and other
Operating loss for corporate and other decreased $7 million or 13.7% (decreased $6 million or 12.0% on an
adjusted basis) compared to the prior year. The reduction in adjusted operating loss was primarily due to reduced
information technology and franchise tax costs.
Interest Expense
Interest expense was $55 million and $54 million for 2015 and 2014, respectively, primarily related to interest
expense on $1.2 billion aggregate principal amount of our senior notes. Refer to Note 13, “Credit Facilities and
Long-Term Debt,” for further details.
Income Tax Expense
The income tax provision for 2015 was $63 million at an effective tax rate of 15.6% compared to $84 million at an
effective tax rate of 19.8% in 2014. The 2015 effective tax rate is lower than 2014 due primarily to geographic mix of
earnings as well as a reduction in the amount of unrecognized tax benefits recorded.
Other Comprehensive (Loss) Income
Other comprehensive loss before tax of $130 million in 2015 as compared to $284 million loss in 2014 was primarily
due to a $23 million net gain in postretirement benefit plans foreign currency in 2015 as compared to a net loss of
$110 million for 2014. Further contributing to this decreased loss was a lower translation loss of $26 million primarily
due to less weakening of the Euro against the U.S. Dollar largely offset by the additional weakening of the Swedish
Krona against the U.S. Dollar. Additionally, there was a release of $8 million of currency translation gains out of
Other comprehensive (loss) income recognized as part of the sale of a business.
2014 versus 2013
Revenue
Revenue generated for 2014 was $3,916 million, an increase of $79 million, or 2.1%, compared to $3,837 million in
2013. On a constant currency basis, revenue grew 3.3%. The following table illustrates the impact on 2014 revenue
from organic growth, recent acquisitions, and fluctuations in foreign currency.
(in millions)
2013 Revenue
Organic Growth
Acquisitions/(Divestitures)
Constant Currency
Foreign currency translation (a)
Total change in revenue
2014 Revenue
$ Change
% Change
$
$
3,837
134
(6)
128
(49)
79
3,916
3.5 %
(0.2)%
3.3 %
(1.3)%
2.1 %
(a)
Foreign currency impact primarily due to weakness in the value of the Canadian Dollar, Australian Dollar, Argentine
Peso, Swedish Krona and Norwegian Krone against the U.S. Dollar, partially offset by strength in the value of the
British Pound against the U.S. Dollar.
The following table summarizes revenue by segment for 2014 and 2013:
(in millions)
Water Infrastructure
Applied Water
Total
Water Infrastructure
2014
2013
$
$
2,442 $
1,474
3,916 $
2,384
1,453
3,837
As Reported
Change
2.4%
1.4%
2.1%
Constant
Currency Change
4.4%
1.6%
3.3%
Water Infrastructure’s revenue increased $58 million, or 2.4% in 2014 (4.4% on a constant currency basis). The
4.4% constant currency increase reflects growth within the industrial water and public utility end markets and $6
million of incremental revenue from our 2013 acquisitions.
Organic revenue increased $99 million or 4.2% during the year, which was substantially due to higher volumes in
transport, test and treatment applications. Revenue from transport applications grew primarily from increased
industrial dewatering applications in the United States from oil and gas market-related rental activities. Transport
35
also grew organically from public utility pump and aftermarket demand. Revenue from test applications increased
due to significant strength in the United States from increased government spending coupled with the continued
success of new products and cross-selling of our European technologies. Revenue from treatment applications
grew from the delivery of several large projects in the emerging markets, particularly in Latin America, partially
offset by lower deliverable project backlog in the United States and European markets.
Applied Water
Applied Water’s revenue increased $21 million, or 1.4% in 2014 (a 1.6% increase on a constant currency basis).
The growth on a constant currency basis is driven primarily by organic revenue growth of $35 million, or 2.4%
versus the prior year due to strength in the commercial building services, industrial water and agriculture end
markets, which more than offset declines in the residential building services. The increase in the current year was
partially offset by the absence of revenue from our Wolverhampton valves business following its divestiture in the
third quarter of 2014 as compared to $12 million of revenue for the comparative period in 2013.
Organic revenue increased $35 million or 2.4% for the year due primarily to commercial building recovery in the
United States institutional building market, including distributor restocking and promotional activity. Also contributing
to the organic growth was industrial water application strength across all regions, particularly from projects in the
Middle East and Latin America. Irrigation application revenue also grew, driven by the timing of project shipments
and increased demand for vertical turbines. A decline in European demand for residential applications partially
offset organic growth.
Orders/Backlog
Orders received during 2014 increased by $109 million, or 2.8% to $4,021 million (a 3.9% increase on a constant
currency basis). Organic order growth increased $153 million or 3.9% for the year.
Water Infrastructure segment orders increased $68 million, or 2.8% to $2,511 million (4.4% growth on a constant
currency basis), including $8 million from acquisitions. Organic order growth of 4.1% was primarily due to higher
industrial demand within transport for wastewater pumps in the United States and Europe as well as strength within
the dewatering business for rental and equipment sales into oil and gas markets. Orders for test applications also
bolstered the growth for the segment from large orders in the United States. The strength in transport and test offset
declines in treatment from project delays in the United States and Europe.
Orders increased in our Applied Water segment $41 million, or 2.8% to $1,510 million (3.0% growth on a constant
currency basis). Organic growth of 3.6% was driven by strong performance in the commercial building services and
industrial water markets in the United States, as well as continued strength in China. The growth was partially offset
by weakness in the residential markets of Europe.
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 $740 million at
December 31, 2014 and $707 million at December 31, 2013. We anticipate that more than 85% of the backlog at
December 31, 2014 will be recognized as revenue during 2015.
Gross Margin
Gross margins as a percentage of consolidated revenue declined to 38.6% in 2014 from 39.1% in 2013. The
decrease is primarily attributable to lower margin sales within the Water Infrastructure segment caused by higher
mix sold to emerging markets, which have lower margins, in conjunction with foreign exchange headwinds as well
as unfavorable product sales mix. These negative impacts were partially mitigated by benefits from restructuring
savings and cost-saving initiatives through lean six sigma and global sourcing across both segments.
36
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
NM Not meaningful percentage change
Selling, General and Administrative Expenses
2014
2013
Change
$
$
$
$
920
23.5%
104
2.7%
26
—
1,050
26.8%
986
25.7%
104
2.7%
42
4
1,136
29.6%
(6.7 )%
(220)bp
— %
—bp
(38.1 )%
NM
(7.6 )%
(280)bp
SG&A decreased by $66 million or 6.7% to $920 million, or 23.5% of revenue in 2014, as compared to $986 million
or 25.7% of revenue in 2013. The decrease in SG&A expenses as a percentage of revenue is due primarily to
savings from restructuring actions combined with lapping the impacts from non-recurring special charges in 2013 of
$24 million, which comprise the legal settlement with Xylem Group LLC, costs incurred for the change in our chief
executive officer, costs incurred for the contractual indemnification of federal tax obligations to ITT and costs
associated with a legal judgment arising from a historical acquisition matter. The decrease was also driven by $7
million less realignment costs in 2014, which were costs incurred by the Company to reposition our European
business in an effort to optimize our cost structure and improve our operational efficiency and effectiveness as well
as implement our new organizational structure.
Research and Development Expenses
R&D spending was flat at $104 million or 2.7% of revenue in both 2014 and 2013.
Restructuring and Asset Impairment Charges
During 2014, we incurred restructuring costs of $19 million, $6 million and $1 million in our Water Infrastructure and
Applied Water segments, and Corporate and other, respectively. These charges were incurred primarily in an effort
to realign our organizational structure in Europe and North America to optimize our cost structure. The charges
relate to the reduction in structural costs, including a decrease in headcount and consolidation of facilities. During
2013, we recognized 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.
Total expected costs associated with actions that commenced during 2014 are approximately $19 million for Water
Infrastructure, approximately $6 million for Applied Water and approximately $1 million for Corporate and other.
These costs primarily comprise severance charges and the actions are substantially complete. As a result of these
actions initiated in 2014, we achieved savings of approximately $13 million in 2014 and annual future net savings
beginning in 2015 of approximately $26 million.
Total costs associated with actions that commenced during 2013 are approximately $32 million for Water
Infrastructure and approximately $8 million for Applied Water. These costs primarily comprise severance charges.
These actions are substantially complete. As a result of actions initiated during 2013, we achieved net savings of
approximately $13 million in 2013 and annual future net savings beginning in 2014 of approximately $36 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 4, “Restructuring and Asset Impairment
Charges,” for additional information.
37
Operating Income
We generated operating income of $463 million during 2014, a $100 million or 27.5% increase from the prior year
operating income of $363 million, primarily reflecting cost-saving initiatives and savings from restructuring actions.
These benefits were partially offset by cost inflation combined with unfavorable impacts from our geographic and
product sales mix described above. Another driving factor in the year-over-year improvement was the absence of
the aforementioned special charges in 2013 within SG&A, which did not recur as well as lower restructuring and
realignment costs. The following table illustrates operating income results by business segments for 2014 and
2013.
(in millions)
Water Infrastructure
Applied Water
Segment operating income
Corporate and other
Total operating income
Operating margin
Water Infrastructure
Applied Water
Total Xylem
2014
2013
Change
$
$
321
193
514
(51)
463
$
$
13.1%
13.1%
11.8%
263
175
438
(75)
363
11.0%
11.6%
9.5%
22.1 %
10.3 %
17.4 %
(32.0)%
27.5 %
210bp
150bp
230bp
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
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Applied Water
Operating income
Restructuring and realignment costs
Adjusted operating income
Adjusted operating margin
Corporate and other
Operating loss
Restructuring and realignment costs
Special charges
Adjusted operating loss
Total Xylem
Operating income
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
NM Not meaningful percentage change
2014
2013
Change
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
321
29
—
350
14.3%
193
13
206
14.0%
(51)
1
—
(50)
463
43
—
506
12.9%
263
48
4
315
13.2%
175
16
191
13.1%
(75)
—
20
(55)
363
64
24
451
11.8%
22.1 %
(39.6)%
NM
11.1 %
110bp
10.3 %
(18.8)%
7.9 %
90bp
(32.0)%
NM
100.0 %
(9.1)%
27.5 %
(32.8)%
NM
12.2 %
110bp
38
Water Infrastructure
Operating income for our Water Infrastructure segment increased $58 million or 22.1% (increased $35 million or
11.1% on an adjusted basis) compared with the prior year. The 11.1% increase was primarily driven by higher
volume, restructuring savings and cost reduction initiatives, such as global sourcing and lean six sigma. The
increase was partially offset by cost inflation, unfavorable sales mix and price.
Applied Water
Operating income for our Applied Water segment increased $18 million or 10.3% (increased $15 million or 7.9% on
an adjusted basis) compared to the prior year. The 7.9% increase was driven by lean six sigma initiatives, global
sourcing and restructuring savings combined with modest price realization. The increase was partially offset by cost
inflation and unfavorable foreign exchange headwinds.
Corporate and other
Operating loss for corporate and other decreased $24 million or 32.0% (decreased $5 million or 9.1% on an
adjusted basis) compared to the prior year. The reduction in adjusted operating loss was primarily due to reduced
stock based compensation expense and costs associated with the corporate headquarter move in 2013 that did not
recur in 2014.
Interest Expense
Interest expense was $54 million and $55 million for 2014 and 2013, respectively, primarily related to interest
expense on $1.2 billion aggregate principal amount of our senior notes. Refer to Note 13, “Credit Facilities and
Long-Term Debt,” for further details.
Income Tax Expense
The income tax provision for 2014 was $84 million at an effective tax rate of 19.8% compared to $70 million at an
effective tax rate of 23.5% in 2013. The 2014 effective tax rate is lower than 2013 due primarily to geographic mix of
earnings.
Other Comprehensive (Loss) Income
Other comprehensive loss before tax of $284 million in 2014 as compared to income of $74 million in 2013 was
primarily due to a $221 million foreign currency translation impact due to a weakening of the Euro, British Pound
and Swedish Krona against the U.S. Dollar. Further contributing to the year-over-year decline was a $110 million
net loss in postretirement benefit plans in 2014 as compared to a net gain of $34 million in 2013 due to a decrease
in discount rates, partially mitigated by actual gains on plan assets in excess of the assumed long-term rate of
return. The effective tax rate on other comprehensive income decreased as compared to 2013 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 and 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 (a)
Total
Year Ended December 31,
2015
2014
2013
$
$
464 $
(132)
(262)
(53)
17 $
416 $
(86)
(147)
(53)
130 $
324
(199)
(100)
4
29
(a) 2015 and 2014 impact is primarily due to the weakness of the Euro against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
During 2015, net cash provided by operating activities was $464 million, compared to $416 million in 2014. The $48
million year-over-year increase was primarily driven by a decrease in the use of working capital from reduced
inventory levels in 2015 and improved collections of receivables. Lower payments for restructuring and
39
postretirement benefit plans were more than offset by increased payments for foreign value-added taxes as
compared to the prior year.
During 2014, net cash provided by operating activities was $416 million, compared to $324 million in 2013. The $92
million year-over-year increase was driven by an increase in income, as well as a modest improvement in working
capital performance. Reductions in payments made for restructuring and postretirement plan contributions in 2014
were largely offset by an increase in tax payments. Also contributing to the increase was a refund of value-added
tax in the current year that had been paid during 2013.
Investing Activities
Cash used in investing activities was $132 million for 2015, compared to $86 million in 2014. The increase of $46
million was primarily due to $18 million spent on an acquisition in 2015 as compared to nothing in 2014 as well as
cash received in 2014 of $30 million for the sale of our Wolverhampton business.
Cash used in investing activities was $86 million in 2014 compared to $199 million in 2013. The decrease of $113
million was primarily driven by a decrease in acquisition activity as there were no acquisitions in 2014, whereas we
spent $81 million for acquisitions during 2013. Also contributing to the decrease was the receipt of $30 million in
2014 for the sale of a business. Capital expenditures were also lower in 2014, with a $7 million reduction primarily
due to a decrease in the spending on post Spin-off information technology investments and the relocation of our
corporate headquarters.
Financing Activities
Cash used by financing activities was $262 million, $147 million and $100 million during 2015, 2014 and 2013,
respectively. In 2015, the $115 million increase is primarily driven by an increase in share repurchase activity of $45
million and an increase of $8 million, or a 10% per share increase, in dividends paid to shareholders as well as a
decrease in cash received from short-term debt borrowings under the European Investment Bank facility of $50
million. In 2014, the $47 million increase reflected cash used for share repurchase activity increasing $61 million
and dividend payments increasing $7 million compared to 2013. These uses were partially offset by an increase in
cash received from short-term debt borrowings under the European Investment Bank facility of $50 million in 2014
versus $38 million in 2013.
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations, and access
to bank financing and the capital markets. 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 such financing will be available
to us on acceptable terms or that such financing will be available at all.
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 from 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.
We anticipate that our present sources of funds, including funds from operations and additional borrowings, 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 leaseback 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
40
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. If a change of control triggering event (as defined in the
Senior Notes) 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. As of December 31, 2015, we
were in compliance with all covenants.
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.
As of December 31, 2015, we have classified $600 million of our Senior Notes due 2016 as long-term based on our
current ability and intent to refinance the outstanding borrowings on a long-term basis.
Credit Facility
Effective March 27, 2015, Xylem entered into a Five-Year Revolving Credit Facility with Citibank, 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) revolving extensions of credit outstanding at any time and (ii) the issuance of letters of
credit in a face amount not in excess of $100 million outstanding at any time. The Credit Facility provides for
increases of up to $200 million for a possible maximum total of $800 million in aggregate principal amount at our
request and with the consent of the institutions providing such increased commitments.
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 Citibank, N.A.,
(b) the U.S. Federal funds effective rate plus 0.5% 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 to 1.00 (based on a ratio of
total debt to earnings before interest, taxes, depreciation and amortization) throughout the term. The Credit Facility
also contains limitations on, among other things, incurring secured debt, granting liens, entering into sale and
leaseback transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. 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, 2015, we were in compliance with all covenants.
As of December 31, 2015, the Credit Facility was undrawn.
Research and Development Facility Agreement
On December 3, 2015, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D
Facility Agreement") with The European Investment Bank (the "EIB") to amend the maturity date. The facility
provides an aggregate principal amount of up to €120 million (approximately $132 million) to finance research
projects and infrastructure development in the European Union. The Company's wholly owned subsidiaries in
Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á 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 during the period from 2013 through 2016 at the Company's facilities in Sweden, Germany, Italy, the
United Kingdom, Austria, Norway and Hungary.
Under the R&D Facility Agreement, the borrower can draw loans on or before March 31, 2016 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 is 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 is 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 is 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
to 1.00 (based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) throughout
the term. The R&D Facility Agreement also contains limitations on, among other things, incurring debt, granting
liens, and entering into 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, 2015, we were in compliance with all covenants.
41
As of December 31, 2015 and 2014, $76 million and $84 million was outstanding, respectively, under the R&D
Facility Agreement. Although the borrowing term for this arrangement is up to 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 a year.
Non-U.S. Operations
For 2015 and 2014, we generated 59% and 62% of our revenue from non-U.S. operations, respectively. 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 we believe it is cost effective to do so. We continually review our domestic and
foreign cash profile, expected future cash generation and investment opportunities, which support our current
designation of a portion 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
may be required to accrue additional U.S. taxes. As of December 31, 2015, our foreign subsidiaries were holding
$656 million in cash or marketable securities.
As of December 31, 2015, our excess of financial reporting over the tax basis of investments in certain foreign
subsidiaries totaled $1.9 billion. We have not asserted that $41 million of our excess basis difference will be
indefinitely reinvested and have therefore provided for U.S 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, 2015:
(in millions)
Debt and capital lease obligations (1)
2016
2017 - 2018
2019 - 2020
Thereafter
Total
$
678 $
— $
— $
600 $
1,278
Interest payments (1) (2)
Operating lease obligations
Purchase obligations (3)
Other long-term obligations reflected on
the balance sheet
51
55
82
3
59
76
3
6
59
40
—
5
29
19
—
8
198
190
85
22
Total commitments
$
869 $
144 $
104 $
656 $
1,773
In addition to the amounts presented in the table above, we have recorded liabilities for uncertain tax positions of $47 million, net
investment hedges of $18 million and employee severance indemnity of $13 million. These amounts have been excluded from
the contractual obligations table due to an inability to reasonably estimate the timing or amounts 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 14, “Postretirement Benefit Plans” of the consolidated
financial statements and not included in the above table. Finally, estimated environmental payments and workers' compensation
and general liability reserves are excluded from the table above. We estimate, based on historical experience, that we will spend
approximately $1 million to $2 million per year on environmental investigation and remediation and approximately $4 million to
$5 million per year on workers' compensation and general liability. At December 31, 2015, we had estimated and accrued $4
million and $24 million related to environmental matters, and workers' compensation and general liability, respectively.
(1) Refer to Note 13, “Credit Facilities and Long-Term Debt,” of 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. As of December 31, 2015, we have classified $600
million of our Senior Notes due 2016 as long-term based on our current ability and intent to refinance the outstanding
borrowings on a long-term basis, however, we cannot reasonably estimate the future debt terms and interest payments.
(2) Amounts represent estimates of future interest payments on long-term debt outstanding as of December 31, 2015.
(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 able to cancel without
penalty have been excluded.
42
Off-Balance Sheet Arrangements
As of December 31, 2015, we have issued guarantees for the debt and other obligations of consolidated
subsidiaries in the normal course of business. We have determined that none of these arrangements has a material
current effect or is reasonably likely to have a material future effect on our consolidated financial statements,
financial condition, changes in financial condition, revenues or expenses, liquidity, capital expenditures or capital
resources.
We obtain certain stand-by letters of credit, bank guarantees and surety bonds from third-party financial institutions
in the ordinary course of business when required under contracts or to satisfy insurance related requirements. As of
December 31, 2015, the amount of stand-by letters of credit, bank guarantees and surety bonds was $161 million.
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 Financial Statements are discussed in
Note 1, “Summary of Significant Accounting Policies,” of the consolidated financial statements. Accounting
estimates and assumptions discussed in this section are those that we consider 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.
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.
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.
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
43
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
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 20, “Segment and Geographic Data,” of the consolidated 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.
44
During the fourth quarter of 2015, we performed our annual impairment assessment and determined that the
estimated fair values of our goodwill reporting units were substantially in excess of each of their carrying values.
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. We determined that no impairment of the indefinite-lived intangibles
existed as of the measurement date in 2015.
Contingent Liabilities. As discussed in Note 18, "Commitments and Contingencies" of the consolidated financial
statements, the Company is, from time to time, subject to a variety of litigation, environmental liabilities, product
liabilities, and similar contingent liabilities incidental to its business (or the business operations of previously owned
entities). The Company recognizes a liability for any contingency that is known or probable of occurrence and
reasonably estimable. These assessments require judgments concerning matters such as litigation developments
and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending
and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may
change in the future due to various factors, including those discussed in Note 18 of the consolidated financial
statements. If the liabilities established by the Company with respect to these contingencies are inadequate, the
Company would be required to incur an expense equal to the amount of the loss incurred in excess of the recorded
liability, which would adversely affect the Company’s financial statements.
Receivables and Allowance for Doubtful Accounts and Discounts. Receivables primarily comprise uncollected
amounts owed to us from transactions with customers and are presented net of allowances for doubtful accounts
and early payment 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. In addition, 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 early payment 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, 2015 and
2014 we do not believe we have any significant concentrations of credit risk.
Postretirement Plans. Company employees around the world participate in numerous defined benefit plans. The
determination of projected benefit obligations and the recognition of expenses related to these 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 years of service
(some of which are disclosed in Note 14, “Postretirement Benefit Plans,” of the consolidated financial statements)
and other factors. 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 projected benefit obligation,
over the average remaining service period of active plan participants, or for plans with all or substantially all inactive
participants, over the average remaining life expectancy.
45
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 2015 and 2014.
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
2015
2014
U.S.
Int’l
U.S.
Int’l
4.27%
NM
4.01%
8.00%
NM
3.44%
3.29%
3.14%
7.31%
3.34%
4.01%
NM
4.79%
8.00%
NM
3.14%
3.34%
4.23%
7.30%
3.48%
NM Not meaningful. The pension benefits for future service for all the U.S. pension plans are 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 14, “Postretirement Benefit Plans,” of 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
2015
2014
2013
7.38%
3.51%
7.38%
18.13%
7.40%
10.17%
For the recognition of net periodic pension cost, the calculation of the expected return on plan assets is generally
derived by applying the expected long-term rate of return to the market-related value of plan assets. The market-
related value of plan assets is 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. The weighted
average expected long-term rate of return for all of our plan assets to be used in determining net periodic benefit
costs for 2016 is estimated at 7.32%. 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
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 30 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, 2016, is 3.53%. 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, 2016, our expected rate of future compensation is 3.29% 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 7.00% for
2016, decreasing ratably to 4.50% in 2027. 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 $4 million.
46
We currently anticipate making contributions to our pension and postretirement benefit plans in the range of $26
million to $36 million during 2016, of which $8 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 $26 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, 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, 2015 and 2014 for these assets represented less
than 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 $25 million.
New Accounting Pronouncements
See Note 2, “Recently Issued Accounting Pronouncements,” of the consolidated financial statements for a complete
discussion of recent accounting pronouncements.
47
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange rates 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
We conduct approximately 59% of our business in various locations outside the United States.
Our economic foreign currency risk primarily 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. We 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. These risks are also mitigated by natural hedges including the presence of manufacturing
facilities outside the United States, global sourcing and other spending which occurs in foreign countries. Our
principal foreign currency transaction exposures primarily relate to the Euro, Swedish Krona, Canadian Dollar,
British Pound, Polish Zloty and Australian Dollar. We estimate that a hypothetical 10% movement in foreign
currency exchange rates would not have a material economic impact to Xylem’s financial position and results of
operations.
Additionally, we are subject to foreign exchange translation risk due to changes in the value of foreign currencies in
relation to our reporting currency, the U.S. Dollar. The translation risk is primarily concentrated in the exchange rate
between the U.S. Dollar and the Euro, British Pound, Chinese Yuan, Swedish Krona, Canadian Dollar and
Australian Dollar. As the U.S. Dollar strengthens against other currencies in which we transact business, revenue
and income will generally be negatively impacted, and if the U.S. Dollar weakens, revenue and income will
generally be positively impacted. We estimate that a hypothetical 10% movement of the U.S. Dollar to the various
foreign currency exchange rates we translate from, in the aggregate, could have approximately a 7% impact on
Xylem's consolidated revenue and income as reported in U.S. Dollars. 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, though our intent is to indefinitely reinvest most of these funds outside
of the U.S. As such, we do not expect translation risk to have a material economic impact on our financial position
and results of operations.
Interest Rate Risk
As of December 31, 2015, our debt portfolio is primarily comprised of two fixed-rate senior notes that total $1.2
billion. The $600 million senior note due 2021 is not exposed to interest rate risk as the bond is at a fixed-rate until
maturity. The other $600 million senior note will mature on September 20th, 2016, and the company intends to
refinance the debt with new debt instruments. Until the company closes the refinancing of the notes due, we are
exposed to interest rate risk that can potentially impact the planned issuance of debt instruments. Based on current
interest rate market we do not anticipate material risk associated with our debt refinancing within the target time-
frame of completion.
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.
48
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and
2013
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2015,
2014 and 2013
Notes to Consolidated Financial Statements:
Note 1 Summary of Significant Accounting Policies
Note 2 Recently Issued Accounting Pronouncements
Note 3 Acquisitions and Divestitures
Note 4 Restructuring and Asset Impairment Charges
Note 5 Other Non-Operating Income, Net
Note 6 Income Taxes
Note 7 Earnings Per Share
Note 8 Inventories
Note 9 Property, Plant and Equipment
Note 10 Goodwill and Other Intangible Assets
Note 11 Derivative Financial Instruments
Note 12 Accrued and Other Current Liabilities
Note 13 Credit Facilities and Long-Term Debt
Note 14 Postretirement Benefit Plans
Note 15 Stock-Based Compensation Plans
Note 16 Capital Stock
Note 17 Accumulated Other Comprehensive Income (Loss)
Note 18 Commitment and Contingencies
Note 19 Related Party Transactions
Note 20 Segment and Geographic Data
Note 21 Valuation and Qualifying Accounts
Note 22 Quarterly Financial Data
Note 23 Subsequent Events
49
Page
No.
50
51
52
53
54
55
56
62
64
65
67
67
70
70
71
71
72
74
74
76
83
85
87
88
91
92
94
94
94
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, 2015 and 2014, and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. 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, 2015 and 2014, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles
generally accepted in the United States of America.
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, 2015, based on the
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 26, 2016 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 26, 2016
50
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED 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
Restructuring and asset impairment charges
Operating income
Interest expense
Other non-operating income (expense), net
Gain from sale of business
Income before taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Weighted average number of shares:
Basic
Diluted
Dividends declared per share
2015
2014
2013
3,653 $
2,249
1,404
854
95
6
449
55
—
9
403
63
340 $
3,916 $
2,403
1,513
920
104
26
463
54
1
11
421
84
337 $
1.88 $
1.87 $
1.84 $
1.83 $
3,837
2,338
1,499
990
104
42
363
55
(10)
—
298
70
228
1.23
1.22
180.9
181.7
0.5632 $
183.1
184.2
0.5120 $
185.2
186.0
0.4656
$
$
$
$
$
See accompanying notes to consolidated financial statements.
51
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
Year Ended December 31,
Net income
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustment
Foreign currency gain reclassified into net income
Net change in derivative hedge agreements:
Unrealized (losses) gains
Amount of loss reclassified into net income
Net change in postretirement benefit plans:
Net gain (loss)
Prior service credit
Amortization of prior service (credit) cost
Amortization of net actuarial loss into net income
Settlement
Foreign currency translation adjustment
Other comprehensive (loss) income, before tax
Income tax expense (benefits) related to other comprehensive (loss) income
2015
2014
2013
$
340 $
337 $
228
(180)
(8)
(22)
20
23
1
(3)
18
—
21
(130)
9
(206)
—
(22)
6
(110)
17
(1)
11
1
20
(284)
(18)
(266)
15
—
1
—
34
4
1
17
—
2
74
22
52
71 $
280
Other comprehensive (loss) income, net of tax
Comprehensive income
(139)
201 $
$
See accompanying notes to consolidated financial statements.
52
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, returns and doubtful accounts of $33
and $34 in 2015 and 2014, respectively
Inventories
Prepaid and other current 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 18)
Stockholders’ equity:
Common Stock — par value $0.01 per share:
Authorized 750.0 shares, issued 190.2 and 188.9 shares in 2015 and 2014,
respectively
Capital in excess of par value
Retained earnings
Treasury stock – at cost 11.8 shares and 6.6 shares in 2015 and 2014,
respectively
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
2015
2014
$
680 $
663
749
433
143
2,005
439
1,584
435
194
4,657 $
338 $
407
78
823
1,196
335
118
101
771
486
144
2,064
461
1,635
470
203
4,833
338
476
89
903
1,195
388
136
84
2,573
2,706
2
1,834
885
(399)
(238)
2,084
4,657 $
2
1,796
648
(220)
(99)
2,127
4,833
$
$
$
See accompanying notes to consolidated financial statements.
53
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED 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:
Depreciation
Amortization
Deferred income taxes
Share-based compensation
Restructuring and asset impairment charges, net
Gain from sale of businesses
Other, net
Payments for 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
Proceeds from sale of business
Other, net
Net Cash — Investing activities
Financing Activities
(Repayment) issuance of short-term debt, net
Principal payments of debt and capital lease obligations
Repurchase of common stock
Proceeds from exercise of employee stock options
Excess tax benefit from share based compensation
Dividends paid
Other, net
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)
2015
2014
2013
$
340 $
337 $
228
88
45
(9)
15
6
(9)
12
(14)
(25)
(24)
23
20
(11)
(3)
10
464
(117)
—
(18)
1
2
(132)
(3)
—
(179)
21
2
(102)
(1)
(262)
(53)
17
663
680 $
95
47
(29)
18
26
(11)
2
(26)
(35)
(37)
(49)
17
3
25
33
416
(119)
2
—
30
1
(86)
52
—
(134)
26
2
(94)
1
(147)
(53)
130
533
663 $
52 $
75 $
51 $
81 $
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
51
65
$
$
$
See accompanying notes to consolidated financial statements.
54
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Millions, except per share amounts)
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2012
2
1,706
Net income
Other comprehensive loss, net
Dividends declared ($0.4656 per
share)
Stock incentive plan activity
Repurchase of common stock
Balance at December 31, 2013
Net income
Other comprehensive income, net
Dividends declared ($0.5120 per
share)
Stock incentive plan activity
Repurchase of common stock
Balance at December 31, 2014
Net income
Other comprehensive income, net
Dividends declared ($0.5632 per
share)
Stock incentive plan activity
Repurchase of common stock
47
$
2
$
1,753
$
43
$
2
$
1,796
$
264
228
(87)
$
405
337
(94)
$
648
340
(103)
38
115
52
Treasury
Stock
(13)
(73)
Total
2,074
228
52
(87)
47
(73)
167
$
(86) $
2,241
(266)
337
(266)
(94)
43
(134)
(134)
(99) $
(220) $
2,127
(139)
340
(139)
(103)
38
(179)
(179)
Balance at December 31, 2015
$
2
$
1,834
$
885
$
(238) $
(399) $
2,084
See accompanying notes to consolidated financial statements.
55
XYLEM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 serves many of the primary 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.
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.,
acquired by Harris Inc. on May 29, 2015, (“Exelis”) and Xylem. Xylem Inc. was incorporated in Indiana on May 4,
2011 in connection with the Spin-off.
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 financial
statements to “ITT” or “ former parent” refers to ITT Corporation and its consolidated subsidiaries (other than Xylem
Inc.).
Basis of Presentation
The consolidated financial statements reflect our financial position and results of operations in conformity with
accounting principles generally accepted in the United States of America (“GAAP”). All intercompany transactions
between our businesses have been eliminated. Certain prior year amounts have been reclassified to conform to the
current year presentation.
In 2014, we implemented an organizational redesign to integrate our commercial teams within geographical
regions. While this organizational redesign did not change our reportable segments, it had implications on how we
manage our business. These changes and the related measurement system were effective in the fourth quarter
2014 and as a result, we commenced reporting our financial performance at such time based on the new
organizational design.
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 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.
56
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.
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.
57
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 long-term debt 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.
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 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.
58
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 Discounts
Receivables primarily comprise uncollected amounts owed to us from transactions with customers and are
presented net of allowances for doubtful accounts and early payment 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. In addition, 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 early payment 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, 2015 and
2014 we do not believe we have any significant concentrations of credit risk.
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, software 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 1 to 20 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.
59
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
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 also record a warranty liability for specific
matters. 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, years of service 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 return on plan
assets is generally derived by applying the expected long-term rate of return on the market-related value of plan
assets. The market-related value of plan assets is 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 average 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. The excess
of the acquisition price over those estimated fair values is recorded as goodwill. 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. 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
60
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.
The effective portion of changes in the fair value of derivatives designated and that qualify as net investment
hedges of foreign exchange risk is recorded in OCI. Amounts in OCI are reclassified into earnings at the time the
hedged net investment is sold or substantially liquidated. Effectiveness of derivatives designated as net investment
hedges is assessed using the forward method. Any ineffective portion of the change in fair value of the derivative is
recognized directly in selling, general and administrative expenses.
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, 2015 and
2014 were uninsured. Foreign cash balances at December 31, 2015 and 2014 were $656 million and $537 million,
respectively.
61
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 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.
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.
NAV Practical Expedient is the measurement of fair value using the net asset value ("NAV") per share (or its
equivalent) practical expedient as an alternative to the fair value hierarchy as discussed above.
Note 2. Recently Issued Accounting Pronouncements
Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance amending the accounting
for leases. Specifically, the amended guidance requires all lessees to record a lease liability at lease inception, with
a corresponding right of use asset, except for short-term leases. Lessor accounting is not fundamentally changed.
This amended guidance is effective for interim and annual periods beginning after December 15, 2018 using a
modified retrospective approach. Early adoption is permitted. We are evaluating the impact of the guidance on our
financial condition and results of operations
In January 2016, the FASB issued guidance amending the classification and measurement of financial instruments.
Specifically, the amended guidance (1) requires equity securities with readily determinable fair values to be
measured at fair value with changes in fair value recognized through net income (2) simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative impairment
assessment at each reporting period and requiring any impaired investment be measured at fair value (3) requires
separate presentation of financial assets and financial liabilities by measurement category and form of financial
asset on the balance sheet or accompanying notes to the financial statements and (4) eliminates the requirement to
disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for
financial instruments measured at cost on the balance sheet. This amended guidance is effective for interim and
annual periods beginning after December 15, 2017 by means of a cumulative-effect adjustment to the balance
sheet as of the beginning of the year of adoption. Early adoption is permitted for fiscal years or interim periods for
which the applicable financial statements have not been issued. We are evaluating the impact of the guidance on
our financial condition and results of operations
In July 2015, the FASB issued guidance regarding simplifying the measurement of inventory. Under prior guidance,
inventory is measured at the lower of cost or market, where market is defined as replacement cost, with a ceiling of
net realizable value and a floor of net realizable value less a normal profit margin. The amended guidance requires
the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. This guidance is effective prospectively for interim and annual periods beginning after December
15, 2016 and early application is permitted. We are evaluating the impact of the guidance on our financial condition
and results of operations
In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The guidance
outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of
the model is that an entity recognizes revenue to portray the transfer of goods and services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The standard also expands disclosure requirements regarding revenue recognition. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2017 and may be applied
retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial
62
application. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016.
We are evaluating the impact of the guidance on our financial condition and results of operations.
Recently Adopted Pronouncements
In November 2015, the FASB issued guidance that changes the presentation of deferred income taxes. Under prior
accounting guidance deferred income tax liabilities and assets are separated into current and noncurrent amounts
in an entity’s balance sheet. The guidance requires that deferred income tax liabilities and assets be classified as
noncurrent in an entity’s balance sheet. This guidance may be applied prospectively or retrospectively to all
deferred income tax balances. We elected to early adopt this guidance effective the fourth quarter of 2015 on a
retrospective basis. Accordingly, $71 million and $118 million are reflected in noncurrent deferred tax assets and
noncurrent deferred tax liabilities, respectively as of December 31, 2015. Additionally, $38 million of current deferred
tax assets and $5 million of current deferred tax liabilities were reclassified to noncurrent deferred tax assets and
liabilities as of December 31, 2014 resulting in total noncurrent deferred tax assets and noncurrent deferred tax
liabilities of $90 million and $136 million, respectively.
In September 2015, the FASB issued guidance regarding simplifying the accounting for measurement-period
adjustments attributable to an acquisition. Under prior guidance, adjustments to provisional amounts during the
measurement period that arise due to new information regarding acquisition date circumstances must be made
retrospectively with a corresponding adjustment to goodwill. The amended guidance requires an acquirer to record
adjustments to provisional amounts made during the measurement period in the period that the adjustment is
determined. The adjustments should reflect the impact on earnings of changes in depreciation, amortization, or
other income effects, if any, as if the accounting had been completed as of the acquisition date. Additionally,
amounts recorded in the current period that would have been reflected in prior reporting periods if the adjustments
had been recognized as of the acquisition date must be disclosed either on the face of the income statement or in
the notes to financial statements. This guidance is effective prospectively for interim and annual periods beginning
after December 15, 2015. We elected to early adopt this guidance effective the fourth quarter of 2015. Our adoption
of this guidance did not have any impact on our financial condition or results of operations.
In May 2015, the FASB issued guidance regarding the disclosure of investments which are valued at fair value
using the net asset value ("NAV") per share practical expedient. Investments measured at NAV per share using the
practical expedient will be presented as a reconciling item between the fair value hierarchy disclosure and the
balance sheet. The amended guidance removes the requirement to categorize such investments within the fair
value hierarchy. The amendment also removes the requirement to make certain disclosures for all investments that
are eligible to be measured at fair value using the NAV per share practical expedient, instead limiting such
disclosures to those investments measured at fair value using the NAV practical expedient. This guidance is
effective for interim and annual periods beginning after December 15, 2015. The guidance must be applied
retrospectively and early adoption is permitted. We elected to early adopt this guidance effective the fourth quarter
of 2015. Adoption of this guidance did not have an impact on our financial condition and results of operations.
In April 2015, the FASB issued guidance which changes the presentation of debt issuance costs in the balance
sheet. Under prior guidance, debt issuance costs are reflected on the balance sheet as an asset. This amendment
requires such costs to be reflected as a direct deduction to the related debt liability, with retrospective application
upon adoption. Subsequently, in August 2015, the FASB issued additional guidance indicating that debt issuance
costs associated with line-of-credit arrangements may be presented as an asset and amortized over the term of the
line-of-credit arrangement. We elected to early adopt these standards effective the first and third quarter of 2015,
respectively. Accordingly, $4 million of debt issuance costs were reflected within long-term debt as of December 31,
2015 and December 31, 2014. These costs were previously recorded within other non-current assets.
In April 2015, the FASB issued guidance regarding whether a cloud computing arrangement includes a software
license. If a cloud computing arrangement includes a software license then the software license element of the
arrangement should be accounted for in a manner that is consistent with accounting for the acquisition of other
software licenses. If a cloud computing arrangement does not include a software license then the arrangement
should be accounted for as a service contract. This guidance is effective for interim and annual periods beginning
after December 15, 2015. The guidance may be applied (1) retrospectively or (2) prospectively to arrangements
entered into, or materially modified after the effective date. Early adoption is permitted. We elected to early adopt
this standard effective in the second quarter of 2015 with retrospective application. Our adoption of this guidance
did not have any impact on our financial condition or results of operations.
In February 2015, the FASB issued guidance which amends the requirements to determine whether a company
needs to consolidate certain legal entities into its reported financial statements. Specifically, the amendment: (1)
modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities
63
(“VIEs”) or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited
partnership and (3) affects the consolidation analysis of reporting entities that are involved with VIEs. This guidance
is effective for interim and annual reporting periods beginning after December 15, 2015 and may be applied
retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial
application. We elected to early adopt this standard effective in the second quarter of 2015 with retrospective
application. Our adoption of this guidance did not have any impact on our financial condition or results of
operations.
In January 2015, the FASB issued guidance which eliminates from GAAP the concept of an extraordinary item.
Under prior guidance, an event or transaction must be unusual in nature and must occur infrequently to be
considered an extraordinary item. Additionally, under prior guidance extraordinary items are separately presented in
a company’s income statement and disclosed in the footnotes to the company’s financial statements. As a result of
the new guidance regarding extraordinary items, a company will no longer (1) segregate an extraordinary item from
the results of ordinary operations, (2) separately present an extraordinary item on its income statement, and (3)
disclose income taxes and earnings-per-share data applicable to an extraordinary item. We elected to early adopt
this standard effective in the first quarter of 2015 with retrospective application. Our adoption of this guidance did
not have any impact on our financial condition or results of operations.
In June 2014, as a result of inconsistency in practice, the FASB issued guidance related to the recognition of
compensation on employee share-based payments in which the terms of the award provide that a performance
target that affects vesting could be achieved after the requisite service period. The standard states that the
performance target should not be reflected in estimating the grant date fair value of the award. Compensation cost
should be recognized in the period in which it becomes probable that the performance target will be achieved and
should represent the compensation cost attributable to the periods for which the service has already been rendered.
If the performance target becomes probable of being achieved before the end of the requisite service period, the
remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite
service period. We elected to early adopt this guidance effective in the first quarter of 2015 with retrospective
application. Our adoption of this guidance did not have any impact on our financial condition or results of operations
as we were using the accounting prescribed in the new guidance.
In April 2014, the FASB issued guidance related to the reporting of discontinued operations. The guidance states
that the disposal of a business or operation is required to be reported as discontinued operations if the disposal
represents a strategic shift that will have a major effect on an entity’s operations and financial results. The guidance
also expands disclosures about discontinued operations and the disposal of significant businesses that did not
qualify for discontinued operations presentation. This standard is effective prospectively, for disposals (or
businesses that qualify as “held for sale”) that occur within annual periods beginning on or after December 15, 2014
and interim periods within those years. Our adoption of this guidance effective in the first quarter of 2015 did not
have any impact on our financial condition or results of operations.
In January 2014, the 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 Accounting Standards
Codification Topic 840, Leases, but rather other guidance as deemed appropriate. This guidance is effective for
interim and reporting periods beginning on or after December 15, 2014. The guidance requires opening retained
earnings in the year of adoption to reflect the cumulative historical impact of any arrangements existing at the date
of adoption, and the new guidance to be applied to the financial statements on a prospective basis. Our adoption of
this guidance effective in the first quarter of 2015 did not have any impact on our financial condition or results of
operations.
Note 3. Acquisitions and Divestitures
2015 Acquisition and Divestitures
Hypack
On October 22, 2015, we acquired substantially all of the assets of Hypack, Inc. ("Hypack"), a leading provider of
hydrographic software worldwide, for approximately $18 million. Hypack, a privately-owned company
headquartered in Middletown, Connecticut, has approximately 30 employees and annual revenue of approximately
$8 million. Our consolidated financial statements include Hypack's results of operations prospectively from October
22, 2015 within the Water Infrastructure segment.
64
During 2015, we divested two businesses within our Water Infrastructure segment for $1 million, which were not
material, individually or in the aggregate, to our results of operations or financial position. The sales resulted in a
gain of $9 million, reflected in gain from sale of businesses in our Consolidated Income Statement.
2014 Divestiture
On July 2, 2014, we divested our Wolverhampton, U.K.-based pneumatic and hydraulic valves business for
approximately $30 million. The sale resulted in a gain of $11 million, reflected in gain from sale of business in our
Consolidated Income Statement. The business, which was part of our Applied Water segment, provided a wide
range of products, primarily to industrial original equipment manufacturer customers in the oil and gas sector. The
business reported 2013 annual revenue of approximately $25 million.
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.
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 2015,
2014 and 2013, the costs incurred primarily relate to the reduction in structural costs, including the elimination of
headcount and consolidation of facilities primarily within 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
Reversal of restructuring accruals
Total restructuring charges
Asset impairment
Total restructuring and asset impairment charges
By segment:
Water Infrastructure
Applied Water
Corporate and other
65
Year Ended December 31,
2015
2014
2013
$
$
$
7 $
—
(1)
6
—
6 $
5 $
1
—
26 $
1
(1)
26
—
26 $
19 $
6
1
38
2
—
40
2
42
33
9
—
Restructuring
The following table displays a rollforward of the restructuring accruals, presented on our Consolidated Balance
Sheet within accrued and other current liabilities, for the years ended December 31, 2015 and 2014.
(in millions)
Restructuring accruals - January 1
Restructuring charges
Cash payments
Foreign currency and other
Restructuring accruals - December 31
By segment:
Water Infrastructure
Applied Water
Regional selling locations (a)
Corporate and other
$
$
$
2015
2014
12 $
6
(14)
(1)
3 $
1 $
1
1
—
13
26
(26)
(1)
12
5
3
3
1
(a)
Regional selling locations consist primarily of selling and marketing organizations that incurred restructuring expense
which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the
segments.
The following is a rollforward of employee position eliminations associated with restructuring activities for the years
ended December 31, 2015 and 2014.
Planned reductions - January 1
Additional planned reductions
Actual reductions
Planned reductions - December 31
2015
2014
133
87
(138)
82
51
320
(238)
133
Total expected costs associated with actions for Water Infrastructure that commenced during 2015 are
approximately $5 million. These costs primarily consist of severance charges. Approximately $4 million of the
expected cost was incurred in 2015. We currently expect activity related to these actions to continue through the
second quarter of 2016. Total expected costs associated with actions for Applied Water that commenced during
2015 are approximately $1 million. These costs primarily consist of severance charges. Substantially all of the
costs associated with these actions have been incurred in 2015.
Total expected costs associated with actions for Water Infrastructure that commenced during 2014 are
approximately $19 million. The actions are substantially complete with approximately $18 million of the expected
cost was incurred in 2014 and $1 million was incurred during 2015. Total expected costs associated with actions for
Applied Water that commenced during 2014 are approximately $6 million. Substantially all of the costs associated
with these actions have been incurred in 2014.
Total expected costs associated with actions for Water Infrastructure that commenced during 2013 are
approximately $32 million. The actions are substantially complete with approximately $31 million of the expected
cost was incurred in 2013 and $1 million was incurred during 2014. Total expected costs associated with actions for
Applied Water that commenced during 2013 are approximately $8 million. Substantially all of the costs associated
with these actions have been incurred in 2013.
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. 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 Income
Statement.
66
Note 5. Other Non-Operating Income (Expense), Net
The components of other non-operating income (expense), net are as follows:
(in millions)
Interest income
Income from joint ventures
Other expense – net (a)
Total other non-operating income (expense), net
Year Ended December 31,
2015
2014
2013
$
$
2 $
3
(5)
— $
2 $
2
(3)
1 $
3
2
(15)
(10)
(a) 2013 includes $10 million of expense incurred under the Tax Matters Agreement with ITT. Refer to Note 6 "Income Taxes"
for additional information regarding the Tax Matters Agreement.
Note 6. Income Taxes
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,
2015
2014
2013
$
$
$
$
$
$
$
$
$
$
116
287
403
32
6
34
72
1
1
(11)
(9)
63
15.6%
$
$
$
$
$
118
303
421
44
7
62
113
(14)
—
(15)
(29)
84
19.8%
49
249
298
37
1
46
84
(6)
—
(8)
(14)
70
23.5%
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:
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
Tax incentives
Other – net
Effective income tax rate
67
Year Ended December 31,
2015
2014
2013
35.0%
35.0%
35.0%
1.0
0.5
8.6
(13.1)
(7.2)
0.2
(7.8)
(1.6)
15.6%
1.0
0.4
22.9
(26.3)
(4.2)
(1.7)
(6.2)
(1.1)
19.8%
0.7
—
39.4
(43.0)
(4.1)
5.1
(8.1)
(1.5)
23.5%
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 and maintaining
certain employment thresholds. The inability to meet the thresholds would have a prospective impact and at this
time we continue to believe we will meet the requirements.
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.
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 and other tax credit carryforwards
Inventory
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,
2015
2014
$
$
$
$
106 $
24
285
7
3
425
(248)
177 $
168 $
4
17
35
224 $
124
25
456
6
3
614
(427)
187
173
8
22
30
233
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, 2015, a
valuation allowance of $248 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.
A reconciliation of our valuation allowance on deferred tax assets is as follows:
(in millions)
Valuation allowance — January 1
Change in assessment
Current year operations
Foreign currency and other (a)
Valuation allowance — December 31
2015
2014
2013
$
$
427 $
(5)
39
(213)
248 $
349 $
(4)
100
(18)
427 $
229
—
118
2
349
(a) Included in foreign currency and other in 2015 is the reduction of a net operating loss that was subject to a valuation
allowance of $176 million.
Deferred taxes are classified net of unrecognized tax benefits in the Consolidated Balance Sheets as follow
(in millions)
Non-current assets
Non-current liabilities
Total net deferred tax liabilities
December 31,
2015
2014
$
$
71 $
(118)
(47) $
90
(136)
(46)
68
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, 2015
8
$
53
43
897
First Year of Expiration
December 31, 2024
December 31, 2016
December 31, 2020
December 31, 2018
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, 2015, we have provided a deferred tax liability of $4 million on the excess of $41 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
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:
Settlements
Unrecognized tax benefits — December 31
2015
2014
2013
44 $
30 $
4
1
(2)
47 $
9
7
(2)
44 $
8
23
—
(1)
30
$
$
The amount of unrecognized tax benefits at December 31, 2015 was $47 million which, if ultimately recognized, will
reduce our annual effective tax rate. We believe that it is reasonably possible that the unrecognized tax benefits will
be reduced by $22 million 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 tax returns including tax returns filed by
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 our earliest open tax years by major jurisdiction:
Jurisdiction
Germany
Italy
Luxembourg
Sweden
Switzerland
United Kingdom
United States
Earliest Open Year
2009
2010
2011
2010
2011
2011
2012
69
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 Income Statements. The amount
of accrued interest relating to unrecognized tax benefits as of December 31, 2015 and 2014 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
payment to ITT in the event audit settlement payments exceed amounts specified in the agreement.
During 2015, ITT effectively settled the Federal income tax audit for the period including the year of the Spin-Off
which resulted in a closing of the Federal Tax Audit portion of the Tax Matters Agreement. In connection with that,
Xylem has accrued a liability of $9 million. While the U.S. State Income Tax Audit and Non U.S. Audit portion of the
Tax Matters Agreement remain operational, we have not accrued a liability.
Note 7. 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,
2015
2014
2013
$
340 $
337 $
228
180,854
39
180,893
465
379
181,737
183,030
47
183,077
643
529
184,249
$
$
1.88 $
1.87 $
1.84 $
1.83 $
185,082
134
185,216
264
558
186,038
1.23
1.22
(a) Restricted stock awards containing rights to non-forfeitable dividends that 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 15, "Stock-Based Compensation Plans" for
further detail on the performance share units.
(in thousands)
Stock options
Restricted shares
Performance shares
Year Ended December 31,
2015
2014
2013
2,616
723
181
2,720
525
119
4,126
703
80
70
Note 8. Inventories
The components of total inventories are summarized as follows:
(in millions)
Finished goods
Work in process
Raw materials
Total inventories
Note 9. Property, Plant and Equipment
The components of total property, plant and equipment, net are as follows:
(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,
2015
2014
213 $
32
188
433 $
194
42
250
486
December 31,
2015
2014
240 $
650
205
79
46
19
1,239
800
439 $
252
655
207
87
41
23
1,265
804
461
$
$
$
$
Depreciation expense was $88 million, $95 million, and $99 million for 2015, 2014, and 2013, respectively.
Note 10. Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill by operating segment during the years ended December 31, 2015 and
2014 are as follows:
(in millions)
Balance as of December 31, 2013
Activity in 2014
Divestiture (a)
Foreign currency and other
Balance as of December 31, 2014
Activity in 2015
Acquired (a)
Foreign currency and other
Balance as of December 31, 2015
Water
Infrastructure
Applied Water
Total
1,149 $
569 $
1,718
—
(51)
1,098 $
10
(42)
1,066 $
(6)
(26)
537 $
—
(19)
518 $
(6)
(77)
1,635
10
(61)
1,584
$
$
$
(a) On July 2, 2014, we divested our Wolverhampton, U.K.-based pneumatic and hydraulic valves business which had $6
million of goodwill associated with the business. On October 22, 2015, we acquired substantially all of the assets of
Hypack, Inc. and recorded $10 million of goodwill. Refer to Note 3, "Acquisitions and Divestitures" for additional
information.
During the fourth quarter of 2015, we performed our annual impairment assessment and determined that the
estimated fair values of our goodwill reporting units were in excess of each of their carrying values. 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.
71
Other Intangible Assets
Information regarding our other intangible assets is as follows:
(in millions)
December 31, 2015
December 31, 2014
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor
relationships
Proprietary technology
and patents
Trademarks
Software (a)
Other
Indefinite-lived intangibles
$
320 $
(140) $
180 $
331 $
(122) $
209
116
35
155
8
132
(54)
(19)
(110)
(8)
—
(331) $
62
16
45
—
132
435 $
116
36
145
9
136
(49)
(17)
(106)
(9)
—
773 $
(303) $
67
19
39
—
136
470
Other intangibles
$
766 $
(a) The December 31, 2014 carrying amount of software was previously included within other non-current assets on the
Consolidated Balance Sheets and is now being reflected within other intangible assets to conform to a current period
change in balance sheet presentation.
We determined that no impairment of the indefinite-lived intangibles existed as of the measurement date of our
annual impairment assessment in 2015 or 2014. 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 and patents, trademarks, software and other are
amortized over weighted average lives of approximately 13 years, 19 years, 16 years, 5 years and 6 years,
respectively.
Total amortization expense for intangible assets was $45 million, $47 million, and $51 million for 2015, 2014 and
2013, respectively.
Estimated amortization expense for each of the five succeeding years is as follows:
(in millions)
2016
2017
2018
2019
2020
$
44
43
40
36
34
Note 11. 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, cash payments, and the value of our stockholders' equity. 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 and reduce the volatility in stockholders' equity.
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.
72
Certain business units with exposure to foreign currency exchange risks have designated certain currency forward
agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal
currency exposures relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty, Australian
Dollar and Hungarian Forint. We held forward foreign exchange contracts with purchase notional amounts totaling
$94 million and $355 million as of December 31, 2015 and 2014, respectively. As of December 31, 2015, our most
significant foreign currency derivatives include contracts to purchase Swedish Krona and sell Euro, sell U.S. Dollar
and purchase Euro, and to sell British Pound and purchase Euro. The purchased notional amounts associated with
these currency derivatives are $51 million, $24 million and $12 million, respectively. As of December 31, 2014, our
most significant foreign currency derivatives include contracts to purchase Swedish Krona and sell Euro, sell U.S.
Dollar and purchase Euro, and to sell British Pound and purchase Euro. The purchase notional amounts
associated with these currency derivatives were $140 million, $85 million and $51 million, respectively.
Hedges of Net Investments in Foreign Operations
We are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.
Beginning in 2015, we entered into cross currency swaps to manage our exposure to fluctuations in the Euro-U.S.
Dollar exchange rate. The total notional amount of derivative instruments designated as net investment hedges
was $411 million as of December 31, 2015.
The table below presents the effect of our derivative financial instruments on the Consolidated Income Statements
and Statements of Comprehensive Income.
(in millions)
Derivatives in Cash Flow Hedges
Foreign Exchange Contracts
Year Ended December 31,
2015
2014
2013
Amount of (loss) gain recognized in OCI (a)
Amount of loss (gain) reclassified from OCI into revenue (a)
Amount of loss reclassified from OCI into cost of revenue (a)
$
(5) $
19
1
(22) $
5
1
1
(2)
2
Derivatives in Net Investment Hedges
Amount of (loss) recognized in OCI (a)
(a) Effective portion
$
(17) $
— $
—
As of December 31, 2015, $1 million of the net gains on cash flow hedges is expected to be reclassified into
earnings in the next 12 months. The ineffective portion of the change in fair value of a cash flow hedge is excluded
from effectiveness testing and is recognized immediately in selling, general and administrative expenses in the
Consolidated Income Statements and was not material for 2015, 2014, and 2013.
As of December 31, 2015, no gains or losses on the net investment hedges are expected to be reclassified into
earnings over the next 12 months. The net investment hedges did not experience any ineffectiveness for 2015.
The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and
are determined through the use of models that consider various assumptions including yield curves, time value and
other measurements.
73
The fair values of our derivative contracts currently included in our hedging program were as follows:
(in millions)
Derivatives designated as hedging instruments
Assets
Cash Flow Hedges
Other current assets
Liabilities
Cash Flow Hedges
Other current liabilities
Net Investment Hedges
Other non-current liabilities
Note 12. Accrued and Other Current Liabilities
(in millions)
Compensation and other employee-benefits
Customer-related liabilities
Accrued warranty costs
Accrued taxes
Other accrued liabilities
Total accrued and other current liabilities
Note 13. Credit Facilities and Long-Term Debt
Total debt outstanding is summarized as follows:
(in millions)
3.550% Senior Notes due 2016 (a)
4.875% Senior Notes due 2021 (a)
Research and Development Facility Agreement
Other
Debt issuance costs and unamortized discount (b)
Total debt
Less: short-term borrowings and current maturities of long-term debt
Total long-term debt
December 31,
2015
2014
$
2 $
1
—
(18)
December 31,
2015
2014
156 $
64
33
64
90
407 $
(13)
—
186
66
31
77
116
476
December 31,
2015
2014
600 $
600
76
2
(4)
1,274
78
1,196 $
600
600
84
5
(5)
1,284
89
1,195
$
$
$
$
(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 $607
million and $621 million as of December 31, 2015 and 2014, respectively. The fair value of our Senior Notes due 2021 (as
defined below) was $640 million and $653 million as of December 31, 2015 and 2014, respectively.
(b) The debt issuance costs and 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 Income Statements
over the expected remaining terms of the Senior Notes.
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”).
74
The Senior Notes include covenants which restrict our ability, subject to exceptions, to incur debt secured by liens
and engage in sale and leaseback 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. 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. As of
December 31, 2015, we were in compliance with all covenants.
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.
As of December 31, 2015, we have classified $600 million of our Senior Notes due 2016 as long-term based on our
current ability and intent to refinance the outstanding borrowings on a long-term basis.
Five-Year Revolving Credit Facility
Effective March 27, 2015, Xylem entered into a Five-Year Revolving Credit Facility (the "Credit Facility") with
Citibank, 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) revolving extensions of credit (the "revolving loans") outstanding at any
time and (ii) the issuance of letters of credit in a face amount not in excess of $100 million outstanding at any time.
The Credit Facility provides for increases of up to $200 million for a possible maximum total of $800 million in
aggregate principal amount at our request and with the consent of the institutions providing such increased
commitments.
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 Citibank, N.A.,
(b) the U.S. Federal funds effective rate plus 0.5% 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 to 1.00 (based on a ratio of
total debt to earnings before interest, taxes, depreciation and amortization) throughout the term. The Credit Facility
also contains limitations on, among other things, incurring secured debt, granting liens, entering into sale and
leaseback transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. 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, 2015, we were in compliance with all covenants.
As of December 31, 2015, the Credit Facility was undrawn.
Research and Development Facility Agreement
On December 3, 2015, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D
Facility Agreement") with The European Investment Bank (the "EIB") to amend the maturity date. The facility
provides an aggregate principal amount of up to €120 million (approximately $132 million) to finance research
projects and infrastructure development in the European Union. The Company's wholly owned subsidiaries in
Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á 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 during the period from 2013 through 2016 at the Company's facilities in Sweden, Germany, Italy, the
United Kingdom, Austria, Norway and Hungary.
Under the R&D Facility Agreement, the borrower can draw loans on or before March 31, 2016 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 is 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 is 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 is determined by reference to the credit rating of the
Company.
75
In accordance with the terms of the R&D Facility Agreement, we may not exceed a maximum leverage ratio of 3.50
to 1.00 (based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) throughout
the term. The R&D Facility Agreement also contains limitations on, among other things, incurring debt, granting
liens, and entering into 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, 2015, we were in compliance with all covenants.
As of December 31, 2015 and 2014, $76 million and $84 million was outstanding, respectively, under the R&D
Facility Agreement. Although the borrowing term for this arrangement is up to 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 a year.
Note 14. Postretirement Benefit Plans
Defined contribution plans – 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. Xylem’s U.S. plan also provides for transition
credits for eligible U.S. employees for the first five years after the Spin-off 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 $2 million and $2 million at
December 31, 2015 and 2014, respectively. 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)
2015
2014
2013
Defined Contribution
$
32
36
35
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 414 thousand and 415 thousand shares of Xylem Inc. common stock in the Xylem Stock Fund at
December 31, 2015 and 2014, 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.
During 2015, we made several amendments to plans that had no material impact to the Company's financial
statements.
During the third quarter 2014, we amended one of our international pension plans as well as one of our domestic
other postretirement plans. The pension plan amendment froze the accrual of benefits and closed the plan to new
entrants. The other postretirement plan amendment modified the accrual of benefits and closed the plan to new
entrants. The overall impact of these changes was a $10 million increase to funded status. This included a net loss
of $3 million ($1 million net of tax) and a prior service credit of $13 million ($8 million net of tax) recognized in other
comprehensive income.
Effective October 1, 2013, the Xylem Canada Company Pension Plan for Salaried Employees was amended to
close the plan to new entrants and implemented 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 U.S. business unit's pension plans for its
hourly workers 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.
76
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, 2015
December 31, 2014
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 credit
Total
$
$
$
$
$
$
Pension
Other
Total
Pension
Other
Total
559 $
(779)
(220) $
— $
(61)
(61) $
559 $
(840)
(281) $
584 $
(872)
(288) $
— $
(58)
(58) $
584
(930)
(346)
68 $
— $
68 $
55 $
— $
55
(10)
(278)
(220) $
(234) $
—
(234) $
(4)
(57)
(61) $
(31) $
15
(16) $
(14)
(335)
(281) $
(10)
(333)
(3)
(55)
(288) $
(58) $
(265) $
15
(250) $
(297) $
(30) $
—
17
(297) $
(13) $
(13)
(388)
(346)
(327)
17
(310)
The unrecognized amounts recorded in accumulated other comprehensive income will be subsequently recognized
as expense 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 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.
The net actuarial loss included in accumulated other comprehensive income at the end of 2015 and expected to be
recognized in net periodic benefit cost during 2016 is $14 million ($10 million, net of tax). The prior service credit
included in accumulated other comprehensive income to be recognized in 2016 is $3 million ($2 million, net of tax).
77
The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated 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,
2015
2014
2015
2014
Benefit obligation at beginning of year
$
88 $
74 $
784 $
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
Unfunded status of the plans
$
$
$
$
3
4
(4)
(5)
1
(1)
86 $
60
3
(2)
(4)
—
—
57 $
(29) $
2
3
(3)
13
—
(1)
88 $
58 $
4
3
(3)
—
(2)
60 $
(28) $
12
22
(29)
(39)
(1)
(56)
693 $
524 $
19
22
(29)
—
(34)
502 $
(191) $
703
12
27
(30)
144
(2)
(70)
784
466
28
92
(30)
(2)
(30)
524
(260)
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 loss
Plan amendment
Benefit obligation at the end of year
2015
2014
$
$
58 $
1
2
(3)
4
(1)
61 $
63
1
3
(3)
12
(18)
58
The accumulated benefit obligation (“ABO”) for all the defined benefit pension plans was $746 million and $830
million at December 31, 2015 and 2014, respectively. For defined benefit pension plans in which the ABO was in
excess of the fair value of the plans’ assets, the projected benefit obligation, 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,
2015
2014
$
392 $
365
106
453
419
110
78
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
Net periodic benefit cost
Total net periodic benefit cost
Year Ended December 31,
2015
2014
2013
$
$
$
$
$
3 $
4
(5)
—
2
4 $
12 $
22
(32)
13
—
15 $
19 $
2 $
3
(4)
—
2
3 $
12 $
27
(32)
7
1
15 $
18 $
3
3
(4)
1
2
5
14
28
(31)
13
—
24
29
Other changes in assets and benefit obligations recognized in other comprehensive (loss) income, as they pertain
to our defined benefit pension plans are as follows:
(in millions)
Domestic defined benefit pension plans:
Net loss (gain)
Prior service cost (credit)
Amortization of prior service cost
Amortization of net actuarial loss
Losses (gains) recognized in other comprehensive (loss) income
International defined benefit pension plans:
Net (gain) loss
Amortization of net actuarial loss
Settlement
Foreign currency translation/other
(Gains) losses recognized in other comprehensive (loss) income
Total (gains) losses recognized in other comprehensive (loss)
income
Total (gains) losses recognized in comprehensive income
Year Ended December 31,
2015
2014
2013
$
$
$
$
$
$
2 $
—
—
(2)
— $
(29) $
(13)
—
(21)
(63) $
(63) $
(44) $
14 $
1
—
(2)
13 $
84 $
(7)
(1)
(20)
56 $
69 $
87 $
The components of net periodic benefit cost for other postretirement employee benefit plans are as follows:
(in millions)
Service cost
Interest cost
Amortization of prior service credit
Amortization of net actuarial loss
Net periodic benefit cost
Year Ended December 31,
2015
2014
2013
$
$
1 $
2
(3)
3
3 $
1 $
3
(1)
2
5 $
79
(11)
(4)
(1)
(2)
(18)
(21)
(13)
—
(2)
(36)
(54)
(25)
1
3
—
2
6
Other changes in benefit obligations recognized in other comprehensive (loss) income, as they pertain to other
postretirement employee benefit plans are as follows:
(in millions)
Net loss (gain)
Prior service credit
Amortization of prior service credit
Amortization of net actuarial loss
Losses (gains) recognized in other comprehensive (loss) income
Total losses (gains) recognized in comprehensive income
Assumptions
Year Ended December 31,
2015
2014
2013
$
$
$
4 $
(1)
3
(3)
3 $
6 $
12 $
(18)
1
(2)
(7) $
(2) $
(2)
—
—
(2)
(4)
2
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
2015
2014
2013
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
4.27%
3.44%
4.01%
3.14%
4.79%
4.23%
NM
3.29%
NM
3.34%
NM
3.48%
4.01%
3.14%
4.79%
4.23%
4.13%
4.04%
8.00%
7.31%
8.00%
7.30%
8.00%
7.33%
NM
3.34%
NM
3.48%
4.50%
3.50%
NM Not meaningful. The pension benefits for future service for all the U.S. pension plans are 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 U.S. Master
Trust which has only existed since 2011, 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 for
all of our plan assets to be used in determining net periodic benefit costs for 2016 is estimated at 7.32%.
80
The table below provides the weighted average actual rate of return generated on all of our 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
2015
2014
2013
7.38%
3.51%
7.38%
18.13%
7.40%
10.17%
The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.00% for
2016, decreasing ratably to 4.50% in 2027. 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 $4 million.
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, 2015 and 2014, and the
related asset target allocation ranges by asset category.
Equity securities
Fixed income
Hedge funds
Private equity
Insurance contracts and other
Fair Value of Plan Assets
2015
2014
22.5%
31.5%
34.0%
3.1%
8.9%
28.8%
37.3%
25.0%
3.2%
5.7%
Target
Allocation
Ranges
20-40%
20-60%
20-60%
0-15%
0-30%
In measuring plan assets at fair value, the fair value hierarchy is applied which categorizes and prioritizes the inputs
used to estimate fair value into three levels. See Note 1 "Summary of Significant Accounting Policies" for further
detail on fair value hierarchy.
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.
Those equities that are held in proprietary funds pooled with other investor accounts measured at fair value
using the NAV per share practical expedient are not classified in the fair value 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 listed on active markets are classified in Level 1. Fixed income held in proprietary funds pooled with
other investor accounts measured at fair value using the NAV per share practical expedient are not classified in
the fair value hierarchy.
81
• 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. Generally, hedge funds are valued
using the NAV reported by the asset manager, and are 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. $158 million (83%) of the hedge
funds have no lockup or gate, and a redemption period of 90 days or less. Hedge funds have unfunded
commitments of $6 million at both December 31, 2015 and 2014.
• Private equity — Private equity includes a diversified range of strategies, including buyout funds, distressed
funds, venture and growth equity funds and mezzanine funds with long-term commitments, and redemptions
beginning no earlier than 2018. The valuation of limited partnership interests in private equity funds may require
significant management judgment. Generally, private equity is valued using the NAV reported by the asset
manager, and 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. Private equity is not liquid and has unfunded commitments of $4 million and $5
million at December 31, 2015 and 2014, respectively.
•
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 and are generally classified as Level 3. Insurance contracts are held by
certain foreign pension plans. Cash and cash equivalents are held in accounts with brokers or custodians for
liquidity and investment collateral and are classified as Level 1.
The following table provides the fair value of plan assets held by our pension benefit plans by asset class.
2015
2014
(in millions)
Level 1
Level 2
Level 3
NAV
Practical
Expedient
Total
Level 1
Level 2
Level 3
NAV
Practical
Expedient
Total
Equity securities
Global stock funds/
securities
Index funds
Emerging market
funds
Fixed income
Corporate bonds
Government bonds
Hedge funds
Private equity
Insurance contracts and
other
Total plan assets
subject to leveling
$
79 $ — $ — $
4 $
83 $ 112 $ — $ — $
40
—
—
4
6
3
34
99
9
—
25
—
—
4
18
—
—
—
—
—
—
—
—
—
25
34
—
11
10
181
17
3
49
127
190
17
—
50
3
53
87
11
—
16
—
4
42
—
—
—
—
—
—
—
—
17
11 $ 123
38
—
22
10
135
19
42
3
79
139
146
19
—
33
$ 255 $
22 $
25 $
257 $ 559 $ 286 $
46 $
17 $
235 $ 584
82
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, 2014 (a)
Purchases, sales, settlements
Net transfers
Currency impact
Balance, December 31, 2015
Insurance Contracts
and Other
$
$
17
2
7
(1)
25
(a)
There were no material changes to Level 3 assets during 2014.
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 $25 million and $35 million to our pension and postretirement
defined benefit plans during 2015 and 2014, respectively. We currently anticipate making contributions to our
pension and postretirement defined benefit plans in the range of $26 million to $36 million during 2016, of which
approximately $8 million is expected to be made in the first quarter.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as
follows:
(in millions)
2016
2017
2018
2019
2020
Years 2021 - 2025
$
Pension
Other Benefits
4
4
4
4
4
22
32 $
33
33
34
35
187
Note 15. 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. Under the 2011 Omnibus Incentive Plan, the number of shares initially available for
awards was 18 million. As of December 31, 2015, there were approximately 9 million shares of common stock
available for future grants.
Total share-based compensation costs recognized for 2015, 2014 and 2013 were $15 million, $18 million, and $27
million, respectively. The unamortized compensation expense at December 31, 2015 related to our stock options,
restricted shares and performance-based shares was $5 million, $19 million and $3 million, respectively, and is
expected to be recognized over a weighted average period of 1.8, 1.9 and 1.9 years, respectively.
The amount of cash received from the exercise of stock options was $21 million for 2015 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.
83
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, 2015, there were options to purchase an aggregate of 2.6 million shares of
common stock. The following is a summary of the changes in outstanding stock options for 2015:
(shares in thousands)
Outstanding at January 1, 2015
Granted
Exercised
Forfeited and expired
Outstanding at December 31, 2015
Options exercisable at December 31, 2015
Vested and non-vested expected to vest as of December 31,
2015
Weighted
Average
Exercise
Price / Share
28.60
35.88
24.86
34.76
31.16
28.49
Shares
2,989 $
708 $
(840) $
(296) $
2,561 $
1,608 $
2,480 $
31.00
Weighted Average
Remaining
Contractual
Term (Years)
6.5
9.2
4.5
8.6
6.8
5.7
6.7
The amount of non-vested options outstanding was 1.0 million, 1.0 million and 1.5 million at a weighted average
grant date fair value of $35.65, $32.45 and $26.90 as of December 31, 2015, 2014 and 2013, respectively. The
aggregate intrinsic value of the outstanding, exercisable, and vested and non-vested stock options expected to vest
at December 31, 2015 was $15 million, $13 million and $15 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 2015, 2014 and 2013 was $9 million, $10 million and $7 million, respectively.
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 used for
2015, 2014, and 2013:
Dividend yield
Volatility
Risk-free interest rate
Expected term (in years)
Weighted-average fair value per share
2015
2014
2013
1.57%
27.77%
1.64%
5.58
1.34%
28.49%
1.82%
5.60
$
8.49
$
9.71
$
1.69%
31.10%
1.28%
6.62
7.58
Expected volatility is calculated based on a weighted analysis of historic and implied volatility measures for a set of
peer companies and Xylem. 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 risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.
Restricted Stock Grants
Restricted shares granted to employees generally become fully vested upon the third anniversary of the date of
grant. 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 do not have certain
rights of a stockholder, such as the right to vote and receive dividends; however, dividends accrue during the
vesting period and are paid upon vesting. 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, a pro
rata portion of the restricted stock may vest in accordance with the terms of the grant agreements. Restricted
shares granted to Board members become fully vested upon the day prior to the next annual meeting. Our
restricted stock activity was as follows for 2015:
84
(shares in thousands)
Outstanding at January 1, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2015
Performance-Based Share Grants
Shares
Weighted Average
Grant Date Fair
Value / Share
1,171 $
426 $
(426) $
(158) $
1,013 $
31.80
35.87
28.85
32.75
34.52
As part of the annual grants 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 performance periods, 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. 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 2015:
(shares in thousands)
Outstanding at January 1, 2015
Granted
Forfeited
Outstanding at December 31, 2015
Note 16. Capital Stock
Shares
Weighted Average
Grant Date Fair
Value / Share
124 $
103 $
(67) $
160 $
33.95
35.91
33.21
35.48
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 $0.5632, $0.5120 and $0.4656 during 2015, 2014 and 2013,
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
Stock incentive plan net activity
Repurchase of common stock
Ending Balance, December 31
2015
2014
2013
182,300
1,280
(5,203)
178,377
184,557
1,226
(3,483)
182,300
185,658
1,203
(2,304)
184,557
On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 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 2015, we repurchased 2.3 million shares for $80 million under this program.
There are up to $420 million in shares that may still be purchased under this plan as of December 31, 2015.
On August 20, 2013, our Board of Directors authorized the repurchase of up to $250 million in shares with no
expiration date. The program's objective was to deploy our capital in a manner that benefited our shareholders and
maintain our focus on growth. During 2015 and 2014, we repurchased 2.0 million shares and 3.4 million shares for
$70 million and $130 million, respectively, under this program. As of December 31, 2015, we have exhausted the
authorized amount to repurchase shares under this plan.
85
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. During 2015 we repurchased 0.8 million shares for
$25 million. There are up to 0.3 million shares (approximately $9 million in value) that may still be purchased under
this plan as of December 31, 2015. There were no shares repurchased under this plan during 2014.
Aside from the aforementioned repurchase programs, we repurchased 0.1 million and 0.2 million shares for $4
million and $4 million during 2015 and 2014, respectively in relation to settlement of employee tax withholding
obligations due as a result of the vesting of restricted stock. These repurchases are included in the stock incentive
plan net activity in the above table.
86
Note 17. Accumulated Other Comprehensive Income (Loss)
The following table provides the components of accumulated other comprehensive income (loss) for 2015, 2014
and 2013:
Foreign Currency
Translation
Postretirement
Benefit Plans
Derivative
Instruments
Total
$
336 $
15
(222) $
1 $
40
(17)
7
7
1
3
(5)
(in millions)
Balance at January 1, 2013
Foreign currency translation adjustment
Changes in postretirement benefit plans
Income tax expense on changes in
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
Income tax impact on amortization of
postretirement benefit plan items
Unrealized gain on derivative hedge
agreements
Reclassification of unrealized gain on
derivative hedge agreements into revenue
Reclassification of unrealized loss on
derivative hedge agreements into cost of
revenue
351 $
(206)
(186) $
(92)
20
20
4
5
1
(3)
Balance at December 31, 2013
$
Foreign currency translation adjustment
Changes in postretirement benefit plans
Income tax expense on changes in
postretirement benefit plans
Foreign currency translation adjustment for
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
Income tax impact on amortization of
postretirement benefit plan items
Unrealized loss on derivative hedge
agreements
Income tax benefit on unrealized loss on
derivative hedge agreements
Reclassification of unrealized loss on derivative
hedge agreements into revenue
Reclassification of unrealized loss on derivative
hedge agreements into cost of revenue
Balance at December 31, 2014
$
145 $
(231) $
87
115
15
40
(17)
7
7
1
3
(5)
1
(2)
2
167
(206)
(92)
20
20
4
5
1
(3)
(22)
1
5
1
(99)
1
(2)
2
2 $
(22)
1
5
1
(13) $
(in millions)
Balance at January 1, 2015
Foreign Currency
Translation
Postretirement
Benefit Plans
Derivative
Instruments
Total
$
145 $
(231) $
(13) $
(180)
(8)
24
(10)
21
4
9
1
1
(4)
Foreign currency translation adjustment
Foreign currency gain reclassified into gain on
sale of businesses
Changes in postretirement benefit plans
Income tax expense on changes in
postretirement benefit plans
Foreign currency translation adjustment for
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 income (expense), net
Income tax impact on amortization of
postretirement benefit plan items
Unrealized loss on derivative hedge
agreements
Income tax benefit on unrealized loss on
derivative hedge agreements
Reclassification of unrealized loss on derivative
hedge agreements into revenue
Reclassification of unrealized loss on derivative
hedge agreements into cost of revenue
Income tax benefit on reclassification of
unrealized loss on derivative hedge agreements
Balance at December 31, 2015
$
(43) $
(185) $
(99)
(180)
(8)
24
(10)
21
4
9
1
1
(4)
(22)
6
19
1
(22)
6
19
1
(1)
(10) $
(1)
(238)
Note 18. Commitments and Contingencies
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, intellectual property matters, product liability and personal injury claims,
employment and pension matters, government and commercial contract disputes.
On December 17, 2014, the Korea Fair Trade Commission (“KFTC”) issued a written decision regarding an
investigation into bid-rigging allegations against Xylem Water Solutions South Korea Co., Ltd. (“Xylem South
Korea”), a subsidiary of Xylem Inc. The KFTC found that certain employees of Xylem South Korea had participated
in activities that violated Korea’s antitrust laws. Xylem South Korea was assessed a fine of approximately $1.6
million, and following criminal prosecution a minimal criminal penalty was imposed. In January 2015, Xylem South
Korea paid the fine and filed an appeal of the KFTC’s decision with the Seoul High Court.
In connection with the KFTC matter, the Company commenced an internal investigation relating to the allegations
against Xylem South Korea. In late 2014, the Company broadened this internal investigation to assess related
allegations made by certain employees of Xylem South Korea during the investigation into the KFTC matter. The
broadened investigation includes a review of compliance by Xylem South Korea and its employees with the
requirements of the Foreign Corrupt Practices Act. The Company engaged independent outside counsel to assist
with its investigation and an independent professional services firm to provide forensic accounting assistance. In
late January 2015, the Company voluntarily contacted the SEC and the Department of Justice ("DOJ") to advise
both agencies of this internal investigation. The Company is fully cooperating with any government investigation
and has been informed by the SEC that it will not bring an enforcement action against the Company in connection
with the events at Xylem South Korea and the DOJ has informed the Company that it has declined to prosecute the
88
Company in connection with the events at Xylem South Korea. Xylem South Korea’s revenue is less than one
percent of the Company’s total revenue. Although the Company currently cannot reasonably estimate the potential
liability, if any, related to the investigation, we currently believe that these matters will not have a material adverse
effect on the Company’s business, financial condition or results of operations.
On October 1, 2014, there was a court approved settlement agreement with respect to a purchase price dispute
with the minority shareholders arising from one of our historical acquisitions. All outstanding claims have been
settled and court proceedings have been terminated. The outstanding balance of the settlement is reflected in the
2015 Consolidated Balance Sheet.
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 in March 2013, the High Court
upheld the determination of the CNC and the fine previously assessed. In June 2013, the Company appealed the
decision to the Tribunal Supremo, the Supreme Court of Spain, and in November 2015 the Tribunal Supremo
upheld the determination and the fine previously assessed. The outstanding balance of the fine is reflected in the
2015 Consolidated Balance Sheet. The Company petitioned the Spanish Constitutional Court and the Council of the
CNC in December 2015 and January 2016, respectively, for review of certain aspects relevant to the fine
determination, and is awaiting decisions.
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 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 $6 million and $9 million as of December 31,
2015 and 2014, respectively for these general legal matters.
Indemnifications
As part of our 2011 spin-off from our former parent, ITT, Exelis Inc. and Xylem will 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. The former parent’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 31,
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 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 the former parent or
Exelis Inc. 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. On May 29, 2015, Harris Inc. acquired
Exelis. As the parent of Exelis, Harris Inc. is responsible for Exelis’s indemnification obligations under the
Distribution Agreement.
Guarantees
We obtain certain stand-by letters of credit, bank guarantees and surety bonds from third-party financial institutions
89
in the ordinary course of business when required under contracts or to satisfy insurance related requirements. As of
December 31, 2015, the amount of stand-by letters of credit, bank guarantees and surety bonds was $161 million.
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 or for which we are responsible under the Distribution
Agreement, 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 $4 million and
$5 million as of December 31, 2015 and 2014, 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. We believe the total amount
accrued is reasonable based on existing facts and circumstances.
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, 2015 was as follows:
(in millions)
2015
2014
2013
Total
$
59
73
77
At December 31, 2015, we are obligated to make minimum rental payments under operating leases which are as
follows:
(in millions)
Minimum rental payments
2016
2017
2018
2019
$
55 $
43 $
33 $
23 $
2020
Thereafter
19
17 $
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 $32 million, $27 million, and $34 million for 2015, 2014 and 2013,
respectively. The table below provides changes in the product warranty accrual over each period.
90
(in millions)
Warranty accrual – January 1
Net charges for product warranties in the period
Settlement of warranty claims
Foreign currency and other
Warranty accrual – December 31
Note 19. Related Party Transactions
2015
2014
$
$
31 $
32
(29)
(1)
33 $
37
27
(31)
(2)
31
Sales to and purchases from unconsolidated joint ventures for 2015, 2014 and 2013 are as follows:
(in millions)
Sales to unconsolidated affiliates
Purchases from unconsolidated affiliates
2015
2014
2013
$
11 $
19
16 $
18
15
20
91
Note 20. Segment and Geographic Data
Our business has two reportable 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 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. Our Regional selling locations
consist primarily of selling and marketing organizations and related support that offer products and services across
both of our reportable segments. 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 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
Total
Operating income:
Water Infrastructure
Applied Water
Corporate and other
Total operating income
Interest expense
Other non-operating income (expense)
Gain from sale of businesses
Income before taxes
Depreciation and amortization:
Water Infrastructure
Applied Water
Regional selling locations (a)
Corporate and other
Total
Capital expenditures:
Water Infrastructure
Applied Water
Regional selling locations (b)
Corporate and other
Total
Year Ended December 31,
2015
2014
2013
$
$
$
$
$
$
$
$
2,231 $
1,422
3,653 $
303 $
190
(44)
449
55
—
9
403 $
88 $
26
12
7
133 $
67 $
22
23
5
117 $
2,442 $
1,474
3,916 $
321 $
193
(51)
463
54
1
11
421 $
100 $
25
12
5
142 $
73 $
28
10
8
119 $
2,384
1,453
3,837
263
175
(75)
363
55
(10)
—
298
104
26
13
7
150
67
31
12
16
126
(a) Depreciation and amortization expense incurred by the Regional selling locations was included in an overall allocation
of Regional selling location costs to the segments; however, a certain portion of that expense was not specifically
identified to a segment. That is the expense captured in this Regional selling location line.
(b) Represents capital expenditures incurred by the Regional selling locations not allocated to the segments.
92
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,
2015
2014
2013
$
$
2,917 $
736
3,653 $
3,094 $
822
3,916 $
3,076
761
3,837
(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, 2015, 2014 and 2013.
(in millions)
Water Infrastructure
Applied Water
Regional selling locations (a)
Corporate and other (b)
Total
Total Assets
2015
2014
2013 (c)
$
$
2,024 $
1,054
905
674
4,657 $
2,128 $
1,114
961
630
4,833 $
2,224
1,122
983
528
4,857
(a) The Regional selling locations have assets that consist primarily of cash, accounts receivable and inventory which are not
allocated to the segments.
(b) Corporate and other consists of items pertaining to our corporate headquarters function, which principally consist of cash,
deferred tax assets, pension assets and certain, plant and equipment.
(c)
In 2013, debt issuance costs of $6 million were reclassified to long-term debt from other non-current assets and deferred
tax assets of $33 million were reclassified to deferred tax liabilities within the Consolidated Balance Sheet. See Note 2,
“Recently Issued Accounting Pronouncements,” of the consolidated financial statements.
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,
2014
2013
2015
1,490 $
1,179
482
502
3,653 $
1,477 $
1,379
478
582
3,916 $
1,434
1,387
467
549
3,837
Property, Plant & Equipment
2015
December 31,
2014
2013
168 $
189
56
26
439 $
180 $
206
53
22
461 $
186
225
45
32
488
$
$
$
$
93
Note 21. Valuation and Qualifying Accounts
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
Note 22. Quarterly Financial Data (Unaudited)
2015
2014
2013
$
$
24 $
4
(6)
22 $
22 $
9
(7)
24 $
25
8
(11)
22
Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except
for the fourth quarter which ends on December 31.
(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
Note 23. Subsequent Events
Dec. 31
Sept. 30
June 30
Mar. 31
2015 Quarter Ended
994 $
390
142
114 $
0.64 $
0.63 $
902 $
351
120
88 $
0.48 $
0.48 $
920 $
348
104
74 $
0.41 $
0.41 $
837
315
83
64
0.35
0.35
Dec. 31
Sept. 30
June 30
Mar. 31
2014 Quarter Ended
1,042 $
407
141
96 $
0.53 $
0.52 $
963 $
376
130
106 $
0.58 $
0.58 $
1,005 $
388
116
86 $
0.47 $
0.47 $
906
342
76
49
0.27
0.27
$
$
$
$
$
$
$
$
On February 1, 2016, we acquired Tideland Signal Corporation (“Tideland”), a leading producer of analytics
solutions in the coastal and ocean management sectors, for approximately $69 million. Tideland, a privately-owned
company headquartered in Texas, has approximately 160 employees and annual revenue of approximately $48
million.
94
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 Chief Executive Officer ("CEO") and Interim Chief Financial Officer ("CFO") of the
Company, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as
of the end of the year ended December 31, 2015 pursuant to Rule 13a-15(b) and 15d-15(e) 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 as of the year ended December 31, 2015 were effective, in all material respects,
and designed to provide reasonable assurance that the 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, 2015 based on the framework established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission
(2013). 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, 2015.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2015 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, 2015 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None
95
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, 2015, based on criteria established in Internal Control - Integrated Framework (2013) 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
Control 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, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) 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, 2015 of the
Company and our report dated February 26, 2016 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 26, 2016
96
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 2016 Annual Meeting of Shareholders (the “2016 Proxy
Statement”) under the captions “Proposal 1 - Election of Directors,” "Identifying and Evaluating Director Nominees,"
"Board Committees - 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 board committees. The principles
address director qualification standards, responsibilities, access to management and independent advisors,
compensation, orientation and continuing education, succession planning and board and committee self-evaluation.
The corporate governance principles and board committee charters are available on the Company’s website at
www.investors.xyleminc.com. A copy of the corporate governance principles and board committee charters are also
available to any shareholder who requests a copy from the Company’s Corporate Secretary at our Principal
Executive Offices.
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 Interim 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 of
Conduct has been posted to our website and it is also available to any shareholder who requests a copy from our
Corporate Secretary. We intend to disclose any changes in our Code of Conduct and waivers of the Code of
Conduct on our website at www.xyleminc.com within four business days following the date of the amendment or
waiver.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information in our 2016 Proxy
Statement set forth under captions “Executive Compensation," "Director Compensation", "Board Committees -
Leadership Development and Compensation Committee" and “Leadership Development and Compensation
Committee Report.”
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 2016 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 2016 Proxy
Statement set forth under the captions "Governance - Director Independence" and “Governance - Related Party
Transactions.”
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the information in our 2016 Proxy
Statement set forth under the captions “Fees of Audit and Other Services Fees” and "Pre-Approval of Audit and
Non-Audit Services."
97
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
(1) The Index to Consolidated 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.
98
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 and Duly Authorized Officer)
February 26, 2016
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 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
/s/ Patrick K. Decker
Patrick K. Decker
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Shashank Patel
Shashank Patel
Interim 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/ Steven R. Loranger
Steven R. Loranger, Director
/s/ Edward J. Ludwig
Edward J. Ludwig, Director
/s/ Surya N. Mohapatra
Surya N. Mohapatra, Director
February 26, 2016
/s/ Jerome A. Peribere
Jerome A. Peribere, Director
99
EXHIBIT INDEX
Description
Location
Exhibit
Number
(2.1)
Distribution Agreement, dated as of October 25, 2011, among
ITT Corporation, Exelis Inc. and Xylem Inc.
(3.1)
Third 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)
Form of Xylem 2011 Omnibus Incentive Plan Non-Qualified
Stock Option Award Agreement (2015)
(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.
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 3.1 of
Xylem Inc.’s Form 10-Q filed on July 29,
2014 (CIK No. 131190969, File
No. 1-35229).
Incorporated by reference to Exhibit 3.1 of
Xylem Inc.’s Form 8-K filed on February
25, 2016 (CIK No. 1524472, 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 Xylem Inc.’s Form 10-K Annual Report
filed on February 26, 2015 (CIK No.
1524472, File No. 1-35229).
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).
(10.5)
Five-Year Revolving Credit Facility Agreement, dated as of
March 27, 2015, among Xylem Inc., the Lenders Named
Therein, Citibank, N.A., as Administrative Agent and J.P.
Morgan Chase Bank, N.A., as Syndication Agent.
Incorporated by reference to Exhibit 10.1
of Xylem Inc.'s Form 8-K filed on March
31, 2015 (CIK No. 1524472, File No.
1-35229).
(10.6) Xylem 2011 Omnibus Incentive Plan (Amended as of
Filed herewith.
February 24, 2016)
(10.7)
(10.8)
Form of Xylem Non-Qualified Stock Option Award Agreement
(Amended as of February 24, 2016)
Filed herewith.
Form of Xylem Restricted Stock Unit Agreement (Amended
as of February 24, 2016)
Filed herewith.
100
Exhibit
Number
(10.9)
Form of Xylem Performance Share Unit Agreement
(Amended as of February 24, 2016)
Description
(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) Form of Non-Employee Director Restricted Stock Unit Award
Agreement
Location
Filed herewith.
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 21, 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 21, 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 July 30, 2015 (CIK No.
1524472, File No. 1-35229).
(10.15) Xylem Special Senior Executive Severance Pay Plan
Filed herewith.
(Amended as of February 24, 2016)
(10.16) Xylem Senior Executive Severance Pay Plan (Amended as of
Filed herewith.
February 24, 2016)
(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
Incorporated by reference to Exhibit 10.17
of Xylem Inc.’s Form 10-Q Quarterly
Report filed on November 21, 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 21, 2011 (CIK
No. 1524472, File No. 1-35229).
(10.19) Xylem Annual Incentive Plan for Executive Officers (Amended
Filed herewith.
as of February 24, 2016)
(10.20) Form of Director’s Indemnification Agreement
Filed herewith.
(10.21) Form of Xylem 2011 Omnibus Incentive Plan Non-Qualified
Stock Option Award Agreement (2013)
(10.22) Letter Agreement between Xylem Inc. and Patrick K. Decker
(10.23) Restricted Stock Unit Grant Agreement between Xylem Inc.
and Patrick K. Decker
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 10.1
of Xylem Inc.'s Form 10-Q Quarterly
Report filed on April 29, 2014 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.1
of Xylem Inc.'s Form 8-K Current Report
filed on March 20, 2014 (CIK No.
1524472, File No. 1-35229).
101
Description
Exhibit
Number
(10.24) 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.
(10.25) Agreement dated May 4, 2015, Amending the Research and
Development Facility Agreement - Xylem Water Technologies
Risk-Sharing Financing Facility First Amended and Restated
Finance Contract, dated June 28, 2014, among the European
Investment Bank, Xylem Holdings S.á r.l. and Xylem
International S.á r.l., as borrowers, and Xylem Inc., as
guarantor.
Location
Incorporated by reference to Exhibit 10.30
of Xylem Inc.’s Form 10-K Annual Report
filed on February 27, 2014 (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 July 30, 2015 (CIK No.
1524472, File No. 1-35229).
(10.26) Agreement dated December 3, 2015, Amending the
Filed herewith.
Research and Development Facility Agreement - Xylem
Water Technologies Risk-Sharing Financing Facility First
Amended and Restated Finance Contract, dated June 28,
2014, among the European Investment Bank, Xylem
Holdings S.á r.l. and Xylem International S.á r.l., as
borrowers, and Xylem Inc., as guarantor.
(11.0) Statement re computation of per share earnings
Information required to be presented in
Exhibit 11 is provided under "Earnings Per
Share" in Note 7 of 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.
(32.1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.
102
Exhibit
Number
(32.2) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Description
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(101)
The following materials from Xylem Inc.’s Annual Report on
Form 10-K for the year ended December 31, 2015, formatted
in XBRL (Extensible Business Reporting Language): (i)
Consolidated Income Statements, (ii) Consolidated
Statements of Comprehensive Income, (iii) Consolidated
Balance Sheets, (iv) Consolidated Statements of Cash Flows
and (v) Notes to Consolidated Financial Statements
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.
Submitted electronically with this report.
103
Amended and Restated on February 24, 2016
XYLEM
2011 OMNIBUS INCENTIVE PLAN
EXHIBIT 10.6
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment. Xylem Inc., an Indiana corporation (the “Company”), establishes an incentive compensation plan
to be known as the Xylem 2011 Omnibus Incentive Plan (the “Plan”), as set forth in this document. The Plan permits
the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights (SARs), Restricted Stock,
Restricted Stock Units and Other Awards. The Plan first became effective October 31, 2011 (the “Effective Date”)
following the spin-off of Xylem Inc. from ITT Corporation (the “Predecessor Corporation”) on October 31, 2011.
The Predecessor Corporation maintained a similar plan prior to the spin-off (the “Predecessor Plan”) and Participants
shall receive full credit for their service and participation with the Predecessor Corporation as provided in Section 5.3
hereof.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the long-term interests of the Company and its
shareholders by strengthening the Company’s ability to attract and retain employees of the Company and its Affiliates
and members of the Board of Directors upon whose judgment, initiative, and efforts the financial success and growth
of the business of the Company largely depend, and to provide an additional incentive for such individuals through
share ownership and other rights that promote and recognize the financial success and growth of the Company and
create value for shareholders.
1.3 Duration of the Plan. The Plan shall commence as of the Effective Date, as described in Section 1.1 hereof, and
shall remain in effect, subject to the right of the Leadership Development and Compensation Committee of the Board,
(the “Committee”) to amend or terminate the Plan at any time pursuant to Article 14 hereof, until all Shares subject
to it shall have been purchased or acquired according to the Plan’s provisions.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is
intended, the initial letter of the word shall be capitalized.
2.1 “Affiliate” means any Subsidiary and any other Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Person specified.
2.2 “Award” means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive
Stock Options, SARs, Restricted Stock, Restricted Stock Units, Converted Awards and Other Awards.
2.3 “Award Agreement” means either (i) an agreement entered into by the Company and a Participant setting forth
the terms and provisions applicable to Awards granted under this Plan, or (ii) a statement issued by the Company to a
Participant describing the terms and conditions of such Award.
2.4 “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 and 13d-5 of the General Rules
and Regulations under the Exchange Act.
2.5 “Benefits and Compensation Matters Agreement” means the Benefits and Compensation Matters Agreement
by and among the Company, the Predecessor Corporation and Exelis Inc. (now Harris Inc.).
2.6 “Board” or “Board of Directors” means the Board of Directors of the Company.
2.7 “Change in Control” means the occurrence of any of the following:
(a) a person or group (as defined in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or
a subsidiary of the Company or any employee benefit plan sponsored by the Company or a subsidiary) becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Act) of 30% or more of the outstanding
common stock of Xylem Inc. (the “Stock”);
(b) any person or group (other than the Company or a subsidiary of the Company, or any employee benefit plan
sponsored by the Company or a subsidiary) purchases shares to acquire Stock (or securities convertible into
1
Stock) through a tender offer or exchange offer where after consummation of the offer, the person in question
will be the beneficial owner, directly or indirectly, of 30% or more of Stock;
(c) the consummation of (A) any consolidation, business combination or merger involving the Company, except
where holders of Stock immediately prior to the consolidation, business combination or merger (x) continue
to hold 50% or more of the combined voting power of the Company (or the corporation resulting from the
merger or consolidation or the parent of such corporation) after the merger and (y) have the same proportionate
ownership of Stock of the Company (or the corporation resulting from the merger or consolidation or the
parent of such corporation), relative to other holders of Stock immediately after the transaction as immediately
before, or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions)
of all or substantially all the assets of the Company;
(d) there is a change in a majority of the members of the Board of Directors of the Company within a 12-month
period unless the election or nomination by the Company’s stockholders of each new director during such 12-
month period was approved by the vote of 2/3rds of the directors then still in office who (x) were directors at
the beginning of the 12-month period or (y) whose nomination or election as directors was recommended or
approved by a majority of the directors who were directors at the beginning of the 12-month period; or
(e) approval by the Company’s shareholders of a plan of complete liquidation or dissolution of the Company,
other than a plan of liquidation or dissolution which results in the acquisition of all or substantially all of the
assets by an Affiliate of the Company.
2.8 “Code” means the U.S. Internal Revenue Code of 1986, as amended from time to time.
2.9 “Committee” means the Leadership Development and Compensation Committee of the Board.
2.10 “Company” means Xylem Inc., an Indiana corporation, and any successor thereto as provided in Article 16 herein;
provided, however, that for purposes of grants made under the Predecessor Plan, Company shall mean the Predecessor
Corporation as the original grantor.
2.11 “Converted Award” means Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock,
Restricted Stock Units and Other Awards denominated in Shares that were originally granted to a Participant under any
of the Predecessor Corporation Equity Plans, as adjusted pursuant to the terms of the Benefits and Compensation Matters
Agreement.
2.12 “Covered Employee” means a Participant who is a “Covered Employee,” as defined in Code Section 162(m) and
the regulations promulgated under Code Section 162(m), or any successor statute.
2.13 “Director” means any individual who is a member of the Board of Directors.
2.14 “Employee” means any employee of the Company or its Affiliates.
2.15 “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act
thereto.
2.16 “Fair Market Value” means a price that is based on the opening, closing, actual, high, low, or average selling
prices of a Share on the New York Stock Exchange (“NYSE”) or other established stock exchange (or exchanges) on
the applicable date, the preceding trading day, the next succeeding trading day, or an average of trading days, as
determined by the Committee in its discretion. Such definition of Fair Market Value may differ depending on whether
Fair Market Value is in reference to the grant, exercise, vesting, or settlement or payout of an Award. If, however, the
accounting standards used to account for equity awards granted to Participants are substantially modified subsequent
to the Effective Date of the Plan, the Committee shall have the ability to determine an Award’s Fair Market Value based
on the relevant facts and circumstances. If Shares are not traded on an established stock exchange, Fair Market Value
shall be determined by the Committee based on objective criteria.
2.17 “Freestanding SAR” means a SAR that is granted independently of any Options, as described in Article 7 herein.
2.18 “Full Value Award” means an Award other than an Option granted with an Option Price equal to at least Fair
Market Value on the date of grant or a SAR with a Grant Price equal to at least Fair Market Value on the date of grant.
2.19 “Grant Price” means the amount to which the Fair Market Value of a Share is compared pursuant to Section 7.6
to determine the amount of payment that should be made upon exercise of a SAR.
2
2.20 “Incentive Stock Option” or “ISO” means an Option that meets the requirements of Code Section 422, or any
successor provision, and that is not designated as a Nonqualified Stock Option.
2.21 “Insider” means an individual who is, on the relevant date, an executive officer, Director, or more than ten percent
(10%) Beneficial Owner of any class of the Company’s equity securities that is registered pursuant to Section 12 of
the Exchange Act, as determined by the Board or the Committee in accordance with Section 16 of the Exchange Act.
2.22 “Nonqualified Stock Option” or “NQSO” means an Option that is not intended to meet the requirements of Code
Section 422, or that otherwise does not meet such requirements.
2.23 “Option” means an Incentive Stock Option or a Nonqualified Stock Option to purchase Shares, as described in
Article 6 herein.
2.24 “Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.
2.25 “Other Award” means an Award granted to a Participant pursuant to Article 9 herein.
2.26 “Participant” means an Employee or Director who has been selected to receive an Award or who has an outstanding
Award granted under the Plan.
2.27 “Performance-Based Compensation” means an Award that is intended to qualify as “performance-based
compensation” under Code Section 162(m).
2.28 “Performance Measures” means measures as described in Article 10, the attainment of which may determine
the amount of payout and/or vesting with respect to Awards.
2.29 “Performance Period” means the period of time during which the performance goals must be met in order to
determine the amount of payout and/or vesting with respect to an Award.
2.30 “Period of Restriction” means the period when Restricted Stock or Restricted Stock Units are subject to a
substantial risk of forfeiture (based on the passage of time, the achievement of performance goals, or upon the occurrence
of other events as determined by the Committee, at its discretion) and transfer restrictions, as provided in Article 8
herein.
2.31 “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections
13(d) and 14(d) thereof.
2.32 “Plan Year” means the fiscal year of the Company.
2.33 “Plan” means the Xylem Omnibus Incentive Plan; provided, however, that for purposes of grants made under the
Predecessor Plan, Plan shall mean the Predecessor Plan as it existed on the date of such grant.
2.34 “Predecessor Corporation Equity Plan” means any of the plans maintained by the Predecessor Corporation
under which equity or equity-based awards were granted, including the ITT 2003 Equity Incentive Plan, ITT Corporation
1997 Long-Term Incentive Plan, 1994 ITT Incentive Stock Plan, ITT 1996 Restricted Stock Plan for Non-Employee
Directors, and 2002 ITT Stock Option Plan for Non-Employee Directors.
2.35 “Restricted Stock” means an Award granted to a Participant pursuant to Article 8 herein.
2.36 “Restricted Stock Unit” means an Award granted to a Participant pursuant to Article 8 herein.
2.37 “Share” means a share of common stock of the Company, $0.01 par value per share.
2.38 “Stock Appreciation Right” or “SAR” means an Award granted to a Participant pursuant to Article 7 herein.
2.39 “Subsidiary” means any corporation, partnership, joint venture, limited liability company, or other entity (other
than the Company) in an unbroken chain of entities beginning with the Company if each of the entities other than the
last entity in the unbroken chain owns at least fifty percent (50%) of the total combined voting power in one of the
other entities in such chain.
2.40 “Substitute Awards” means Awards granted or Shares issued by the Company in assumption of, or in substitution
or exchange for, awards previously granted, or the right or obligation to make future awards, by a company acquired
by the Company or any Subsidiary or with which the Company or any Subsidiary combines.
2.41 “Tandem SAR” means a SAR that is granted in connection with a related Option pursuant to Article 7.
3
ARTICLE 3. ADMINISTRATION
3.1 General. The Committee shall be responsible for administering the Plan. The Committee may employ attorneys,
consultants, accountants, and other persons, and the Committee, the Company, and its officers and Directors shall be
entitled to rely upon the advice, opinions, or valuations of any such persons. All actions taken and all interpretations
and determinations made by the Committee shall be final and binding upon the Participants, the Company, and all other
interested persons.
3.2 Authority of the Committee. The Committee shall have full and exclusive discretionary power to interpret the
terms and the intent of the Plan and to determine eligibility for Awards and to adopt such rules, regulations, and guidelines
for administering the Plan as the Committee may deem necessary or proper. Such authority shall include, but not be
limited to, selecting Award recipients, establishing all Award terms and conditions and making exceptions to any such
terms and conditions if the Committee, in good faith, determines that it is appropriate to do so, defining any terms not
otherwise defined herein, establishing and verifying the extent of satisfaction of any Performance Measures or other
conditions applicable to the grant, issuance, retention, vesting, exercisability or settlement of any Award, prescribing
and amending the terms of or form of any document or notice required to be delivered to the Company by Participants
under this Plan, determining the extent to which adjustments are required pursuant to Section 4.2, approving corrections
in the documentation or administration of any Award, and, subject to Article 14, adopting modifications and amendments
to the Plan or any Award Agreement, including without limitation, any that are necessary to comply with the laws of
the countries in which the Company and its Affiliates operate and making all other determinations deemed necessary
or advisable for the administration of this Plan. The Committee may, in its sole and absolute discretion, without
amendment to the Plan but subject to the limitations otherwise set forth in Article 14, waive or amend the operation of
Plan provisions respecting exercise after termination of employment or service to the Company or an Affiliate. The
Committee or any member thereof may, in its sole and absolute discretion and, except as otherwise provided in Article
14, waive, settle or adjust any of the terms of any Award so as to avoid unanticipated consequences or address
unanticipated events (including any temporary closure of an applicable stock exchange, disruption of communications
or natural catastrophe). Any power of the Committee may also be exercised by the Board, except to the extent that the
grant or exercise of such authority would (i) cause any Award or transaction to become subject to (or lose an exemption
under) the short-swing profit recovery provisions of Section 16 of the Exchange Act, (ii) cause an Award intended to
qualify as “performance-based compensation” under Section 162(m) of the Code not to qualify for such treatment, or
(iii) violate any requirement or rules of the stock exchange or market or quotation system on which the Shares are
traded, listed or quoted.
3.3 Delegation. To the maximum extent permissible under applicable law, the Committee may delegate to one or more
of its members or to one or more agents or advisors such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render
advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may,
by resolution, authorize one or more officers of the Company to do one or both of the following: (a) designate employees
to be recipients of Awards; and (b) determine the size of the Award; provided, however, the Committee shall not delegate
such responsibilities to any such officer for Awards granted to an Employee that is considered an executive officer of
the Company, or to the extent it would unintentionally cause Performance-Based Compensation to lose its status as
such.
4
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 Number of Shares Available for Awards. Subject to adjustment as provided in Section 4.2 herein, the number of
Shares hereby reserved for issuance to Participants under the Plan shall be eighteen million (18,000,000). For purposes
of the prior sentence, Shares subject to outstanding awards under the Predecessor Plan shall not be considered available
for issuance under the Predecessor Plan. Any Shares related to Awards under the Plan or awards under the Predecessor
Plan that terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled
in cash in lieu of Shares, or are exchanged with the Committee’s permission for Awards not involving Shares, shall be
available again for grant under the Plan. Notwithstanding the foregoing, (a) upon the exercise of a stock-settled SAR
or net-settled Option, the number of Shares subject to the Award (or portion of the Award) that is then being exercised
shall be counted against the maximum aggregate number of Shares that may be issued under the Plan as provided above,
on the basis of one Share for every Share subject thereto, regardless of the actual number of Shares issued upon exercise
and (b) any Shares withheld with respect to an Award (or, with respect to Restricted Stock, returned) in satisfaction of
tax withholding obligations shall be counted as Shares issued.
In addition, any Shares related to Full Value Awards under the Plan or the Predecessor Plan that terminate by expiration,
forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled in cash in lieu of Shares, or are
exchanged with the Committee’s permission for Awards not involving Shares, shall be available again for grant of Full
Value Awards under the Plan.
All of the reserved Shares may be used as ISOs.
The Shares available for issuance under the Plan may be authorized and unissued Shares or treasury Shares.
The following limits (“Award Limits”) shall apply to Awards (other than Converted Awards), dividends and dividend
equivalent intended to qualify as Performance-Based Compensation:
(a) Options: The maximum aggregate number of Shares that may be granted in the form of Options, pursuant to
any Award granted in any one Plan Year to any one Participant shall be three million (3,000,000).
(b) SARs: The maximum number of Shares that may be granted in the form of SARs, pursuant to any Award
granted in any one Plan Year to any one Participant shall be three million (3,000,000).
(c) Restricted Stock or Restricted Stock Units: The maximum aggregate grant with respect to Awards of
Restricted Stock or Restricted Stock Units granted in any one Plan Year to any one Participant shall be one
million (1,000,000).
(d) Other Awards: The maximum aggregate number of Shares with respect to which Other Awards may be granted
in any one Plan Year to any one Participant shall be one million (1,000,000) and the maximum aggregate cash
that may be payable with respect to Other Awards granted in any one Plan Year to any one Participant shall
be fifteen million ($15,000,000) dollars.
(e) Dividends and Dividend Equivalents: The maximum aggregate value of cash dividends (other than large,
nonrecurring cash dividends) or dividend equivalents that any one Participant may receive pursuant to Awards
in any one Plan Year shall not exceed six million ($6,000,000) dollars.
Substitute Awards shall not reduce the Shares authorized for issuance under the Plan or authorized for grant to a
Participant in any Plan Year. Additionally, in the event that a company acquired by the Company or any Subsidiary, or
with which the Company or any Subsidiary combines, has shares available under a pre-existing plan approved by
stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant
to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment
or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the
holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the
Plan and shall not reduce the Shares authorized for issuance under the Plan; provided that Awards using such available
shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan,
absent the acquisition or combination, and shall only be made to individuals who were employees or directors of such
acquired or combined company before such acquisition or combination.
5
4.2 Adjustments in Authorized Shares. In the event of any equity restructuring (within the meaning of FASB
Accounting Standards Codification (ASC) 718 (formerly FAS 123R) that causes the per share value of Shares to change,
such as a stock dividend, stock split, spin off, rights offering, or recapitalization through a large, nonrecurring cash
dividend, the Committee shall cause there to be made an equitable adjustment to: (a) the number and, if applicable,
kind of shares that may be issued under the Plan or pursuant to any type of Award under the Plan, (b) the Award Limits,
(c) the number and, if applicable, kind of shares subject to outstanding Awards, as applicable, the Option Price or Grant
Price of any then outstanding Awards, vesting and other terms, which adjustments need to be uniform as between
different Awards or types of Awards. In the event of any other change in corporate structure or capitalization, such as
a merger, consolidation, any reorganization (whether or not such reorganization comes within the definition of such
term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee, in its sole
discretion, in order to prevent dilution or enlargement of Participants’ rights under the Plan, shall cause there to be
made such equitable adjustments described in the foregoing sentence. Any fractional shares resulting from adjustments
made pursuant to this Section 4.2 shall be eliminated. Any adjustment made pursuant to this Section 4.2 shall be
conclusive and binding for all purposes of the Plan.
Except to the extent it would unintentionally cause Performance Based Compensation to fail to qualify for the
performance based exception to Code Section 162(m), appropriate adjustments may also be made by the Committee
in the terms of any Awards under the Plan to reflect such changes or distributions and to modify any other terms of
outstanding Awards on an equitable basis, including modifications of performance goals and changes in the length of
Performance Periods. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive
and binding on Participants under the Plan and need to be uniform as between different Awards or types of Awards.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Individuals eligible to participate in this Plan include all employees and Directors.
5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all
eligible individuals, those to whom Awards shall be granted and shall determine the form and amount of each Award.
5.3 Prior Participation. Notwithstanding any other provision of the Plan to the contrary, all prior service and
participation by a Participant with the Predecessor Corporation shall be credited in full towards a Participant’s service
and participation with the Corporation.
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such
number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. ISOs
may not be granted following the ten-year (10) anniversary of the date the Plan was last approved by shareholders in
a manner that satisfies the shareholder approval requirements applicable to ISOs. ISOs may be granted only to
Employees.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option
Price, the duration of the Option, the number of Shares to which the Option pertains, the conditions upon which an
Option shall become vested and exercisable, and such other provisions as the Committee shall determine which are
not inconsistent with the terms of the Plan. The Award Agreement also shall specify whether the Option is intended to
be an ISO or an NQSO.
6.3 Option Price. The Option Price for each grant of an Option under this Plan shall be as determined by the Committee;
provided, however, the Option Price shall not be less than one hundred percent (100%) of the Fair Market Value of a
Share on the date the Option is granted. Notwithstanding the foregoing, the Option Price with respect to an Option that
is a Substitute Award for options held by optionees of the acquired entity may be less than 100% of the Fair Market
Value of the Shares on the date such Option is granted if such Option Price is based on a formula set forth in the terms
of the options held by such optionees or in the terms of the agreement providing for such merger or other acquisition
that satisfies the requirements of Section 409A and Section 424(a) of the Code, as applicable.
6
6.4 Duration of Options. Each Option granted to a Participant shall expire at such time as the Committee shall determine
at the time of grant; provided, however, no Option shall be exercisable later than the tenth (10th) anniversary of its
grant.
6.5 Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such
terms and conditions as the Committee shall in each instance approve, which need not be the same for each grant or
for each Participant.
6.6 Payment. Options granted under this Article 6 shall be exercised by the delivery of notice of exercise to an agent
designated by the Company or by complying with any alternative procedures which may be authorized by the Committee,
setting forth the number of Shares with respect to which the Option is to be exercised.
A condition of the issuance of the Shares as to which an Option shall be exercised shall be the payment of the Option
Price. The Option may be exercised (and the Option Price may be satisfied) by (a) delivering cash or its equivalent,
(b) tendering (either by actual delivery or attestation) previously acquired Shares having an aggregate Fair Market
Value at the time of exercise equal to the Option Price, (c) broker-assisted cashless exercise, (d) net exercise, (e) a
combination of the foregoing or (f) by any other method approved by the Committee in its sole discretion. The Committee
shall determine acceptable methods for tendering Shares as payment upon exercise of an Option and may impose such
limitations and prohibitions on the use of Shares to exercise an Option as it deems appropriate.
Subject to any governing rules or regulations, as soon as practicable after receipt of written notification of exercise and
full payment (including satisfaction of any applicable tax withholding), the Company shall deliver to the Participant
evidence of book entry Shares, or upon the Participant’s request, Share certificates in an appropriate amount based
upon the number of Shares purchased under the Option(s).
Unless otherwise determined by the Committee, all payments under the methods indicated above shall be paid in United
States dollars.
6.7 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired
pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation,
restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon
which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such
Shares.
6.8 Termination of Employment or Service as a Director. The impact of a termination of a Participant’s employment
on an Option’s vesting and exercise period shall be determined by the Committee, in its sole discretion, in the Participant’s
Award Agreement, and need not be uniform among Option grants or Participants. The impact of a termination on a
Participant’s service as a Director on an Option’s vesting and exercise period shall be determined by the Committee,
in its sole discretion, in the Participant’s Award Agreement, and need not be uniform among Option grants or Participants.
6.9 Transferability of Options. During his or her lifetime, only the Participant shall have the right to exercise the
Options. After the Participant’s death, the Participant’s estate or beneficiary shall have the right to exercise such Options.
(a) Incentive Stock Options. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.
(b) Nonqualified Stock Options. Except as otherwise provided in a Participant’s Award Agreement, no NQSO
granted under this Article 6 may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Under no circumstances may an NQSO be
transferable for value or consideration.
6.10 Notification of Disqualifying Disposition. If any Participant shall make any disposition of Shares issued pursuant
to the exercise of an ISO under the circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions), such Participant shall notify the Company of such disposition within ten (10) days thereof.
6.11 Incentive Stock Options. Notwithstanding anything to the contrary in this Article 6, in the case of the grant of
an Option intending to qualify as an ISO, if the Participant owns stock possessing more than 10 percent of the combined
voting power of all classes of stock of the Company (a “10% Stockholder”), the Option Price of such Option must be
at least 110 percent of the Fair Market Value of the Shares on the date of grant and the Option must expire within a
period of not more than five (5) years from the date of grant. Notwithstanding anything in this Article 6 to the contrary,
Options designated as ISO shall not be eligible for treatment under the Code as ISOs (and will be deemed to be NQSOs)
7
to the extent that either (a) the aggregate Fair Market Value of Shares (determined as of the time of grant) with respect
to which such Options are exercisable for the first time by the Participant during any calendar year (under all plans of
the Company and any Subsidiary) exceeds $100,000, taking Options into account in the order in which they were
granted, or (b) such Options otherwise remain exercisable but are not exercised within three (3) months (or such other
period of time provided in Section 422 of the Code) of separation of service (as determined in accordance with Section
3401(c) of the Code and the regulations promulgated thereunder).
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time
and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs, or any combination of these forms of SARs. All Tandem SARs shall have the same exercise price, vesting,
exercisability, forfeiture and termination provisions as the Award to which they relate.
Subject to the terms and conditions of the Plan, the Committee shall have complete discretion in determining the number
of SARs granted to each Participant and, consistent with the provisions of the Plan, in determining the terms and
conditions pertaining to such SARs.
The SAR Grant Price for each grant of a Freestanding SAR shall be determined by the Committee and shall be specified
in the Award Agreement. The SAR Grant Price shall not be less than one hundred percent (100%) of the Fair Market
Value of a Share on the date the SAR is granted. Notwithstanding the foregoing, the Grant Price with respect to a SAR
that is a Substitute Award for stock appreciation rights held by award holders of the acquired entity may be less than
100% of the Fair Market Value of the Shares on the date such SAR is granted if such Grant Price is based on a formula
set forth in the terms of the stock appreciation rights held by such award holders or in the terms of the agreement
providing for such merger or other acquisition that satisfies the requirements of Section 409A of the Code. The Grant
Price of Tandem SARs shall be equal to the Option Price of the related Option.
7.2 SAR Agreement. Each SAR Award shall be evidenced by an Award Agreement that shall specify the Grant Price,
the term of the SAR, and such other provisions as the Committee shall determine.
7.3 Term of SAR. The term of a SAR granted under the Plan shall be determined by the Committee, in its sole discretion,
provided that, no SAR shall be exercisable later than the tenth (10th) anniversary of its grant.
7.4 Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the
Committee, in its sole discretion, imposes upon them; provided, however, such terms and conditions shall be subject
to Section 7.1 as to grant price and Section 7.3 as to the term of the SAR.
7.5 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related
Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then exercisable.
Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection
with an ISO: (a) the Tandem SAR will expire no later than the expiration of the underlying ISO; (b) the value of the
payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between
the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the
time the Tandem SAR is exercised; and (c) the Tandem SAR may be exercised only when the Fair Market Value of the
Shares subject to the ISO exceeds the Option Price of the ISO.
7.6 Payment of SAR Amount. Upon the exercise of a SAR, a Participant shall be entitled to receive payment from
the Company in an amount determined by multiplying:
(a) The difference between the Fair Market Value of a Share on the date of exercise over the Grant Price; by
(b) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon a SAR exercise may be in cash, in Shares of equivalent value,
in some combination thereof, or in any other manner approved by the Committee at its sole discretion. The Committee’s
determination regarding the form of SAR payout shall be set forth in the Award Agreement pertaining to the grant of
the SAR.
8
7.7 Termination of Employment or Service as a Director. The impact of a termination of a Participant’s employment
on a SAR’s vesting and exercise period shall be determined by the Committee, in its sole discretion, in the Participant’s
Award Agreement, and need not be uniform among SAR grants or Participants. The impact of a termination on a
Participant’s service as a Director on a SAR’s vesting and exercise period shall be determined by the Committee, in its
sole discretion, in the Participant’s Award Agreement, and need not be uniform among SAR grants or Participants.
7.8 Nontransferability of SARs. Except as otherwise provided in a Participant’s Award Agreement, no SAR granted
under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will
or by the laws of descent and distribution. Under no circumstances may a SAR be transferable for value or consideration.
Further, except as otherwise provided in a Participant’s Award Agreement, all SARs granted to a Participant under the
Plan shall be exercisable during his or her lifetime only by such Participant.
7.9 Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares received
upon exercise of a SAR granted pursuant to the Plan as it may deem advisable. This includes, but is not limited to,
requiring the Participant to hold the Shares received upon exercise of a SAR for a specified period of time.
ARTICLE 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
8.1 Grant of Restricted Stock or Restricted Stock Units. Subject to the terms and conditions of the Plan, the
Committee, at any time and from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to
Participants in such amounts as the Committee shall determine. Restricted Stock Units shall be similar to Restricted
Stock except that no Shares are actually awarded to the Participant on the date of grant.
8.2 Restricted Stock or Restricted Stock Unit Agreement. Each Restricted Stock and/or Restricted Stock Unit grant
shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of
Restricted Stock or the number of Restricted Stock Units granted, and such other provisions as the Committee shall
determine.
8.3 Transferability. Except as provided in this Article 8, the Shares of Restricted Stock and/or Restricted Stock Units
granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of
the applicable Period of Restriction established by the Committee and specified in the Award Agreement (and in the
case of Restricted Stock Units until the date of delivery or other payment), or upon earlier satisfaction of any other
conditions, as specified by the Committee, in its sole discretion, and set forth in the Award Agreement.
8.4 Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of
Restricted Stock or Restricted Stock Units granted pursuant to the Plan as it may deem advisable including, without
limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each
Restricted Stock Unit, restrictions based upon the achievement of specific performance goals, time-based restrictions
on vesting following the attainment of the performance goals, time-based restrictions, and/or restrictions under
applicable federal or state securities laws.
To the extent deemed appropriate by the Committee, the Company may retain the certificates representing Shares of
Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such
Shares have been satisfied or lapse.
Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock Award shall
become freely transferable by the Participant after all conditions and restrictions applicable to such Shares have been
satisfied or lapse (including satisfaction of any applicable tax withholding obligations), and Restricted Stock Units
shall be paid in cash, Shares, or a combination of cash and Shares as the Committee, in its sole discretion shall determine.
8.5 Voting Rights. To the extent permitted or required by law, as determined by the Committee, Participants holding
Shares of Restricted Stock granted hereunder may be granted the right to exercise full voting rights with respect to
those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted
Stock Units granted hereunder.
8.6 Dividends and Other Distributions. During the Period of Restriction, Participants holding Shares of Restricted
Stock or Restricted Stock Units granted hereunder may, if the Committee so determines, be credited with dividends
paid with respect to the underlying Shares or dividend equivalents while they are so held in a manner determined by
the Committee in its sole discretion. The Committee may apply any restrictions to the dividends or dividend equivalents
9
that the Committee deems appropriate. The Committee, in its sole discretion, may determine the time and form of
payment of dividends or dividend equivalents, including cash, Shares, Restricted Stock, or Restricted Stock Units;
provided, however, that if dividends or dividend equivalents are granted with respect to any Shares of Restricted Stock
or Restricted Share Units that are subject to performance goals, the dividends or dividend equivalents shall be
accumulated or reinvested and paid following the time such performance goals are met, as set forth by the Committee
in the applicable Award Agreement.
8.7 Termination of Employment or Service as a Director. The impact of a termination of a Participant’s employment
on a Restricted Stock or Restricted Stock Unit’s vesting and settlement shall be determined by the Committee, in its
sole discretion, in the Participant’s Award Agreement, and need not be uniform among Restricted Stock or Restricted
Stock Unit grants or Participants. The impact of a termination of a Participant’s service as a Director on a Restricted
Stock or Restricted Stock Unit’s vesting and settlement shall be determined by the Committee, in its sole discretion,
in the Participant’s Award Agreement, and need not be uniform among Restricted Stock or Restricted Stock Unit grants
or Participants.
8.8 Section 83(b) Election. The Committee may provide in an Award Agreement that the Award of Restricted Stock
is conditioned upon the Participant making or refraining from making an election with respect to the Award under
Section 83(b) of the Code. If a Participant makes an election pursuant to Section 83(b) of the Code concerning a
Restricted Stock Award, the Participant shall be required to file promptly a copy of such election with the Company.
ARTICLE 9. OTHER AWARDS
The Committee may grant Other Awards, which may include, without limitation, unrestricted Shares, the payment of
Shares in lieu of cash, the payment of cash based on attainment of Performance Goals, service conditions or other goals
established by the Committee and the payment of Shares in lieu of cash under other Company incentive or bonus
programs. Payment under or settlement of any such Other Awards shall be made in such manner, at such times and
subject to such terms and conditions as the Committee may determine.
ARTICLE 10. PERFORMANCE MEASURES
Unless and until the Committee proposes for shareholder vote and the shareholders approve a change in the general
Performance Measures set forth in this Article 10, the performance goals upon which the payment or vesting of an
Award to a Covered Employee that is intended to qualify as Performance-Based Compensation shall be limited to one
or more of the following Performance Measures:
(a) Net earnings;
(b) Earnings per share;
(c) Net sales growth;
(d) Net income (before or after taxes);
(e) Net operating profit;
(f) Return measures (including, but not limited to, return on assets, capital, equity, or sales);
(g) Cash flow (including, but not limited to, operating cash flow and free cash flow);
(h) Cash flow return on capital;
(i) Earnings before or after taxes, interest, depreciation, and/or amortization;
(j) Gross or operating margins;
(k) Productivity ratios;
(l) Share price (including, but not limited to, growth measures and total shareholder return);
(m) Expense targets;
(n) Margins;
(o) Operating efficiency;
(p) Customer satisfaction;
(q) Employee satisfaction metrics;
(r) Human resources metrics;
(s) Working capital targets; and
(t) EVA®.
10
Any Performance Measure(s) may be used to measure the performance of the Company or an Affiliate as a whole or
any business unit of the Company or an Affiliate or any combination thereof, as the Committee may deem appropriate,
or any of the above Performance Measures as compared to the performance of a group of comparator companies, or
published or special index that the Committee, in its sole discretion, deems appropriate, or the Company may select
Performance Measure (l) above as compared to various stock market indices. The Committee also has the authority to
provide for accelerated vesting of any Award based on the achievement of performance goals pursuant to the Performance
Measures specified in this Article 10.
The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the
following events that occurs during a Performance Period: (a) asset write—downs, (b) litigation or claim judgments
or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported
results, (d) any reorganization and restructuring programs, (e) extraordinary nonrecurring items as described in
Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial condition
and results of operations appearing in the Company’s annual report to shareholders for the applicable year,
(f) acquisitions or divestitures, and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions
affect Awards to Covered Employees, they shall be prescribed in a form that meets the requirements of Code Section
162(m) for deductibility.
Awards that are designed to qualify as Performance-Based Compensation, and that are held by Covered Employees,
may not be adjusted upward. The Committee shall retain the discretion to adjust such Awards downward. In the event
that applicable tax and/or securities laws change to permit Committee discretion to alter the governing Performance
Measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make
such changes without obtaining shareholder approval.
ARTICLE 11. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant,
shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with
the Company during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at
the Participant’s death shall be paid to the Participant’s estate.
ARTICLE 12. RIGHTS OF PARTICIPANTS
12.1 Employment. Nothing in the Plan or an Award Agreement shall interfere with or limit in any way the right of the
Company and/or its Affiliates to terminate any Participant’s employment or of the Board of Directors to terminate
service as a Director at any time or for any reason not prohibited by law, nor confer upon any Participant any right to
continue his or her employment or service as a Director for any specified period of time.
Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company
and, accordingly, subject to Article 3 and Section 14.1, this Plan and the benefits hereunder may be terminated at any
time in the sole and exclusive discretion of the Committee without giving rise to any liability on the part of the Company,
its Affiliates, and/or its Subsidiaries.
12.2 Participation. No individual shall have the right to be selected to receive an Award under this Plan, or, having
been so selected, to be selected to receive a future Award.
12.3 Rights as a Shareholder. Except as otherwise provided in Section 8 of the Plan or in an Award Agreement, a
Participant shall have none of the rights of a shareholder with respect to Shares covered by any Award until the Participant
becomes the record holder of such Shares.
ARTICLE 13. CHANGE IN CONTROL
The Compensation Committee shall specify in each Participant’s Award Agreement the treatment of outstanding Awards
upon a Change in Control; provided that any Converted Award will continue to apply the definition of “change in
11
control” or “Acceleration Event” as provided in the Predecessor Corporation Equity Plan under which such Converted
Award was originally granted, as adjusted pursuant to the terms of the Benefits and Compensation Matters Agreement.
Notwithstanding anything herein to the contrary, in the event of a Change in Control in which the acquiring or surviving
company in the transaction does not assume or continue outstanding Awards upon the Change in Control, immediately
prior to the Change in Control, all Awards that are not assumed or continued shall be treated as follows effective
immediately prior to the Change in Control: (a) in the case of an Option or SAR, the Participant shall have the ability
to exercise such Option or SAR, including any portion of the Option or SAR not previously exercisable, (b) in the case
of any Award the vesting of which is in whole or in part subject to Performance Measures, all conditions to the grant,
issuance, retention, vesting or transferability of, or any other restrictions applicable to, such Award shall immediately
lapse and the Participant shall have the right to receive a payment based on performance or deemed performance in
accordance with the terms of the applicable Award Agreement, and (c) in the case of outstanding Restricted Stock and/
or Restricted Stock Units and or Other Awards (other than those referenced in subsection (b)), all conditions to the
grant, issuance, retention, vesting or transferability of, or any other restrictions applicable to, such Award shall
immediately lapse. In no event shall any action be taken pursuant to this Article 13 that would change the payment or
settlement date of an Award in a manner that would result in the imposition of any additional taxes or penalties pursuant
to Section 409A of the Code.
ARTICLE 14. AMENDMENT, MODIFICATION, SUSPENSION, AND TERMINATION
14.1 Amendment, Modification, Suspension, and Termination. Subject to Section 14.3, the Committee may, at any
time and from time to time, alter, amend, modify, suspend, or terminate the Plan and any Award Agreement in whole
or in part; provided, however, that, except for a change or adjustment made pursuant to Section 4.2, no Option Price
of an outstanding Option or Grant Price of an outstanding SAR shall be reduced (whether through amendment,
cancellation or replacement of Awards with other Awards or other payments of cash or property) without shareholder
approval.
14.2 Adjustment of Awards upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee
may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual
or nonrecurring events (including, without limitation, the events described in Section 4.2 hereof) affecting the Company
or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles,
whenever the Committee determines that such adjustments are appropriate in order to prevent unintended dilution or
enlargement of the benefits or potential benefits intended to be made available under the Plan. The determination of
the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan.
14.3 Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary, no termination,
amendment, suspension, or modification of the Plan or an Award Agreement shall adversely affect in any material way
any Award previously granted under the Plan, without the written consent of the Participant holding such Award,
provided that no such consent shall be required if the Committee determines in its sole discretion and prior to the date
of any Change in Control that such amendment or alteration either (a) is required or advisable in order for the Company,
the Plan or the Award to satisfy any law or regulation or to meet the requirements of or avoid adverse financial accounting
consequences under any accounting standard, or (b) is not reasonably likely to significantly diminish the benefits
provided under such Award, or that any such diminishment has been adequately compensated.
ARTICLE 15. WITHHOLDING
15.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant
to remit to the Company, the minimum statutory amount (or such other amount that will not cause an adverse accounting
consequence or cost) to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of this Plan.
15.2 Share Withholding. With respect to withholding required upon the exercise of Options, or SARs, upon the lapse
of restrictions on Restricted Stock and Restricted Stock Units, or any other taxable event arising as a result of Awards
granted hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the
tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction (or such other
12
amount that will not cause an adverse accounting consequence or cost). All such elections shall be irrevocable, made
in writing, and signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in
its sole discretion, deems appropriate.
ARTICLE 16. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any
successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger,
consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
ARTICLE 17. GENERAL PROVISIONS
17.1 Forfeiture Events. The Committee may specify in an Award Agreement that the Participant’s rights, payments,
and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the
occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an
Award. Such events shall include, but shall not be limited to, termination of employment for cause, violation of material
Company and/or Affiliate policies, breach of noncompetition, confidentiality, or other restrictive covenants that may
apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the
Company and/or its Affiliates.
17.2 Legend. The certificates for Shares may include any legend which the Committee deems appropriate to reflect
any restrictions on transfer of such Shares.
17.3 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also
shall include the feminine, the plural shall include the singular, and the singular shall include the plural.
17.4 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality
or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal
or invalid provision had not been included.
17.5 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities
exchanges as may be required.
17.6 Securities Law Compliance. With respect to Insiders, transactions under this Plan are intended to comply with
all applicable conditions of Rule 16b-3 or its successor under the Exchange Act. To the extent any provision of the Plan
or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
17.7 Registration and Listing. The Company may use reasonable endeavors to register Shares allotted pursuant to
the exercise of an Award with the United States Securities and Exchange Commission or to effect compliance with the
registration, qualification, and listing requirements of any national securities laws, stock exchange, or automated
quotation system.
17.8 Delivery of Title. The Company shall have no obligation to issue or deliver evidence of title for Shares issued
under the Plan prior to:
(a) Obtaining any approvals from governmental agencies that the Company determines are necessary or advisable;
and
(b) Completion of any registration or other qualification of the Shares under any applicable national or foreign
law or ruling of any governmental body that the Company determines to be necessary or advisable.
17.9 Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of
any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as
to which such requisite authority shall not have been obtained.
13
17.10 Employees or Directors Based Outside of the United States. Notwithstanding any provision of the Plan to the
contrary, in order to comply with the laws in other countries in which the Company and its Affiliates operate or have
employees or Directors, the Committee, in its sole discretion, shall have the power and authority to:
(a) Determine which Affiliates shall be covered by the Plan;
(b) Determine which employees and/or Directors outside the United States are eligible to participate in the Plan;
(c) Modify the administrative terms and conditions of any Award granted to employees and/or Directors outside
the United States to comply with applicable foreign laws;
(d) Establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions
may be necessary or advisable. Any subplans and modifications to Plan terms and procedures established
under this Section 17.10 by the Committee shall be attached to this Plan document as appendices; and
(e) Take any action, before or after an Award is made, that it deems advisable to obtain approval or comply with
any necessary local government regulatory exemptions or approvals.
(f) Notwithstanding the above, the Committee may not take any actions hereunder, and no Awards shall be granted,
that would violate the Exchange Act, the Code, any securities law, or governing statute or any other applicable
law.
17.11 Uncertificated Shares. To the extent that the Plan provides for issuance of certificates to reflect the transfer of
Shares, the transfer of such Shares may be effected on a non-certificated basis, to the extent not prohibited by applicable
law or the rules of any stock exchange.
17.12 Unfunded Plan. Participants shall have no right, title, or interest whatsoever in or to any investments that the
Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action
taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship
between the Company and any Participant, beneficiary, legal representative, or any other person. To the extent that any
person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the
right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the
general funds of the Company and no special or separate fund shall be established and no segregation of assets shall
be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not subject to ERISA.
17.13 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The
Committee shall determine whether cash, Awards, or other property shall be issued or paid in lieu of fractional Shares
or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.
17.14 Retirement and Welfare Plans. The value of compensation paid under this Plan will not be included as
“compensation” for purposes of computing the benefits payable to any participant under the Company’s retirement
plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that such
compensation shall be taken into account in computing a participant’s benefit.
17.15 Governing Law. The Plan and each Award Agreement shall be governed by the laws of the State of New York,
excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of
the Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients
of an Award under the Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts
of New York, to resolve any and all issues that may arise out of or relate to the Plan or any related Award Agreement.
17.16 Specified Employee Delay. To the extent any payment under this Plan is considered deferred compensation
subject to the restrictions contained in Section 409A of the Code, and to the extent necessary to avoid the imposition
of taxes under Section 409A of the Code, such payment may not be made to a specified employee (as determined in
accordance with a uniform policy adopted by the Company with respect to all arrangements subject to Section 409A
of the Code) upon separation from service (as defined for purposes of Section 409A of the Code) before the date that
is six months after the specified employee’s separation from service (or, if earlier, the specified employee’s death). Any
payment that would otherwise be made during this period of delay shall be accumulated and paid on the sixth month
plus one day following the specified employee’s separation from service (or, if earlier, as soon as administratively
practicable after the specified employee’s death).
14
XYLEM
2011 OMNIBUS INCENTIVE PLAN
EXHIBIT 10.7
[YEAR] NON-QUALIFIED STOCK OPTION AWARD AGREEMENT
This Agreement (the “Agreement”) between Xylem Inc. (the “Company”) and [Participant Name] (the
“Participant”) is effective as of [Grant Date]. Capitalized terms that are not defined in this Agreement are defined
in the Company’s 2011 Omnibus Incentive Plan (the “Plan”). This Agreement is only being provided in English. The
Participant is an employee of the Company or an Affiliate. In recognition of the Participant’s valued services, the
Company, through the Leadership Development and Compensation Committee of its Board of Directors (the
“Committee”), is providing the Participant an inducement to remain employed and an incentive for increased efforts
while employed. In consideration of the terms and conditions in this Agreement, the parties agree as follows:
1. Grant of Non-Qualified Stock Options. The Company confirms the grant on [Grant Date], (the “Grant Date”)
to the Participant of the option to purchase from the Company all or any part of an aggregate of [#,###] shares
(the “Options”), at the purchase price of $[Grant Date Closing Price] per share (the “Exercise Price”).
Nature of the Grant:
(a) The grant of Options is voluntary and occasional and does not create any contractual or other right to receive
future grants of Options, or benefits in lieu of Options, even if Options have been granted in the past. All
decisions with respect to future grants will be at the sole discretion of the Company;
(b) The Participant is voluntarily participating in the Plan;
(c) The Options are not part of normal or expected compensation for any purpose, including for purposes of
calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments,
bonuses, pension or retirement or welfare benefits or similar payments;
(d) Future value of the underlying shares is unknown, indeterminable and cannot be predicted with certainty;
(e) No claim or entitlement to compensation or damages will arise from forfeiture of the Options resulting from
the termination of the Participant's employment; and
(f) The Company will not be liable for any foreign exchange rate fluctuation between the Participant’s local
currency and the United States Dollar that may affect the value of the Options or of any amounts due to the
Participant on exercise of the Options or on the subsequent sale of any shares acquired on exercise.
2. Terms and Conditions. The Options are subject to the following additional terms and conditions:
(a) Expiration Date. The Options will expire on [ ], or, if the Participant’s employment terminates before that
date, on the date specified in subsection 2(e) below.
(b) Exercise of Options. The Options cannot be exercised until vested.
(c) Vesting. Options will vest if the Participant has been actively employed by the Company or an Affiliate from
the Grant Date through the vesting date. Active employment does not include any potential severance period.
Subject to subsections 2(a), 2(d), and 2(e), the Options will vest in 3 installments as follows:
•
•
•
1/3rd of the Options will vest [ ],
1/3rd of the Options will vest [ ], and
1/3rd of the Options will vest [ ].
[ ], [ ], and [ ] are the respective “Vest Period Start Dates” for each of the 3 installments.
(d) Effect of Change in Control. If the acquiring or surviving company in the transaction assumes or continues
the outstanding Options, any unvested Options will continue to vest based on the Options’ service-based
vesting criteria, if any.
NQSO Grant Agreement
Page 1 of 5
If the Participant's active employment with the Company or an Affiliate is terminated by the Company or an
Affiliate without Cause or by the Participant for Good Reason (for applicable Participants only) within 2
years of a Change in Control, any assumed and unvested Options will become 100% vested on the termination
date. Any vested Options will expire on the earlier of [ ], or the date 3 months after the termination date.
If the acquiring or surviving company in the transaction does not assume or continue outstanding awards
under the Plan, immediately prior to the Change in Control, any unvested Options will become 100% vested
and exercisable.
“Cause” means (i) the Participant’s willful and continued failure to substantially perform his or her duties
with the Company (other than any such failure resulting from the Participant’s incapacity due to physical or
mental illness) or (ii) the Participant willfully engaging in conduct that demonstrably and materially injures
the Company or its Affiliates, monetarily or otherwise. “Willful” means the action is done or omitted in bad
faith or without reasonable belief that the action or omission was in the best interests of the Company.
“Good Reason” means, without the Participant’s express written consent (i) a reduction in annual target total
cash compensation (base salary and target bonus), (ii) the assignment of any duties inconsistent in any material
adverse respect with the Participant’s position, authority, duties or responsibilities, (iii) any other action by
the Company or an Affiliate which results in a material diminution in such position, authority, duties or
responsibilities; or (iv) the Company or an Affiliate requiring the Participant to relocate to a work location
50 miles or more from the location where the Participant was principally working immediately prior to the
Change in Control. The Participant must give notice within 90 days of any Good Reason event.
Good Reason only applies to Company employees who are, at the time of termination of employment, covered
by the Xylem Special Senior Executive Pay Plan or the Xylem Enhanced Severance Pay Plan and will exclude
an isolated, insubstantial and inadvertent action not taken in bad faith that is resolved by the Company or an
Affiliate within 30 days of receiving notice.
(e) Effect of Termination of Employment. Options will only vest while the Participant is actively employed
by the Company or an Affiliate. If the Participant's active employment with the Company or an Affiliate is
terminated for any reason, and such termination constitutes a “separation from service” within the meaning
of Section 409A of the Code and any related regulations or other effective guidance promulgated thereunder
(“Section 409A”), subject to subsection 2(d), the following would apply to any outstanding Options on the
date of the Participant’s termination of employment:
(i) Termination due to Death or Disability. Any unvested Options will immediately become 100% vested.
Any vested Options will expire on the earlier of [ ], or the date 3 years after the Participant’s termination
of employment.
(ii) Termination due to Retirement. A prorated portion of unvested Options with a vesting date within 12
months of termination will immediately vest. All other unvested Options will automatically be forfeited.
Any vested Options will expire on the earlier of [ ], or the date 3 years after the Participant’s termination
of employment.
(iii) Termination other than Death, Disability and Retirement. Any unvested Options will automatically expire.
Any vested portion of the Options will expire on the earlier of [ ], or the date 3 months after the Participant’s
termination of employment.
“Disability” means the complete and permanent inability of the Participant to perform all duties under the
terms of his or her employment, as determined by the Company based on evidence, including independent
medical reports and data, as deemed appropriate or necessary.
“Retirement” means the termination of the Participant's employment (either by the Company of the
Participant), if, at the time of termination, the Participant is at least age 55 and has completed 10 years of
service with the Company or the Participant is age 65 or older.
Prorated Vesting Upon Retirement. The prorated portion of the Options that vests on the Participant’s
termination of employment due to the Participant's Retirement will be determined by multiplying the total
number of unvested Options with vesting date within 12 months of termination by a fraction, of which the
numerator is the number of full months the Participant has been continually employed since the Vest Period
NQSO Grant Agreement
Page 2 of 5
Start Date and the denominator is 12. For this purpose, full months of employment will be based on monthly
anniversaries of the Grant Date, not calendar months.
(f) Payment of Exercise Price. Permissible methods for payment of the Exercise Price on exercise of the Options
are described in Section 6.6 of the Plan, or, if the Plan is amended, successor provisions. In addition to the
methods of exercise permitted by Section 6.6 of the Plan, the Participant may exercise all or part of the
Options by way of (i) broker-assisted cashless exercise in a manner consistent with the Federal Reserve
Board's Regulation T, unless the Committee determines that this is prohibited by law, or (ii) net-settlement,
where the Participant directs the Company to withhold shares that otherwise would be issued upon exercise
of the Options having an aggregate Fair Market Value on the date of the exercise equal to the Exercise Price,
or the portion being exercised by way of net-settlement (rounding up to the nearest whole share).
(g) Tax Withholding. The Company will have the power and the right to deduct or withhold, or require the
Participant to remit to the Company, all applicable federal, state, and local taxes, domestic or foreign, required
by law or regulation to be withheld with respect to the exercise of the Options. The Participant may elect to
satisfy the withholding requirement, in whole or in part, by having the Company withhold shares that otherwise
would be issued upon exercise of the Options, with the number of shares withheld having a Fair Market Value
on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the
transaction (or such other amount that will not cause an adverse accounting consequence or cost) (rounding
up to the nearest whole share). Any election will be subject to any restrictions or limitations that the Committee,
in its sole discretion, deems appropriate.
(h) Automatic Exercise in Certain Circumstances. Subject to subsection 2(i) of this Agreement, if any Options
held by an active Participant are otherwise exercisable but remain unexercised at the close of business on
[Expiration Date], and if on that date the Fair Market Value of the shares subject to the exercisable but
unexercised Options exceeds the aggregate payment that would have been required to exercise the Options,
the Participant will automatically be paid an amount of Company shares having a Fair Market Value equal
to such excess (rounding up to the nearest whole share), if any, and the Options will be cancelled. An automatic
exercise will not occur if the Participant (and, if applicable, the Participant’s authorized legal representative)
waives this subsection 2(h) in writing.
The Participant acknowledges that tax and other legal requirements must be met prior to any settlement of
Options under this subsection and consents to any tax or other consequences that may arise in connection
with this subsection.
(i) Compliance with Laws and Regulations. Notwithstanding anything to the contrary in this Agreement, the
Company will not be obligated to issue any shares under this Agreement issuance of the shares, or the exercise
of the Options by the Participant, violates or is not in compliance with any laws, rules or regulations of the
United States or any state or country. The Participant understands that, if applicable, the laws of the country
where the Participant is working at the time of grant, vesting, and/or exercise of the Options (including any
rules or regulations governing securities, foreign exchange, tax, labor or other matters) may restrict or prevent
exercise of the Options or may subject the Participant to additional procedural or regulatory requirements
that the Participant is solely responsible for and that the Participant will have to independently fulfill. The
Company reserves the right to impose other requirements on the Participant’s participation in the Plan, awards
under the Plan, and any shares acquired under the Plan, if the Company determines the requirement is necessary
or advisable to comply with applicable law or facilitate the administration of the Plan.
(j) Participant Acknowledgements. The Participant acknowledges and agrees that:
(i) Participant Obligations. In partial consideration for the award of these Options, if at any time during the
period between the Grant Date and the 12-month period following the Participant’s termination of
Employment (the “Obligation Period”), the Participant: (i) directly or indirectly, hires or solicits or arranges
for the hiring or solicitation of any employee of the Company or its Affiliates, or encourages any employee
to leave the Company; (ii) directly or indirectly, assist in soliciting in competition with the Company the
business of any current customer, distributor or dealer or other sales or distribution channel partners of
the Company; (iii) uses, discloses, misappropriates or transfers confidential or proprietary information
concerning the Company or its Affiliates (except as required by the Participant’s work responsibilities
with the Company or its Affiliates); or (vi) engages in any activity in violation of Company policies,
including the Company’s Code of Conduct, or engages in conduct materially adverse to the best interests
NQSO Grant Agreement
Page 3 of 5
of the Company or its Affiliates; the Options, whether previously vested or not, may be cancelled in full,
and the Participant may be required to return to the Company any shares received on exercise of vested
Options or the net after-tax income from any disposition of any shares received upon exercise of vested
Options, unless the Company, in its sole discretion, elects not to cancel the Options and/or elects not to
recover any income from exercised Options or unless applicable law prohibits such action.
The obligations in this subsection are in addition to any other agreements related to non-solicitation and
preservation of Company confidential and proprietary information entered into between the Participant
and the Company, or otherwise applicable to the Participant, and nothing in this Agreement is intended
to waive, modify, alter or amend the terms of any such other agreement. THE PARTICIPANT
UNDERSTANDS THAT THIS SUBSECTION IS NOT INTENDED TO AND DOES NOT PROHIBIT
THE CONDUCT DESCRIBED, BUT PROVIDES FOR THE CANCELLATION OF THE AWARD IN
FULL AND A RETURN TO THE COMPANY OF ANY SHARES RECEIVED UPON SETTLEMENT
OF EXERCISED VESTED OPTIONS OR THE NET AFTER-TAX INCOME FROM THE
DISPOSITION OF ANY SHARES RECEIVED UPON SETTLEMENT OF EXERCISED VESTED
OPTIONS IF THE PARTICIPANT SHOULD CHOOSE TO VIOLATE THIS PARAGRAPH DURING
THE OBLIGATION PERIOD. Nothing in this Agreement prohibits the Participant from voluntarily
communicating, without notice to or approval by the Company, with any federal government agency
about a potential violation of a federal law or regulation.
(ii) Electronic Delivery and Acceptance. The Participant consents to electronic delivery of any Plan
documents. The Participant consents to any and all procedures that the Company has established or may
establish for an electronic signature system for delivery and acceptance of Plan related documents. The
Participant agrees that his or her electronic signature is the same as, and will have the same force and
effect as, his or her manual signature. Participant agrees that these procedures and delivery may be effected
by a third party engaged by the Company to provide administrative services related to the Plan.
(iii) Right of Set-Off. If the Company in its reasonable judgment determines that the Participant owes the
Company any amount due to any loan, obligation or indebtedness, including amounts owed under the
Company’s tax equalization program or the Company’s policies with respect to travel and business
expenses, and if the Participant has not satisfied such obligation(s), the Company may instruct the plan
administrator to withhold and/or sell shares acquired by the Participant on exercise of the Options (to
the extent such shares are not subject to Code Section 409A), or the Company may deduct funds equal
to the amount of the obligation from other funds due to the Participant from the Company to the maximum
extent permitted by Code Section 409A.
(iv) Data Privacy. Participant acknowledges and consents to the collection, use, processing and transfer of
personal data. Participant is not obliged to consent to such collection, use, processing and transfer of
personal data. However, failure to provide the consent may affect Participant’s ability to participate in
the Plan. The Company holds certain personal information about Participant, that may include his/her
name, home address and telephone number, date of birth, social security number or other employee
identification number, salary grade, hire data, salary, nationality, job title, or details of all options or
performance stock units or any other entitlement to shares of stock awarded, canceled, purchased, vested,
or unvested, for the purpose of managing and administering the Plan (“Data”). The Company and its
Affiliates will transfer Data amongst themselves as necessary for the purpose of implementation,
administration and management of Participant’s participation in the Plan, and the Company or its Affiliates
may each further transfer Data to any third parties assisting the Company with the implementation,
administration and management of the Plan. These recipients may be located throughout the world,
including the United States. The Participant authorizes them to receive, possess, use, retain and transfer
the Data, in electronic or other form, for the purposes of implementing, administering and managing
participation in the Plan, including any transfer of Data that may be required for the administration of the
Plan and/or the subsequent holding of shares of stock on Participant’s behalf to a broker or other third
party with whom Participant may elect to deposit any shares of stock acquired pursuant to the
Plan. Participant may, at any time, review Data, require any necessary amendments to it or withdraw this
consent in writing by contacting the Company; however, withdrawing consent may affect Participant’s
ability to participate in the Plan.
NQSO Grant Agreement
Page 4 of 5
(v) Stock Ownership Guidelines. If the Participant is or becomes subject to the Company’s Stock Ownership
Guidelines and applicable retention requirements, the Participant may be limited in selling shares obtained
upon settlement of the Options.
(vi) Clawback Policy. If the Participant is covered by the Company’s Clawback Policy, the Participant agrees
that the Options are subject to the Policy and may be subject to recovery (in whole or in part) by the
Company. The Participant agrees that the Clawback Policy may be amended from time to time by the
Committee, including amendments to comply with applicable laws, regulations or stock exchange listing
requirements.
(k) Governing Law. This Agreement is issued, and the Options are granted, in Rye Brook, New York and will
be governed and construed in accordance with the laws of the State of New York, excluding any conflicts or
choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to
the substantive law of another jurisdiction.
By signing a copy of this Agreement, the Participant acknowledges that s/he has received a copy of the Plan and that
s/he has read and understands the Plan and this Agreement and agrees to their terms and conditions. The Participant
also acknowledges that the Options awarded under to this Agreement must be exercised prior to the expiration date,
that it is the Participant's responsibility to exercise the Options, and that the Company has no further responsibility
to notify the Participant of the expiration of the Options.
Agreed to:
XYLEM INC.
_____________________________
Participant
_____________________________
[Name of Xylem Signatory]
(Online Acceptance Constitutes Agreement)
Dated: _________________
Dated: [Date]
Enclosures
NQSO Grant Agreement
Page 5 of 5
XYLEM
2011 OMNIBUS INCENTIVE PLAN
[YEAR] RESTRICTED STOCK UNIT AGREEMENT
EXHIBIT 10.8
This Agreement (the “Agreement”) between Xylem Inc. (the “Company”) and [Participant Name] (the
“Participant”) is effective as of [Grant Date]. Capitalized terms that are not defined in this Agreement are defined
in the Company’s 2011 Omnibus Incentive Plan (the “Plan”). This Agreement is only being provided in English. The
Participant is an employee of the Company or an Affiliate. In recognition of the Participant’s valued services, the
Company, through the Leadership Development and Compensation Committee of its Board of Directors (the
“Committee”), is providing the Participant an inducement to remain employed and an incentive for increased efforts
while employed. In consideration of the terms and conditions in this Agreement, the parties agree as follows:
1. Grant of Restricted Stock Units. The Company hereby confirms the grant on [Grant date] (the “Grant Date”)
to the Participant of [#,###] Restricted Stock Units (“RSUs”). For Band A executives, RSUs granted under this
Agreement are intended to be Performance Based Awards that satisfy the conditions for the Performance-Based
Exception under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The RSUs are
notional units of measurement denominated in shares of common stock (i.e., one Restricted Stock Unit is equivalent
in value to one share of common stock of the Company).
The RSUs represent an unfunded, unsecured right to receive shares and dividend equivalent payments under
subsection 2(b) in the future if the conditions in the Plan and this Agreement are satisfied.
Nature of the Grant:
(a) The grant of the RSUs is voluntary and occasional and does not create any contractual or other right to receive
future grants of RSUs, or benefits in lieu of RSUs, even if RSUs have been granted in the past. All decisions
with respect to future RSUs or other grants, if any, will be at the sole discretion of the Company;
(b) The Participant is voluntarily participating in the Plan;
(c) The RSUs and the shares subject to the RSUs, are not part of normal or expected compensation for any
purpose, including for purposes of calculating any severance, resignation, termination, redundancy, dismissal,
end-of-service payments, bonuses, pension or retirement or welfare benefits or similar payments;
(d) Future value of the underlying shares is unknown, indeterminable and cannot be predicted with certainty;
(e) No claim or entitlement to compensation or damages will arise from forfeiture of the RSUs resulting from
the termination of the Participant's employment; and
(f) The Company will not be liable for any foreign exchange rate fluctuation between the Participant’s local
currency and the United States Dollar that may affect the value of the RSUs or of any amounts due to the
Participant pursuant to the settlement of the RSUs or the subsequent sale of any shares acquired upon
settlement.
2. Terms and Conditions. It is understood and agreed that the RSUs are subject to the following terms and conditions:
(a) Restrictions. Except as otherwise provided in the Plan and this Agreement, neither this Award nor any RSUs
subject to this Award may be sold, assigned, pledged, exchanged, transferred, hypothecated or encumbered,
other than to the Company as a result of forfeiture of the RSUs.
(b) Voting and Dividend Equivalent Rights. The Participant will not have any privileges of a stockholder of
the Company with respect to the RSUs or any shares that may be delivered under this Agreement, including
without limitation any right to vote the shares or to receive dividends, unless and until the shares are delivered
on vesting of the RSUs. Dividend equivalents will be earned with respect to each Restricted Stock Unit that
vests and the amount will be equal to the total dividends declared on a share, where the record date of the
dividend is between the Grant Date of this Award and the date a share is issued on vesting of the RSU. Any
RSU Grant Agreement
Page 1 of 5
dividend equivalents earned will be paid in cash to the Participant when the shares subject to the vested RSUs
are issued. No dividend equivalents will be earned or paid with respect to any RSUs that do not vest. Dividend
equivalents will not accrue interest.
(c) Vesting and Payment. RSUs will vest if the Participant has been actively employed by the Company or an
Affiliate from the Grant Date through the vesting date. Active employment does not include any potential
severance period. The RSUs will vest in 3 installments as follows:
•
•
•
1/3rd of the RSUs will vest [ ],
1/3rd of the RSUs will vest [ ], and
1/3rd of the RSUs will vest [ ].
[ ], [ ], and [ ] are the respective “Vest Period Start Date” for each of the 3 installments.
For Band A executives, vesting is also contingent on achievement of an Adjusted Net Income performance
target for the fiscal year in which the Grant Date occurs as approved by the Committee.
Except as provided in subsection 2(i), on vesting of the RSUs, including vesting pursuant to subsections 2
(d) or 2(e), the Company will deliver to the Participant (i) one share for each vested RSU, with any fractional
shares resulting from proration pursuant to subsection 2(e), if applicable, to be rounded to the nearest whole
share, and (ii) an amount in cash attributable to dividend equivalents earned in accordance with subsection
2(b), less shares withheld in accordance with subsection 2(f).
(d) Effect of Change in control. If the acquiring or surviving company in the transaction assumes or continues
outstanding RSUs under the Plan, any unvested RSUs will continue to vest based on the RSUs’ service-based
vesting criteria, if any.
If the Participant’s active employment with the Company or an Affiliate is terminated by the Company or an
Affiliate without Cause or by the Participant for Good Reason (for applicable Participants only) within 2
years of a Change in Control, any assumed unvested RSUs will become 100% vested on the termination date.
If the acquiring or surviving company in the transaction does not assume or continue outstanding awards
under the Plan, immediately prior to the Change in Control any unvested RSUs will become 100% vested.
“Cause” means (i) the Participant’s willful and continued failure to substantially perform his or her duties
with the Company (other than any such failure resulting from the Participant’s incapacity due to physical or
mental illness) or (ii) the Participant willfully engaging in conduct that demonstrably and materially injures
the Company or its Affiliates, monetarily or otherwise. “Willful” means the action is done or omitted in bad
faith or without reasonable belief that the action or omission was in the best interests of the Company.
“Good Reason” means, without the Participant’s express written consent (i) a reduction in annual target total
cash compensation (base salary and target bonus), (ii) the assignment of any duties inconsistent in any material
adverse respect with the Participant’s position, authority, duties or responsibilities, (iii) any other action by
the Company or an Affiliate which results in a material diminution in such position, authority, duties or
responsibilities; or (iv) the Company or an Affiliate requiring the Participant to relocate to a work location
50 miles or more from the location where the Participant was principally working immediately prior to the
Change in Control. The Participant must give notice within 90 days of any Good Reason event.
Good Reason only applies to Company employees who are at the time of termination of employment, or
were at any time during the 2 year period immediately preceding the Change in Control, covered by the
Xylem Special Senior Executive Pay Plan or the Xylem Enhanced Severance Pay Plan and will exclude an
isolated, insubstantial and inadvertent action not taken in bad faith that is resolved by the Company or an
Affiliate within 30 days of receiving notice.
(e) Effect of Termination of Employment. RSUs will only vest while the Participant is actively employed by
the Company or an Affiliate. If the Participant's active employment with the Company or an Affiliate is
terminated for any reason, and the termination constitutes a “separation from service” within the meaning of
Section 409A of the Code and any related regulations or other effective guidance promulgated thereunder
(“Section 409A”), subject to subsection 2(d), the following would apply to any unvested RSUs on the date
of the Participant’s termination of employment:
RSU Grant Agreement
Page 2 of 5
(i) Termination due to Death or Disability. Any unvested RSUs will immediately become 100% vested.
(ii) Termination due to Retirement. A prorated portion (as described below) of unvested RSUs with vesting
date within 12 months of termination shall immediately vest subject to the prior achievement of the
Section 162(m) Goal, if applicable to the Participant. All other unvested RSUs will automatically be
forfeited.
(iii) Termination other than Death, Disability and Retirement. Any unvested RSUs will automatically be
forfeited.
“Disability” means the complete and permanent inability of the Participant to perform all duties under the
terms of his or her employment, as determined by the Committee upon the basis of such evidence, including
independent medical reports and data, as the Committee deems appropriate or necessary.
“Retirement” means the termination of the Participant's employment (either by the Company or the
Participant), if, at the time of such termination, the Participant is at least age 55 and has completed 10 years
of service with the Company or the Participant is age 65 or older.
Prorated Vesting Upon Retirement. The prorated portion of the RSUs that vests upon the Participant’s
termination of employment due to the Participant's Retirement will be determined by multiplying the total
number of unvested RSUs with vesting date within 12 months of termination by a fraction, of which the
numerator is the number of full months the Participant has been continually employed since the most recent
Vest Period Start Date and the denominator is 12. For this purpose, full months of employment shall be based
on monthly anniversaries of the Vest Period Start Date, not calendar months.
(f) Tax Withholding. The Company may make such provisions and take such actions as it may deem necessary
for the withholding of all applicable taxes attributable to the RSUs and any related dividend equivalents.
Unless the Committee determines otherwise, the minimum statutory tax withholding required to be withheld
upon delivery of the shares (or such other amount that will not cause an adverse accounting consequence or
cost) and payment of dividend equivalents will be satisfied by withholding a number of shares having an
aggregate Fair Market Value equal to the minimum statutory tax required to be withheld (or such other amount
that will not cause an adverse accounting consequence or cost). If this withholding would result in a fractional
share being withheld, the number of shares withheld will be rounded up to the nearest whole share.
Notwithstanding the foregoing, the Participant may elect to satisfy these tax withholding requirements by
timely remitting this amount by cash or check or any other method that is acceptable to the Company, rather
than by withholding of shares. This election must be made in accordance with any conditions and restrictions
the Company may establish. If FICA taxes are required to be withheld while the RSUs are outstanding, the
withholding will be made in a manner determined by the Company.
(g) Participant Acknowledgements. The Participant acknowledges and agrees that:
(i) Participant Obligations. In partial consideration for the award of these RSUs, if at any time during the
period between the Grant Date and the 12-month period following the Participant’s termination of
Employment (the “Obligation Period”), the Participant: (i) directly or indirectly, hires or solicits or arranges
for the hiring or solicitation of any employee or customer of the Company or its Affiliates, or encourages
any employee to leave the Company; (ii) directly or indirectly, assist in soliciting in competition with the
Company the business of any current customer, distributor or dealer or other sales or distribution channel
partners of the Company; (iii) uses, discloses, misappropriates or transfers confidential or proprietary
information concerning the Company or its Affiliates (except as required by the Participant’s work
responsibilities with the Company or its Affiliates); or (iv) engages in any activity in violation of Company
policies, including the Company’s Code of Conduct, or engages in conduct materially adverse to the best
interests of the Company or its Affiliates; the RSUs, whether previously vested or not, may be cancelled
in full, and the Participant may be required to return to the Company any shares received on settlement
of vested RSUs or the net after-tax income from the disposition of any shares received upon settlement
of vested RSUs, unless the Committee, in its sole discretion, elects not to cancel the RSUs and/or elects
not to recover any income from settled RSUs or unless applicable law prohibits such action.
RSU Grant Agreement
Page 3 of 5
The obligations in this subsection are in addition to any other agreements related to non-solicitation and
preservation of Company confidential and proprietary information entered into between the Participant
and the Company, or otherwise applicable to the Participant, and nothing in this Agreement is intended
to waive, modify, alter or amend the terms of any such other agreement. THE PARTICIPANT
UNDERSTANDS THAT THIS SUBSECTION IS NOT INTENDED TO AND DOES NOT PROHIBIT
THE CONDUCT DESCRIBED, BUT PROVIDES FOR THE CANCELLATION OF THE AWARDS IN
FULL AND A RETURN TO THE COMPANY OF ANY SHARES RECEIVED UPON SETTLEMENT
OF VESTED RSUS OR THE NET AFTER-TAX INCOME FROM THE DISPOSITION OF ANY
SHARES RECEIVED UPON SETTLEMENT OF VESTED RSUS IF THE PARTICIPANT SHOULD
CHOOSE TO VIOLATE THIS SUBSECTION DURING THE OBLIGATION PERIOD. Nothing in this
Agreement prohibits the Participant from voluntarily communicating, without notice to or approval by
the Company, with any federal government agency about a potential violation of a federal law or regulation.
(ii) Electronic Delivery and Acceptance. The Participant consents to electronic delivery of any Plan
documents. The Participant consents to any and all procedures that the Company has established or may
establish for an electronic signature system for delivery and acceptance of Plan related documents. The
Participant agrees that his or her electronic signature is the same as, and will have the same force and
effect as, his or her manual signature. Participant agrees that these procedures and delivery may be effected
by a third party engaged by the Company to provide administrative services related to the Plan.
(iii) Right of Set-Off. If the Company in its reasonable judgment determines that the Participant owes the
Company any amount due to any loan, obligation or indebtedness, including amounts owed under the
Company’s tax equalization program or the Company’s policies with respect to travel and business
expenses, and the Participant has not satisfied these obligation(s), the Company may instruct the plan
administrator to withhold and/or sell shares acquired by the Participant on settlement of the RSUs (to the
extent such RSUs are not subject to Code Section 409A), or the Company may deduct funds equal to the
amount of the obligation from other funds due to the Participant from the Company to the maximum
extent permitted by Code Section 409A.
(iv) Data Privacy. Participant acknowledges and consents to the collection, use, processing and transfer of
personal data. Participant is not obliged to consent to such collection, use, processing and transfer of
personal data. However, failure to provide the consent may affect Participant’s ability to participate in
the Plan. The Company holds certain personal information about Participant, that may include his/her
name, home address and telephone number, date of birth, social security number or other employee
identification number, salary grade, hire data, salary, nationality, job title, or details of all options or
performance stock units or any other entitlement to shares of stock awarded, canceled, purchased, vested,
or unvested, for the purpose of managing and administering the Plan (“Data”). The Company and its
Affiliates will transfer Data amongst themselves as necessary for the purpose of implementation,
administration and management of Participant’s participation in the Plan, and the Company or its Affiliates
may each further transfer Data to any third parties assisting the Company with the implementation,
administration and management of the Plan. These recipients may be located throughout the world,
including the United States. The Participant authorizes them to receive, possess, use, retain and transfer
the Data, in electronic or other form, for the purposes of implementing, administering and managing
participation in the Plan, including any transfer of Data that may be required for the administration of the
Plan and/or the subsequent holding of shares of stock on Participant’s behalf to a broker or other third
party with whom Participant may elect to deposit any shares of stock acquired pursuant to the
Plan. Participant may, at any time, review Data, require any necessary amendments to it or withdraw this
consent in writing by contacting the Company; however, withdrawing consent may affect Participant’s
ability to participate in the Plan.
(v) Stock Ownership Guidelines. If the Participant is or becomes subject to the Company’s Stock Ownership
Guidelines and applicable retention requirements, the Participant may be limited in selling shares obtained
upon settlement of the RSUs.
(vi) Clawback Policy. If the Participant is covered by the Company’s Clawback Policy, the Participant agrees
that the RSUs are subject to the Policy and may be subject to recovery (in whole or in part) by the Company.
The Participant agrees that the Clawback Policy may be amended from time to time by the Committee,
RSU Grant Agreement
Page 4 of 5
including amendments to comply with applicable laws, regulations or stock exchange listing requirements.
(h) Section 409A Compliance. It is intended that the Plan and this Agreement comply with the requirements of
Section 409A to the extent applicable, and the Plan and this Agreement shall be interpreted accordingly.
(i) If it is determined that all or a portion of the Award constitutes deferred compensation for the purposes
of Section 409A, and if the Participant is a “specified employee,” as defined in Section 409A(a)(2)(B)(i)
of the Code, at the time of the Participant ’s separation from service, then, to the extent required under
Section 409A, any shares that would otherwise be distributed (along with the cash value of all dividend
equivalents that would be payable) upon the Participant ’s separation from service, shall instead be
delivered (and, in the case of the dividend equivalents, paid) on the earlier of (x) the first business day of
the seventh month following the date of the Participant ’s separation from service or (y) the Participant
’s death.
(ii) If it is determined that all or a portion of the Award constitutes deferred compensation for the purposes
of Section 409A, upon an Change in Control that does not constitute a “change in the ownership” or a
“change in the effective control” of the Company or a “change in the ownership of a substantial portion
of a corporation’s assets” (as those terms are used in Section 409A), the RSUs will vest at the time of the
Change in Control, but distribution of any RSUs (or related dividend equivalents) that constitute deferred
compensation for the purposes of Section 409A will not be accelerated (i.e., distribution will occur when
it would have occurred absent the Change in Control).
(i) Governing Law. This Agreement is issued and the RSUs are granted in Rye Brook, New York, and will be
governed and construed in accordance with the laws of the State of New York, excluding any conflicts or
choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to
the substantive law of another jurisdiction.
By signing a copy of this Agreement, the Participant acknowledges that s/he has received a copy of the Plan and that
s/he has read and understands the Plan and this Agreement and agrees to their terms and conditions.
Agreed to:
_____________________________
Participant
(Online Acceptance Constitutes Agreement)
Dated: _________________
Enclosures
XYLEM INC.
_____________________________
[Name of Xylem Signatory]
Dated: [Date]
RSU Grant Agreement
Page 5 of 5
XYLEM
2011 OMNIBUS INCENTIVE PLAN
[YEAR] PERFORMANCE SHARE UNIT AGREEMENT
EXHIBIT 10.9
This Agreement (the “Agreement”) between Xylem Inc. (the “Company”) and [Participant Name] (the
“Participant”) is effective as of [Grant Date]. Capitalized terms that are not defined in this Agreement are defined
in the Company’s 2011 Omnibus Incentive Plan (the “Plan”). This Agreement is only being provided in English. The
Participant is an employee of the Company or an Affiliate. In recognition of the Participant’s valued services, the
Company, through the Leadership Development and Compensation Committee of its Board of Directors (the
“Committee”), is providing the Participant an inducement to remain employed and an incentive for increased efforts
while employed. In consideration of the terms and conditions in this Agreement, the parties agree as follows:
1. Grant of Performance Share Units. The Company confirms the grant on [Grant Date] (the “Grant Date”) to
the Participant, the target number of [#,###] Performance Share Units (“PSUs”). All PSUs granted under this
agreement are intended to be Performance Based Awards. The PSUs are notional units of measurement
denominated in shares of common stock (i.e., one Performance Share Unit is equivalent in value to one share of
common stock of the Company).
The PSUs represent an unfunded, unsecured right to receive shares and dividend equivalent payments under
subsection 2(b) in the future if the conditions in the Plan and this Agreement are satisfied.
Nature of the Grant:
(a) The grant of the PSUs is voluntary and occasional and does not create any contractual or other right to receive
future grants of PSUs, or benefits in lieu of PSUs, even if PSUs have been granted in the past. All decisions
with respect to future PSUs or other grants, if any, will be at the sole discretion of the Company;
(b) The Participant is voluntarily participating in the Plan;
(c) The PSUs and the shares subject to the PSUs, are not part of normal or expected compensation for any
purpose, including for purposes of calculating any severance, resignation, termination, redundancy, dismissal,
end-of-service payments, bonuses, pension or retirement or welfare benefits or similar payments;
(d) Future value of the underlying shares is unknown, indeterminable and cannot be predicted with certainty;
(e) No claim or entitlement to compensation or damages will arise from forfeiture of the PSUs resulting from
the termination of the Participant's employment; and
(f) The Company will not be liable for any foreign exchange rate fluctuation between the Participant’s local
currency and the United States Dollar that may affect the value of the PSUs or of any amounts due to the
Participant pursuant to the settlement of the PSUs or the subsequent sale of any shares acquired upon
settlement.
2. Terms and Conditions. The PSUs are subject to the following additional terms and conditions:
(a) Restrictions. Except as otherwise provided in the Plan and this Agreement, the PSUs cannot be sold, assigned,
pledged, exchanged, transferred, hypothecated or encumbered, other than to the Company as a result of
forfeiture.
(b) Voting and Dividend Equivalent Rights. The Participant will not have any privileges of a stockholder of
the Company with respect to the PSUs, including without limitation any right to vote such shares or to receive
dividends, unless and until shares are delivered to the Participant on the vesting of the PSUs. Dividend
equivalents will be earned for each Performance Share Unit that vests and the amount will equal the total
dividends declared on a share, where the record date of the dividend is between the Grant Date of this Award
and the date a share is issued on vesting of the PSU. Any dividend equivalents earned will be paid in cash
PSU Grant Agreement
Page 1 of 6
to the Participant when the shares subject to the vested PSUs are issued. No dividend equivalents will be
earned or paid for any PSUs that do not vest. Dividend equivalents will not accrue interest.
(c) Earning of PSUs. The Participant can earn between 0% and 175% of the target number of PSUs granted
under this Agreement, based on the achievement of a 3-year average Xylem adjusted Return on Invested
Capital (“ROIC”) performance target and 3-year Xylem Total Shareholder Return (“TSR”) relative to
companies in the S&P 500 index (excluding Financial Services companies) pursuant to the performance
scales set forth on Exhibit A. For Band A executives, funding of the PSUs to be paid out is contingent on
achievement of a 3-year cumulative Adjusted Net Income performance target as approved by the Committee.
The Committee will determine and certify the results of the level of achievement of such targets and the
associated number of PSUs earned.
Vesting and Payment. Earned PSUs will vest on [Grant Date + 3 years] (the “Vesting Date”) if the
Participant has been actively employed by the Company or an Affiliate from the Grant Date through the
vesting date. Active employment does not include any potential severance period.
Except as provided in subsection 2(h), on vesting of the PSUs, including vesting pursuant to subsections 2
(d) or 2(e), the Company will deliver to the Participant (i) one share for each vested Performance Share Unit,
with any fractional shares resulting from proration pursuant to subsection 2(d) and 2(e) to be rounded to the
nearest whole share, and (ii) an amount in cash attributable to dividend equivalents earned in accordance
with subsection 2(b), less shares withheld in accordance with subsection 2(f).
(d) Effect of Change in Control. If the acquiring or surviving company in the transaction assumes or continues
the outstanding PSUs, any unvested PSUs will be deemed to have satisfied all applicable performance targets
at the target level, and will be converted to restricted stock units, which will continue to vest based on the
PSUs’ service-based vesting criteria, if any.
If the Participant’s active employment with the Company or an Affiliate is terminated by the Company or an
Affiliate without Cause or by the Participant for Good Reason (for applicable Participants only) within 2
years of a Change in Control, any converted and any unvested PSUs will become 100% vested at the target
level on the termination date.
If the acquiring or surviving company in the transaction does not assume or continue outstanding awards
under the Plan, immediately prior to the Change in Control, any unvested PSUs will become 100% vested
based on deemed performance at the target level.
“Cause” means (i) the Participant’s willful and continued failure to substantially perform his or her duties
with the Company (other than any such failure resulting from the Participant’s incapacity due to physical or
mental illness) or (ii) the Participant willfully engaging in conduct that demonstrably and materially injures
the Company or its Affiliates, monetarily or otherwise. “Willful” means the action is done or omitted in bad
faith or without reasonable belief that the action or omission was in the best interests of the Company.
“Good Reason” means, without the Participant’s express written consent (i) a reduction in annual target total
cash compensation (base salary and target bonus), (ii) the assignment of any duties inconsistent in any material
adverse respect with the Participant’s position, authority, duties or responsibilities, (iii) any other action by
the Company or an Affiliate which results in a material diminution in such position, authority, duties or
responsibilities; or (iv) the Company or an Affiliate requiring the Participant to relocate to a work location
50 miles or more from the location where the Participant was principally working immediately prior to the
Change in Control. The Participant must give notice within 90 days of any Good Reason event.
Good Reason only applies to Company employees who are at the time of termination of employment, or
were at any time during the 2 year period immediately preceding the Change in Control, covered by the
Xylem Special Senior Executive Pay Plan or the Xylem Enhanced Severance Pay Plan and will exclude an
isolated, insubstantial and inadvertent action not taken in bad faith that is resolved by the Company or an
Affiliate within 30 days of receiving notice.
(e) Effect of Termination of Employment. PSUs will only vest while the Participant is actively employed by
the Company or an Affiliate. If the Participant's active employment is terminated for any reason, and the
termination constitutes a “separation from service” within the meaning of Section 409A of the Code and any
PSU Grant Agreement
Page 2 of 6
related regulations or other effective guidance promulgated thereunder (“Section 409A”), subject to
subsection 2(d), the following would apply to any unvested PSUs:
(i) Termination due to Death, Disability, or Retirement. Any unvested PSUs continue to vest. A prorated
portion (as described below) of the unvested PSUs will be paid out on Vesting Date.
(ii) Termination other than Death, Disability, or Retirement. Any unvested PSUs will automatically be
forfeited.
“Disability” means the complete and permanent inability of the Participant to perform all duties under the
terms of his or her employment, as determined by the Committee upon the basis of such evidence, including
independent medical reports and data, as the Committee deems appropriate or necessary.
“Retirement” means the termination of the Participant's employment (either by the Company or the
Participant), if, at the time of such termination, the Participant is at least age 55 and has completed 10 years
of service with the Company or the Participant is age 65 or older.
Prorated Vesting. The prorated portion of the PSUs that vests on the Vesting Date following the
Participant's Death, Disability or Retirement (or while Retirement Eligible) will be determined by
multiplying the total number of PSUs the Participant would have earned based on actual performance by a
fraction, of which the numerator is the number of months the Participant had been continually employed
since the beginning of the performance cycle under his or her Death, Disability or Retirement and the
denominator is 36.
(f) Tax Withholding. The Company may make such provisions and take such actions as necessary for the
withholding of all applicable taxes attributable to the PSUs and any related dividend equivalents. Unless the
Committee determines otherwise, the minimum statutory tax withholding required to be withheld on delivery
of the shares (or such other amount that will not cause an adverse accounting consequence or cost) and payment
of dividend equivalents will be satisfied by withholding a number of shares having an aggregate Fair Market
Value equal to the minimum statutory tax required to be withheld (or such other amount that will not cause
an adverse accounting consequence or cost). If this withholding would result in a fractional share being
withheld, the number of shares withheld will be rounded up to the nearest whole share. Notwithstanding the
foregoing, the Participant may elect to satisfy these tax withholding requirements by timely remitting this
amount by cash or check or any other method that is acceptable to the Company, rather than by withholding
of shares. This election must be made in accordance with any conditions and restrictions the Company may
establish. If FICA taxes are required to be withheld while the PSUs are outstanding, the withholding will be
made in a manner determined by the Company.
(g) Participant Acknowledgements. The Participant acknowledges and agrees that:
(i) Participant Obligations. In partial consideration for the award of these PSUs, if at any time during the
period between the Grant Date and the 12-month period following the Participant’s termination of
Employment (the “Obligation Period”), the Participant: (i) directly or indirectly, hires or solicits or arranges
for the hiring or solicitation of any employee of the Company or its Affiliates, or encourages any employee
to leave the Company; (ii) directly or indirectly, assist in soliciting in competition with the Company the
business of any current customer, distributor or dealer or other sales or distribution channel partners of
the Company; (iii) uses, discloses, misappropriates or transfers confidential or proprietary information
concerning the Company or its Affiliates (except as required by the Participant’s work responsibilities
with the Company or its Affiliates); or (iv) engages in any activity in violation of Company policies,
including the Company’s Code of Conduct, or engages in conduct materially adverse to the best interests
of the Company or its Affiliates; the PSUs, whether previously vested or not, may be cancelled in full,
and the Participant may be required to return to the Company any shares received on settlement of vested
PSUs or the net after-tax income from any disposition of any shares received upon settlement of vested
PSUs, unless the Committee, in its sole discretion, elects not to cancel the PSUs and/or elects not to
recover any income from settled and vested PSUs or unless applicable law prohibits such action.
The obligations in this subsection are in addition to any other agreements related to non-solicitation and
preservation of Company confidential and proprietary information entered into between the Participant
and the Company, or otherwise applicable to the Participant, and nothing in this Agreement is intended
PSU Grant Agreement
Page 3 of 6
to waive, modify, alter or amend the terms of any such other agreement. THE PARTICIPANT
UNDERSTANDS THAT THIS SUBSECTION IS NOT INTENDED TO AND DOES NOT PROHIBIT
THE CONDUCT DESCRIBED, BUT PROVIDES FOR THE CANCELLATION OF THE AWARD IN
FULL AND A RETURN TO THE COMPANY OF ANY SHARES RECEIVED ON SETTLEMENT OF
VESTED PSUS OR THE NET AFTER-TAX INCOME FROM THE DISPOSITION OF ANY SHARES
RECEIVED UPON SETTLEMENT OF VESTED PSUS IF THE PARTICIPANT SHOULD CHOOSE
TO VIOLATE THIS PARAGRAPH DURING THE OBLIGATION PERIOD. Nothing in this Agreement
prohibits the Participant from voluntarily communicating, without notice to or approval by the Company,
with any federal government agency about a potential violation of a federal law or regulation.
(ii) Electronic Delivery and Acceptance. The Participant consents to electronic delivery of any Plan
documents. The Participant consents to any and all procedures that the Company has established or may
establish for an electronic signature system for delivery and acceptance of Plan related documents. The
Participant agrees that his or her electronic signature is the same as, and will have the same force and
effect as, his or her manual signature. Participant agrees that these procedures and delivery may be effected
by a third party engaged by the Company to provide administrative services related to the Plan.
(iii) Right of Set-Off. If the Company in its reasonable judgment determines that the Participant owes the
Company any amount due to any loan, obligation or indebtedness, including amounts owed under the
Company’s tax equalization program or the Company’s policies with respect to travel and business
expenses, and the Participant has not satisfied these obligation(s), the Company may instruct the plan
administrator to withhold and/or sell shares acquired by the Participant on settlement of the PSUs (to the
extent such PSUs are not subject to Code Section 409A), or the Company may deduct funds equal to the
amount of the obligation from other funds due to the Participant from the Company to the maximum
extent permitted by Code Section 409A.
(iv) Data Privacy. Participant acknowledges and consents to the collection, use, processing and transfer of
personal data. Participant is not obliged to consent to such collection, use, processing and transfer of
personal data. However, failure to provide the consent may affect Participant’s ability to participate in
the Plan. The Company holds certain personal information about Participant, that may include his/her
name, home address and telephone number, date of birth, social security number or other employee
identification number, salary grade, hire data, salary, nationality, job title, or details of all options or
performance stock units or any other entitlement to shares of stock awarded, canceled, purchased, vested,
or unvested, for the purpose of managing and administering the Plan (“Data”). The Company and its
Affiliates will transfer Data amongst themselves as necessary for the purpose of implementation,
administration and management of Participant’s participation in the Plan, and the Company or its Affiliates
may each further transfer Data to any third parties assisting the Company with the implementation,
administration and management of the Plan. These recipients may be located throughout the world,
including the United States. The Participant authorizes them to receive, possess, use, retain and transfer
the Data, in electronic or other form, for the purposes of implementing, administering and managing
participation in the Plan, including any transfer of Data that may be required for the administration of the
Plan and/or the subsequent holding of shares of stock on Participant’s behalf to a broker or other third
party with whom Participant may elect to deposit any shares of stock acquired pursuant to the
Plan. Participant may, at any time, review Data, require any necessary amendments to it or withdraw this
consent in writing by contacting the Company; however, withdrawing consent may affect Participant’s
ability to participate in the Plan.
(v) Stock Ownership Guidelines. If the Participant is or becomes subject to the Company’s Stock Ownership
Guidelines and applicable retention requirements, the Participant may be limited in selling shares obtained
upon settlement of the PSUs.
(vi) Clawback Policy. If the Participant is covered by the Company’s Clawback Policy, the Participant agrees
that the PSUs are subject to the Policy and may be subject to recovery (in whole or in part) by the Company.
The Participant agrees that the Clawback Policy may be amended from time to time by the Committee,
including amendments to comply with applicable laws, regulations or stock exchange listing requirements.
PSU Grant Agreement
Page 4 of 6
(h) Section 409A Compliance. It is intended that the Plan and this Agreement comply with the requirements of
Section 409A to the extent applicable and the Plan and this Agreement will be interpreted accordingly.
(i) If it is determined that all or a portion of the Award constitutes deferred compensation for the purposes
of Section 409A, and if the Participant is a “specified employee,” as defined in Section 409A(a)(2)(B)(i)
of the Code, at the time of the Participant’s separation from service, then, to the extent required under
Section 409A, any shares that would otherwise be distributed (along with the cash value of all dividend
equivalents that would be payable) on the Participant’s separation from service, will instead be delivered
(and, in the case of the dividend equivalents, paid) on the earlier of (x) the first business day of the seventh
month following the date of the Participant’s separation from service or (y) the Participant’s death.
(ii) If it is determined that all or a portion of the Award constitutes deferred compensation for the purposes
of Section 409A, upon an Change in Control that does not constitute a “change in the ownership” or a
“change in the effective control” of the Company or a “change in the ownership of a substantial portion
of a corporation’s assets” (as those terms are used in Section 409A), the PSUs will vest at the time of the
Change in Control, but distribution of any PSUs (or related dividend equivalents) that constitute deferred
compensation for the purposes of Section 409A will not be accelerated (i.e., distribution will occur when
it would have occurred absent the Change in Control).
(i) Governing Law. This Agreement is issued, and the PSUs are granted, in Rye Brook, New York, and will be
governed and construed in accordance with the laws of the State of New York, excluding any conflicts or
choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to
the substantive law of another jurisdiction.
By signing a copy of this Agreement, the Participant acknowledges that s/he has received a copy of the Plan and that
s/he has read and understands the Plan and this Agreement and agrees to their terms and conditions.
Agreed to:
XYLEM INC.
_____________________________
Participant
_____________________________
[Name of Xylem Signatory]
(Online Acceptance Constitutes Agreement)
Dated: _________________
Dated: [Date]
Enclosures
PSU Grant Agreement
Page 5 of 6
2016-2018 Performance Targets and Payout Scale
Exhibit A
The payout scale for performance metrics below provides for PSUs to be earned above 100% for above target
performance and below 100% for below target performance.
Adjusted ROIC (50%)
Maximum Payout
Above Plan
Plan/Target
Below Plan
Minimum Payout
ROIC 3-Year
Average %
x%
x%
x%
x%
x%
x%
x%
x%
x%
x%
x%
Payout %
x%
x%
x%
x%
x%
x%
x%
x%
x%
x%
0%
Maximum Payout
Relative TSR* (50%)
TSR 3-Year
%ile Rank
xth
xth
xth
xth
xth
xth
xth
xth
xth
xth
< xth
Payout %
x%
x%
x%
x%
x%
x%
x%
x%
x%
x%
0%
Plan/Target
Below Plan
Threshold
Below Threshold
Results are interpolated between threshold and the bottom end of the target range, and between the top end of
the target range and maximum.
For Band A executives, funding for the payout of the Performance Share Units is contingent on achievement of a 3-
year cumulative Adjusted Net Income** performance target as approved by the Committee.
*Measured against S&P 500 less Financial Services companies. Payout capped at target if Xylem’s 3-year TSR is negative.
**Adjusted Net Income is defined as Xylem US GAAP Net Income adjusted for items as identified in the February 2016 Potential
Adjustment Guidelines applicable to both AIP and LTIP.
PSU Grant Agreement
Page 6 of 6
Amended and Restated on February 24, 2016
XYLEM
SPECIAL SENIOR EXECUTIVE SEVERANCE PAY PLAN
EXHIBIT 10.15
1. Purpose
The purpose of this Xylem Special Senior Executive Severance Pay Plan (“Plan”) is to assist in occupational
transition by providing Severance Benefits for employees covered by this Plan whose employment is terminated under
conditions set forth in this Plan.
The Plan first became effective as of October 31, 2011 following the spin-off of Xylem Inc. from ITT Corporation
(the “Predecessor Corporation”) on October 31, 2011. The Predecessor Corporation maintained a similar plan prior
to the spin-off (the “Predecessor Plan”), and the Plan was created to continue service accruals under the Predecessor
Plan. The Plan will remain in effect as provided in Section 9 hereof, and covered employees will receive full credit for
their service and participation with the Predecessor Corporation as provided in Section 5 hereof.
2. Covered Employees
Covered employees under this Plan (“Executives”) are active full-time, regular salaried employees of Xylem Inc.,
(“Xylem”) and of any subsidiary company (“Xylem Subsidiary”) (collectively or individually as the context requires
“Company”; provided, however, that for purposes of service under the Predecessor Plan, Company will include the
Predecessor Corporation) (including Executives who are short term disabled as of a Potential Change in Control within
the meaning of the Company’s short term disability plans) (other than Executives on periodic severance as of a Potential
Change in Control) who are in Band A or B or were in Band A or B at any time within the two year period immediately
preceding a Change in Control and such other employees of the Company who will be designated as covered employees
in Band A or B under the Plan by the Leadership Development and Compensation Committee of Xylem’s Board of
Directors. Executives who are employed outside of the United States are eligible for country specific severance benefits
(only) if the country specific severance benefits are higher than the severance benefits listed below.
“Band A” will have the meaning given such terms under the executive classification system of the Xylem Human
Resources Department as in effect immediately preceding a Change in Control.
“Band B” for the purposes of this Agreement, will only include those executives who were Band B executives on
or before May 1, 2012 and who continue to be “Band B” executives under the executive classification system of the
Xylem Human Resources Department immediately preceding a Change in Control.
After the occurrence of a Change in Control, the terms “Xylem”, “Xylem Subsidiary” and “Company” as used
herein will also include, respectively and as the context requires, any successor company to Xylem or any successor
company to any Xylem Subsidiary and any affiliate of any such successor company.
3. Definitions
“Cause” means (i) the Executive’s willful and continued failure to substantially perform his or her duties with
the Company (other than any such failure resulting from the Executive’s incapacity due to physical or mental illness)
or (ii) the Executive willfully engaging in conduct that demonstrably and materially injures the Company or its
Affiliates, monetarily or otherwise. “Willful” means the action is done or omitted in bad faith or without reasonable
belief that the action or omission was in the best interests of the Company.
“Change in Control” means the occurrence of any of the following:
(i) a person or group (as defined in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or
a subsidiary of the Company or any employee benefit plan sponsored by the Company or a subsidiary)
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Act) of 30% or more of the
outstanding common stock of Xylem Inc. (the “Stock”);
(ii) any person or group (other than the Company or a subsidiary of the Company, or any employee benefit plan
sponsored by the Company or a subsidiary) purchases shares to acquire Stock (or securities convertible into
1
Stock) through a tender offer or exchange offer where after consummation of the offer, the person in
question will be the beneficial owner, directly or indirectly, of 30% or more of Stock;
(iii) the consummation of (A) any consolidation, business combination or merger involving the Company,
except where holders of Stock immediately prior to the consolidation, business combination or merger (x)
continue to hold 50% or more of the combined voting power of the Company (or the corporation resulting
from the merger or consolidation or the parent of such corporation) after the merger and (y) have the same
proportionate ownership of Stock of the Company (or the corporation resulting from the merger or
consolidation or the parent of such corporation), relative to other holders of Stock immediately after the
transaction as immediately before, or (B) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all the assets of the Company;
(iv) there is a change in a majority of the members of the Board of Directors of the Company within a 12-month
period unless the election or nomination by the Company’s stockholders of each new director during such
12-month period was approved by the vote of 2/3rds of the directors then still in office who (x) were
directors at the beginning of the 12-month period or (y) whose nomination or election as directors was
recommended or approved by a majority of the directors who were directors at the beginning of the 12-
month period; or
(v) approval by the Company’s shareholders of a plan of complete liquidation or dissolution of the Company,
other than a plan of liquidation or dissolution which results in the acquisition of all or substantially all of
the assets by an Affiliate of the Company.
“Code” means the Internal Revenue Code of 1986, as amended.
“Good Reason” means, without the Participant’s express written consent (i) a reduction in annual target total
cash compensation (base salary and target bonus), (ii) the assignment of any duties inconsistent in any material adverse
respect with the Executive’s position, authority, duties or responsibilities, (iii) any other action by the Company or an
Affiliate which results in a material diminution in such position, authority, duties or responsibilities; or (iv) the Company
or an Affiliate requiring the Executive to relocate to a work location 50 miles or more from the location where the
Executive was principally working immediately prior to the Change in Control. The Executive must give notice within
90 days of any Good Reason event.
Good Reason excludes an isolated, insubstantial and inadvertent action not taken in bad faith that is resolved by
the Company or an Affiliate within 30 days of receiving notice.
“Potential Change in Control” means any execution of an agreement, the commencement of a tender offer or
any other transaction or event that if consummated would result in a Change in Control.
4. Severance Benefits Upon Termination of Employment
If an Executive’s employment with the Company is terminated due to a Qualifying Termination, he or she will
receive the severance benefits set forth in Section 5 hereof (“Severance Benefits”). “Qualifying Termination” means
a termination of an Executive’s employment with the Company either;
(i) by the Company without Cause (A) within the two (2) year period commencing on the date of the occurrence
of a Change in Control or (B) prior to the occurrence of a Change in Control and either (1) following the public
announcement of the transaction or event which ultimately results in such Change in Control or (2) at the
request of a party to, or participant in, the transaction or event which ultimately results in a Change in Control;
or
(ii) by an Executive for Good Reason within the two (2) year period commencing with the date of the occurrence
of a Change in Control.
2
5. Severance Benefits
Band A Benefits
Severance Benefits for Executives (i) in Band A at the time of a Qualifying Termination or at any time during the
two (2) year period immediately preceding the Change in Control or (ii) designated as a covered employee in Band A
in accordance with Section 2 hereof:
A. Accrued Rights - The Executive’s base salary through the date of termination of employment, any annual
bonus earned but unpaid as of the date of termination for any previously completed fiscal year, reimbursement
for any unreimbursed business expenses properly incurred by the Executive in accordance with Company
policy prior to the date of the Executive’s termination of employment and such employee benefits, if any, as
to which the Executive may be entitled under the employee benefit plans of the Company, including without
limitation, the payment of any accrued or unused vacation under the Company’s vacation policy.
B. Severance Pay – The sum of:
(i)
three (3) times (for hire or promotion date prior to May 1, 2012) or two (2) times (for hire or promotion
date on or after May 1, 2012) the current annual base salary rate paid or in effect (whether or not deferred)
with respect to the Executive at the time of the Executive’s termination of employment, and
(ii) three (3) times (for hire or promotion date prior to May 1, 2012) or two (2) times (for hire or promotion
date on or after May 1, 2012) the most recent annual bonus paid to or earned (target annual bonus for
new hire without a full performance year) by the Executive (whether or not deferred) in respect of the
Company’s most recent completed fiscal year prior to the date of the Executive’s termination of
employment.
C. Benefits
(i) Continued health and life insurance benefits for a three (3) year period (for hire or promotion date prior
to May 1, 2012) or two (2) year period (for hire or promotion date on or after May 1, 2012) following the
Executive’s termination of employment at the same cost to the Executive, and at the same coverage levels,
as provided to the Executive (and the Executive’s eligible dependents) immediately prior to his or her
termination of employment. In the event the Company changes health and/or life insurance programs,
coverage levels, benefit providers and/or modifies benefit contributions, the Executive would be treated
consistent with other Band A executives. In the event continuation of health and/or life insurance is not
permissible, the Company may provide alternative benefits or payments as described under the subheading
“General” below.
(ii) Payment of a lump sum amount (“Savings Plan Lump Sum Amount”) equal to three (3) times (for hire
or promotion date prior to May 1, 2012) or two (2) times (for hire or promotion date on or after May 1,
2012) the following amount: the product of (x) the current annual base salary rate and annual bonus as
determined above as “Severance Pay” and (y) the current aggregate percentage used to determine company
contributions which the Executive would have been eligible for under the Xylem Retirement Savings
Plan and Xylem Supplemental Retirement Savings Plan (or corresponding savings plan arrangements
outside of the United States or any successor plans thereto) in respect of the plan year during which the
Executive’s termination of employment occurs.
D. Outplacement – Outplacement services for one (1) year.
3
Band B Benefits (only applicable to executives were Band B prior to May 1, 2012)
Severance Benefits for Executives (i) in Band B at the time of a Qualifying Termination or at any time during the
two (2) year period immediately preceding the Change in Control or (ii) designated as a covered employee in Band B
in accordance with Section 2 hereof; provided, that an Executive who is in Band B at the time of a Qualifying Termination
but was in Band A anytime during the two (2) year period immediately preceding the Change in Control will be entitled
to Severance Benefits as an Executive in Band A and will not be entitled to the Severance Benefits set forth below:
A. Accrued Rights - The Executive’s base salary through the date of termination of employment, any annual
bonus earned but unpaid as of the date of termination for any previously completed fiscal year, reimbursement
for any unreimbursed business expenses properly incurred by the Executive in accordance with Company
policy prior to the date of the Executive’s termination of employment and such employee benefits, if any, as
to which the Executive may be entitled under the employee benefit plans of the Company, including without
limitation, the payment of any accrued or unused vacation under the Company’s vacation policy.
B. Severance Pay – The sum of:
(i)
two (2) times the current annual base salary rate paid or in effect (whether or not deferred) with respect
to the Executive at the time of the Executive’s termination of employment, and
(ii) two (2) times the most recent annual bonus paid to or earned by the Executive (whether or not deferred)
in respect of the Company’s most recent completed fiscal year prior to the date of the Executive’s
termination of employment.
C. Benefits
(i) Continued health and life insurance benefits for a two (2) year period following the Executive’s termination
of employment at the same cost to the Executive, and at the same coverage levels, as provided to the
Executive (and the Executive’s eligible dependents) immediately prior to his or her termination of
employment. In the event the Company changes health and/or life insurance programs, coverage levels,
benefit providers and/or modifies benefit contributions, the Executive would be treated consistent with
other Band A executives. In the event continuation of health and/or insurance is not permissible, the
Company may provide alternative benefits or payments as described under the subheading “General”
below.
(ii) Payment of the Savings Plan Lump Sum Amount equal to two (2) times the following amount: the product
of (x) the current annual base salary rate and annual bonus as determined above as “Severance Pay” and
(y) the current aggregate percentage used to determine company contributions which the Executive would
have been eligible for under the Xylem Retirement Savings Plan and Xylem Supplemental Retirement
Savings Plan (or corresponding savings plan arrangements outside of the United States or any successor
plans thereto) in respect of the plan year during which the Executive’s termination of employment occurs.
D. Outplacement - Outplacement services for one year.
General
If, for any reason at any time the Company is unable to treat the Executive as being eligible for ongoing participation
in any Company employee benefit plans in existence immediately prior to the termination of employment of the
Executive, and if, as a result, the Executive does not receive a benefit or receives a reduced benefit, the Company will
provide such benefits by making available equivalent benefits from other sources or making cash payments providing
equivalent value (as reasonably determined in good faith by the Company) in a manner consistent with Section 15
below.
Notwithstanding any other provision of the Plan to the contrary, all prior service and participation by an Executive
with the Predecessor Corporation will be credited in full towards an Executive’s service and participation with the
Company.
4
6. Form of Payment of Severance Pay and Lump Sum Payments
Severance Pay and the Savings Plan Lump Sum Amount will be paid in cash within thirty (30) calendar days after
the date the employment of the Executive terminates. The timing of payments will be subject to Section 15, in all
respects.
7. Termination of Employment — Other
The Severance Benefits will only be payable upon an Executive’s termination of employment due to a Qualifying
Termination; provided, that if, following the occurrence of a Change in Control, an Executive is terminated due to the
Executive’s death or disability (as defined in the long-term disability plan that the Executive is entitled to participate
(whether or not the Executive voluntarily participates in such plan)) and, at the time of such termination, the Executive
had grounds to resign with Good Reason, such termination of employment will be deemed to be a Qualifying
Termination.
8. Administration of Plan
This Plan will be administered by the Company’s Human Resources Department, who will have the exclusive right
to interpret this Plan, adopt any rules and regulations for carrying out this Plan as may be appropriate and decide any
and all matters arising under this Plan, including but not limited to the right to determine appeals. Subject to applicable
Federal and state law, all interpretations and decisions by the Company will be final, conclusive and binding on all
parties affected thereby.
Notwithstanding the preceding paragraph, following a Change in Control, any controversy or claim arising out of
or relating to this Plan, or the breach thereof, will be settled by arbitration administered by the American Arbitration
Association under its Commercial Arbitration Rules and the entire cost thereof will be borne by the Company. The
location of the arbitration proceedings will be reasonably acceptable to the Executive. Judgment on the award rendered
by the arbitrator(s) may be entered in any court having jurisdiction thereof. The Company will pay all legal fees, costs
of litigation, prejudgment interest, and other expenses which are incurred in good faith by the Executive as a result of
the Company’s refusal to provide any of the Severance Benefits to which the Executive becomes entitled under this
Plan, or as a result of the Company’s (or any third party’s) contesting the validity, enforceability, or interpretation of
this Plan, or as a result of any conflict between the Executive and the Company pertaining to this Plan. The Company
will pay such fees and expenses from the general assets of the Company.
9. Termination or Amendment
Xylem may terminate or amend this Plan (“Plan Change”) at any time except that following the occurrence of (i)
Change in Control or (ii) a Potential Change in Control, no Plan Change that would adversely affect any Executive
may be made without the prior written consent of such Executive affected thereby; provided, however, that (ii) above
will cease to apply if such Potential Change in Control does not result in the occurrence of a Change in Control.
10. Offset
Any Severance Benefits provided to an Executive under this Plan will be offset in a manner consistent with Section
15 by reducing (x) any Severance Pay hereunder by any severance pay, salary continuation pay, termination pay or
similar pay or allowance and (y) any other Severance Benefits hereunder by corresponding employee benefits, or
outplacement services, which the Executive receives or is entitled to receive, (i) under the Xylem Senior Executive
Severance Pay Plan; (ii) pursuant to any other Company policy, practice, program or arrangement; (iii) pursuant to any
Company employment agreement or other agreement with the Company; or (iv) by virtue of any law, custom or practice
excluding, however, any unemployment compensation in the United States, unless the Executive voluntarily expressly
waives (which the Executive will have the exclusive right to do) in writing any such respective entitlement.
5
11. Excise Tax
If it is determined that any Payment would constitute an “excess parachute payment” within the meaning of Section
280G of the Code, the aggregate of all Payments will be reduced so that the Present Value of the aggregate of all
Payments does not exceed the Safe Harbor Amount; provided, however, that no such reduction will be effected if the
Net After-tax Benefit to the Executive of receiving all of the Payments exceeds the Net After-tax Benefit to the Executive
resulting from having such Payments so reduced. In the event a reduction is required pursuant hereto, the order of
reduction will be first all cash payments on a pro rata basis, then any equity compensation on a pro rata basis, and lastly
medical and dental coverage.
For purposes of this Section 11, the following terms have the following meanings:
(i) “Net After-tax Benefit” will mean the Present Value of a Payment net of all federal state and local income,
employment and excise taxes imposed on Executive with respect thereto, determined by applying the highest
marginal rate(s) applicable to an individual for the Executive’s taxable year that the Qualifying Termination
occurs.
(ii) “Payment” means any payment or distribution or provision of benefits by the Company to or for the benefit
of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Plan or
otherwise, but determined without regard to any reductions required by this Section 11.
(iii) “Present Value” will mean such value determined in accordance with Section 280G(d)(4) of the Code.
(iv) “Safe Harbor Amount” will be an amount expressed in Present Value which maximizes the aggregate Present
Value of Payments without causing any Payment to be subject to excise tax under Section 4999 of the Code
or the deduction limitation of Section 280G of the Code.
All determinations required to be made under this Section 11, including whether and when a reduction is required
and the amount of such reduction and the assumptions to be utilized in arriving at such determination, will be made by
a nationally recognized accounting firm mutually agreed to by the Executive and the Company (the “Accounting Firm”)
which will provide detailed supporting calculations both to the Company and the Executive within ten (10) business
days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by
the Company; provided that for purposes of determining the amount of any reduction, the Executive will be deemed
to pay federal income tax at the highest marginal rates applicable to individuals in the calendar year that any such
Qualifying Termination occurs.
All fees and expenses of the Accounting Firm will be borne solely by the Company. If the Accounting Firm
determines that no excise tax is payable by the Executive, it will so indicate to the Executive in writing. Any determination
by the Accounting Firm will be binding upon the Company and the Executive.
12. Miscellaneous
The Executive will not be entitled to any notice of termination or pay in lieu thereof.
Severance Benefits under this Plan are paid entirely by the Company from its general assets.
This Plan is not a contract of employment, does not guarantee the Executive employment for any specified period
and does not limit the right of the Company to terminate the employment of the Executive at any time.
If an Executive should die while any amount is still payable to the Executive hereunder had the Executive continued
to live, all such amounts will be paid in accordance with this Plan to the Executive’s designated heirs or, in the absence
of such designation, to the Executive’s estate.
The numbered section headings contained in this Plan are included solely for convenience of reference and will
not in any way affect the meaning of any provision of this Plan.
If, for any reason, any one or more of the provisions or part of a provision contained in this Plan will be held to
be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other
provision or part of a provision of this Plan not held so invalid, illegal or unenforceable, and each other provision or
part of a provision will to the full extent consistent with law remain in full force and effect.
6
The Plan will be governed by and construed in accordance with the laws of the State of New York without regard
to the conflicts of law provisions thereof.
The Plan will be binding on all successors and assigns of the Xylem Inc. and an Executive.
13. Notices
Any notice and all other communication provided for in this Plan will be in writing and will be deemed to have
been duly given when delivered by hand or overnight courier or three (3) days after it has been mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to
such other address as either party may have furnished to the other in writing in accordance herewith, except that notice
of change of address will be effective only upon receipt.
If to the Company:
Xylem Inc.
1 International Drive
Rye Brook, NY 10573
Attention: General Counsel
14. Adoption and Amendments
If to Executive:
To the most recent address of Executive
set forth in the personnel records of the
Company.
This Plan was initially adopted by Xylem Inc. on October 31, 2011 (the “Adoption Date”) and subsequently
amended on each of March 26, 2012, October 14, 2014 and February 24, 2016.
15. Section 409A
This Plan is intended to comply with Section 409A of the Code and will be interpreted in a manner intended to
comply with Section 409A of the Code. Notwithstanding anything herein to the contrary, (i) if at the time of the
Executive’s termination of employment with the Company the Executive is a “specified employee” as defined in Section
409A of the Code (and any related regulations or other pronouncements thereunder) and the deferral of the
commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment
is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, the Company will
defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such
payments or benefits ultimately paid or provided to the Executive) until the date that is the earlier of (a) the 1st day of
the 7th month following the Executive’s termination of employment with the Company and (b) the Executive’s death,
at which point all payments deferred pursuant to this Section 15 will be paid to the Executive in a lump sum and (ii) if
any other payments of money or other benefits due hereunder could cause the application of an accelerated or additional
tax under Section 409A of the Code, such payments or other benefits will be deferred if deferral will make such payment
or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits will be
restructured, to the extent possible, in a manner, determined by the Company, that does not cause such an accelerated
or additional tax. To the extent any reimbursements or in-kind benefits due under this Plan constitute “deferred
compensation” under Section 409A of the Code, any such reimbursements or in-kind benefits will be paid in a manner
consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv). Each payment made under this Plan will be designated as a
“separate payment” within the meaning of Section 409A of the Code. The Company will consult with Executives in
good faith regarding the implementation of the provisions of this Section; provided that neither the Company nor any
of its employees or representatives will have any liability to Executives with respect to this Section.
7
Amended and Restated on February 24, 2016
XYLEM
SENIOR EXECUTIVE SEVERANCE PAY PLAN
EXHIBIT 10.16
1. Purpose
The purpose of this Xylem Senior Executive Severance Pay Plan ("Plan") is to assist in occupational transition
by providing severance pay for employees covered by this Plan whose employment is terminated under the conditions
described in this Plan.
The Plan first became effective as of October 31, 2011 following the spin-off of Xylem Inc. from ITT Corporation
(the "Predecessor Corporation") on October 31, 2011. The Predecessor Corporation maintained a similar plan prior
to the spin-off (the "Predecessor Plan"), and the Plan will continue service accruals under the Predecessor Plan. The
Plan will remain in effect as provided in Section 11, and Executives will receive full credit for their service and
participation with the Predecessor Corporation as provided in Section 4.
2. Covered Employees
Covered employees under this Plan ("Executives") are full-time, regular salaried employees of Xylem Inc.
("Xylem") and of any subsidiary company ("Xylem Subsidiary") (collectively or individually as the context requires
the "Company") in Band A (Senior Vice Presidents and above to be further defined by the Company’s Leadership
Development and Compensation Committee) currently or at any time within the two (2) year period immediately
preceding the date the Company selects as the Executive's last day of active employment ("Scheduled Termination
Date"). Executives who are employed outside of the United States are eligible for country specific severance benefits
(only) if the country specific severance benefits are higher than the severance benefits listed below.
3. Severance Pay Upon Termination of Employment
If the Company terminates an Executive's employment, the Executive will be provided severance pay in accordance
with the terms of this Plan except where the Executive:
•
•
•
•
is terminated for Cause; “Cause” means (i) the Executive’s willful and continued failure to substantially
perform his or her duties with the Company (other than any such failure resulting from the Executive’s
incapacity due to physical or mental illness) or (ii) the Executive willfully engaging in conduct that
demonstrably and materially injures the Company or its Affiliates, monetarily or otherwise. “Willful” means
the action is done or omitted in bad faith or without reasonable belief that the action or omission was in the
best interests of the Company,
accepts employment or refuses comparable employment with a purchaser as provided in Section 7,
"Divestiture",
is terminated with a Scheduled Termination Date on or after the Executive's Normal Retirement Date as defined
herein, or
voluntarily terminates employment with the Company prior to the Scheduled Termination Date.
No severance pay will be provided under this Plan where the Executive terminates employment by:
•
•
voluntarily resigning or retiring, or
failing to return from an approved leave of absence (including a medical leave of absence).
No severance pay will be provided under this Plan on any termination of employment as a result of the Executive's
death or disability.
"Normal Retirement Date" means the first of the month that coincides with or follows the Executive's 65th
birthday.
1
4. Schedule of Severance Pay
The following Schedule of Severance Pay sets forth the months of Base Pay (“Severance Pay”) to be provided
based upon the Executive's Years of Service as of the Scheduled Termination Date (the “Severance Period”).
Years of Service
Less than 4
4
5
6
7
8
9
Months of Base Pay
12
13
14
15
16
17
18
Years of Service
10
11
12
13
14
15
More than 15
Months of Base Pay
19
20
21
22
23
24
24
"Base Pay" means the annual base salary rate payable or in effect with respect to the Executive at the Scheduled
Termination Date divided by twelve (12) months. Such annual base salary rate will in no event be less than the highest
annual base salary rate paid or in effect with respect to the Executive at any time during the twenty-four month (24)
period immediately preceding the Scheduled Termination Date.
"Years of Service" means the total number of completed years of employment since the Executive's Xylem system
service date to the Scheduled Termination Date, rounded to the nearest whole year; provided that, for the purposes of
"Years of Service," service will include years with the Predecessor Corporation. The Xylem system service date is the
date from which employment in the Xylem system is recognized for purposes of determining eligibility for vesting
under the applicable Company retirement plan covering the Executive on the Scheduled Termination Date; provided,
however, that for purposes of service under the Predecessor Plan, employment in the Predecessor Corporation's system
is recognized for purposes of determining eligibility for vesting under the applicable retirement plan covering the
Executive.
Notwithstanding the above Schedule of Severance Pay, (i) in no event will months of Base Pay provided to an
Executive exceed the number of months remaining between the Scheduled Termination Date and the Executive's Normal
Retirement Date or (ii) will severance pay exceed the equivalent of twice the Executive's total annual compensation
during the year immediately preceding the Scheduled Termination Date.
Notwithstanding any other provision of the Plan to the contrary, all prior service and participation by an Executive
with the Predecessor Corporation will be credited in full towards an Executive's service and participation with the
Company.
5. Form of Payment of Severance Pay
Severance Pay will be paid in the form of salary continuation or a lump sum as determined by the Company.
In the event of an Executive's death during the period the Executive is receiving Severance Pay, the amount of
severance pay remaining will be paid in a discounted lump sum to the Executive's spouse or to such other beneficiary
or beneficiaries designated by the Executive in writing, or, if the Executive is not married and failing such designation,
to the estate of the Executive. Any discounted lump sum paid under this Plan will be equal to the present value of the
remaining periodic payments of severance pay as determined by Xylem using an interest rate equal to the prime rate
at Citibank in effect on the date of the Executive's death.
If an Executive is receiving Severance Pay, the Executive must continue to be available to render to the Company
reasonable assistance, consistent with the level of the Executive's prior position with the Company, at times and locations
that are mutually acceptable. In requesting such services, the Company will take into account any other commitments
that the Executive may have. After the Scheduled Termination Date and normal wind up of the Executive's former
duties, the Executive will not be required to perform any regular services for the Company. In the event the Executive
secures other employment during the period the Executive is receiving Severance Pay, the Executive must promptly
notify the Company.
2
Severance Pay will cease if an Executive is rehired by the Company.
6. Benefits During Severance Period
During the Severance Period, the Executive will be eligible for continued health and life insurance benefits at the
same cost to the Executive, and at the same coverage levels, as provided to the Executive (and the Executive’s eligible
dependents) immediately prior to his or her termination. In the event the Company changes health and/or life insurance
programs, coverage levels, benefit providers and/or modified benefit contributions, the Executive would be treated
consistent with other Executives in the same Salary Band. If, for any reason, the Company is unable to treat the Executive
as being eligible for ongoing participation in any Company employee benefit plans in existence immediately prior to
the termination of employment of the Executive, and if, as a result thereof, the Executive does not receive a benefit or
receives a reduced benefit, the Company will provide such benefits by making available equivalent benefits from other
sources or making cash payments providing equivalent value (as reasonably determined in good faith by the Company)
in a manner consistent with Section 14 below. Except as provided in this Section, the executive will not be eligible for
any other benefit. An Executive will not be eligible to participate in any Company tax qualified retirement plans, non-
qualified excess or supplemental benefit plans, short-term or long-term disability plans, the Company business travel
accident plan or any new employee benefit plan or any improvement to any existing employee benefit plan adopted by
the Company after the Scheduled Termination Date.
7. Divestiture
If a Xylem subsidiary or division of Xylem where an Executive is employed is sold or divested and if (i) the
Executive accepts employment or continued employment with the purchaser or (ii) refuses employment or continued
employment with the purchaser on terms and conditions substantially comparable to those in effect immediately
preceding the sale or divestiture, the Executive will not be provided severance pay under this Plan. The provisions of
this Section apply to divestitures accomplished through sales of assets or through sales of corporate entities.
8. Disqualifying Conduct
In partial consideration for the severance pay contemplated by the Plan, if during the period an Executive is receiving
Severance Pay, the Executive (i) directly or indirectly, hires or solicits or arranges for the hiring or solicitation of any
employee or customer of the Company or its Affiliates, or encourages any employee to leave the Company; (ii) directly
or indirectly, assist in soliciting in competition with the Company the business of any current customer, distributor or
dealer or other sales or distribution channel partners of the Company; (iii) engages in, becomes affiliated with, or
becomes employed by any business competitive with the Company, without the Company’s prior written consent; (iv)
uses, discloses, misappropriates or transfers confidential or proprietary information concerning the Company or its
Affiliates (except as required by the Executive’s work responsibilities with the Company or its Affiliates); (iv) disparages
the Company; or (v) engages in any activity in violation of Company policies, including the Company’s Code of
Conduct, or engages in conduct materially adverse to the best interests of the Company or its Affiliates; the Company
will have no further obligation to provide severance pay.
The obligations in this Section are in addition to any other agreements related to non-competition, non-solicitation
and preservation of Company confidential and proprietary information entered into between the Executive and the
Company, or otherwise applicable to the Executive, and nothing in this Agreement is intended to waive, modify, alter
or amend the terms of any such other agreement. THE EXECUTIVE UNDERSTANDS THAT THIS PARAGRAPH
IS NOT INTENDED TO AND DOES NOT PROHIBIT THE CONDUCT DESCRIBED, BUT PROVIDES FOR THE
CESSATION OF SEVERANCE PAY IF THE EXECUTIVE SHOULD CHOOSE TO VIOLATE THIS PARAGRAPH
WHILE RECEIVING SEVERANCE PAY. Nothing in this Agreement prohibits the Executive from voluntarily
communicating, without notice to or approval by the Company, with any federal government agency about a potential
violation of a federal law or regulation.
3
9. Release
The Company will not be required to make or continue any severance payments under this Plan unless the Executive
executes and delivers to Xylem, within 45 days (or as specified in termination agreement for Executives who are
employed outside of the United States) following the Scheduled Termination Date, an irrevocable release, satisfactory
to Xylem, in which the Executive discharges and releases the Company and the Company's directors, officers, employees
and employee benefit plans from all claims (other than for benefits to which Executive is entitled under any Company
employee benefit plan) arising out of Executive's employment or termination of employment.
10. Administration of Plan
This Plan will be administered by the Company, who will have the exclusive right to interpret this Plan, adopt any
rules and regulations for carrying out this Plan as may be appropriate and decide any and all matters arising under this
Plan, including but not limited to the right to determine appeals. Subject to applicable Federal and state law, all
interpretations and decisions by the Company’s Chief Human Resources Officer or Chief Executive Officer will be
final, conclusive and binding on all parties.
11. Termination or Amendment
Xylem may terminate or amend this Plan ("Plan Change") at any time except that no Plan Change may reduce or
adversely affect severance pay for any Executive whose employment terminates within two years of the effective date
of the Plan Change provided that the Executive was a covered employee under this Plan on the date of the Plan Change.
12. Offset
Any severance pay provided to an Executive under this Plan will be offset in a manner consistent with Section 14
by reducing such severance pay by any severance pay, salary continuation, termination pay or similar pay or allowance
that the Executive receives or is entitled to receive (i) under any other Company plan, policy practice, program,
arrangement; (ii) pursuant to any employment agreement or other agreement with the Company; (iii) by virtue of any
law, custom or practice. Any severance pay provided to Executive under this Plan will also be offset by reducing such
severance pay by any severance pay, salary continuation pay, termination pay or similar pay or allowance received by
the Executive as a result of any prior termination of employment with the Company.
Coordination of severance pay with any pay or benefits provided by any applicable Xylem short-term or long-
term disability plan will be in accordance with the provisions of those plans.
13. Miscellaneous
Except as provided in this Plan, the Executive will not be entitled to any notice of termination or pay in lieu thereof,
unless statutorily required. In cases where severance pay is provided under this Plan, pay in lieu of any unused current
year vacation entitlement will be paid to the Executive in a lump sum. Benefits under this Plan are paid for entirely by
the Company from its general assets. This Plan is not a contract of employment, does not guarantee the Executive
employment for any specified period and does not limit the right of the Company to terminate the employment of the
Executive at any time. The section headings contained in this Plan are included solely for convenience of reference
and will not in any way affect the meaning of any provision of this Plan.
14. Adoption and Amendments
This Plan was initially adopted by Xylem Inc. on October 31, 2011 (the “Adoption Date”) and most recently
amended on February 24, 2016.
4
15. Section 409A
This Plan is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the
"Code") and will be interpreted in a manner intended to comply with Section 409A of the Code. Notwithstanding
anything herein to the contrary, (i) if at the time of the Executive's termination of employment with the Company the
Executive is a "specified employee" as defined in Section 409A of the Code (and any related regulations or other
pronouncements thereunder) and the deferral of the commencement of any payments or benefits otherwise payable
hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional
tax under Section 409A of the Code, the Company will defer the commencement of the payment of any such payments
or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to the Executive)
until a date that is the earlier of (a) the 1st day of the seventh month following the Executive's termination of employment
with the Company and (b) the Executive’s death, at which point all payments deferred pursuant to this Section will be
paid to the Executive in a lump sum and (ii) if any other payments of money or other benefits due hereunder could
cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits
will be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or
otherwise such payment or other benefits will be restructured, to the extent possible, in a manner, determined by the
Company, that does not cause such an accelerated or additional tax. To the extent any reimbursements or in-kind benefits
due under this Plan constitute "deferred compensation" under Section 409A of the Code, any such reimbursements or
in-kind benefits will be paid in a manner consistent with Treas. Reg. Section 1.409A-3(i)(l)(iv). Each payment made
under this Plan will be designated as a separate payment" within the meaning of Section 409A of the Code. The Company
will consult with Executives in good faith regarding the implementation of the provisions of this Section; provided that
neither the Company nor any of its employees or representatives will have any liability to Executives with respect to
the provisions of this Section.
5
Amended and Restated on February 24, 2016
XYLEM
ANNUAL INCENTIVE PLAN FOR EXECUTIVE OFFICERS
EXHIBIT 10.19
1.
Purpose
The purpose of this Xylem Annual Incentive Plan for Executive Officers (“AIP”) is to provide incentive
compensation in the form of a cash award to executive officers of Xylem Inc. (the “Company”) for achieving
specific pre-established performance objectives and to continue to motivate participating executive officers to
achieve their business goals, while tying a portion of their compensation to measures affecting shareholder value.
The AIP seeks to enable the Company to continue to be competitive in its ability to attract and retain executive
officers of the highest caliber. The AIP first became effective as of October 31, 2011.
It is intended that compensation payable under the AIP will qualify as “performance-based compensation,” within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and regulations
promulgated thereunder, if such qualification is desired. The Company’s shareholders most recently approved the
AIP for purposes of Section 162(m) of the Code on May 6, 2014.
2.
Plan Administration
The Leadership Development and Compensation Committee (the “Committee”) of the Board of Directors (the
“Board”) of the Company, as constituted by the Board from time to time, shall be comprised completely of “outside
directors” as defined under Section 162(m) of the Code.
The Committee shall have full power and authority to administer, construe and interpret the provisions of the AIP
and to adopt and amend administrative rules and regulations, agreements, guidelines and instruments for the
administration of the AIP and for the conduct of its business as the Committee considers appropriate.
Except with respect to matters which under Section 162(m) of the Code are required to be determined in the sole and
absolute discretion of the Committee, the Committee shall have full power, to the extent permitted by law, to
delegate its authority to any officer or employee of the Company to administer and interpret the procedural aspects
of the AIP, subject to the terms of the AIP, including adopting and enforcing rules to decide procedural and
administrative issues.
The Committee may rely on opinions, reports or statements of officers or employees of the Company and of counsel
to the Company (inside or retained counsel), public accountants and other professional or expert persons.
The Board reserves the right to amend or terminate the AIP in whole or in part at any time; provided, however, that
except as necessary to maintain an outstanding incentive award’s qualification as performance-based compensation
under Section 162(m) of the Code (“Performance-Based Compensation”), no amendments shall adversely affect
or impair the rights of any participant that have previously accrued hereunder, without the written consent of the
participant. Unless otherwise prohibited by applicable law, any amendment required to cause an incentive award to
qualify as Performance-Based Compensation may be made by the Committee. No amendment to the AIP may be
made to alter the class of individuals who are eligible to participate in the AIP, the performance criteria specified in
Section 4 hereof or the maximum incentive award payable to any participant without shareholder approval unless
shareholder approval of the amendment is not required in order for incentive awards paid to participants to constitute
Performance-Based Compensation.
No member of the Committee shall be liable for any action taken or omitted to be taken or for any determination
made by him or her in good faith with respect to the AIP, and the Company shall indemnify and hold harmless each
member of the Committee against any cost or expense (including counsel fees) or liability (including any sum paid
in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with
the administration or interpretation of the AIP, unless arising out of such person’s own fraud or bad faith.
1
3.
Eligible Executives
Executive officers of the Company and its subsidiaries, as defined by the Securities Exchange Act of 1934, Rule
3b-7, as that definition may be amended from time to time, shall be eligible to participate in the AIP. The Committee
shall select from all eligible executive officers, those to whom incentive awards shall be granted under the AIP.
4.
Plan Year, Performance Periods, Performance Measures and Performance Targets
Each fiscal year of the AIP (the “Plan Year”) shall begin on January 1 and end on December 31. The performance
period (the “Performance Period”) with respect to which incentive awards may be payable under the AIP shall be
the Plan Year unless the Committee designates one or more different Performance Periods.
The Committee shall establish the performance measures (the “Performance Measures”) to be used which may
include, one or more of the following criteria: (i) consolidated earnings before or after taxes (including earnings
before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per share;
(v) book value per share; (vi) return on shareholders’ equity; (vii) expense management; (viii) return on investment;
(ix) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) maintenance
or improvement of profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales (including organic
revenue); (xv) costs; (xvi) cash flow; (xvii) working capital (xviii) return on assets; (xix) total shareholder return;
(xx) return on invested or total capital and (xxi) economic value added.
In addition, to the extent consistent with Section 162(m) of the Code, Performance Measures may be based upon
other objectives such as negotiating transactions or sales, implementation of Company policy, development of long-
term business goals or strategic plans, negotiation of significant corporate transactions, meeting specified market
penetration goals, productivity measures, geographic business expansion goals, cost targets, customer satisfaction or
employee satisfaction goals, goals relating to merger synergies, management of employment practices and employee
benefits, or supervision of litigation and information technology, and goals relating to acquisitions or divestitures of
subsidiaries and/or other affiliates or joint ventures; provided however, that the measurement of any such
Performance Measures must be objectively determinable.
All Performance Measures shall be objectively determinable and, to the extent they are expressed in standard
accounting terms, shall be according to generally accepted accounting principles as in existence on the date on
which the applicable Performance Period is established and without regard to any changes in such principles after
such date (unless the modification of a Performance Measure to take into account such a change is pre-established in
writing at the time the Performance Measures are established in writing by the Committee and/or the modification
would not affect the ability of the incentive award to qualify as Performance-Based Compensation).
Notwithstanding the foregoing, incentive awards that are not intended to qualify as Performance-Based
Compensation may be based on the Performance Measures described above or such other measures as the
Committee may determine.
The Committee shall establish the performance targets (the “Performance Targets”) to be achieved which shall be
based on one or more Performance Measures relating to the Company as a whole or to the specific businesses of the
Company, subsidiaries, operating groups, or operating units, as determined by the Committee. Performance Targets
may be established on such terms as the Committee may determine, in its discretion, including in absolute terms, as
a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable
companies or an index covering multiple companies. The Committee also shall establish with respect to each
incentive award an objective formula to be used in calculating the amount of incentive award each participant shall
be eligible to receive. There may be a sliding scale of payment dependent upon the percentage levels of achievement
of Performance Targets.
The Performance Measures and Performance Targets, which may be different with respect to each participant and
each Performance Period, must be set forth in writing by the Committee within the first ninety (90) days of the
2
applicable Performance Period or, if sooner, prior to the time when 25 percent of the relevant Performance Period
has elapsed.
5.
Certification of Performance Targets and Calculation of Incentive Awards
After the end of each Performance Period, and prior to the payment for such Performance Period, the Committee
must certify in writing the degree to which the Performance Targets for the Performance Period were achieved,
including the specific target objective or objectives and the satisfaction of any other material terms of the incentive
award. The Committee shall calculate the amount of each participant’s incentive award for such Performance Period
based upon the Performance Measures and Performance Targets for such participant. In establishing Performance
Targets and Performance Measures and in calculating the degree of achievement thereof, the Committee may ignore
extraordinary items, property transactions, changes in accounting standards and losses or gains arising from
discontinued operations. The Committee shall have no authority or discretion to increase the amount of any
participant’s incentive award as so determined to the extent such incentive award is intended to qualify as
Performance-Based Compensation, but it may reduce the amount or totally eliminate any such incentive award if it
determines in its absolute and sole discretion that such action is appropriate in order to reflect the participant’s
performance or unanticipated factors during the Performance Period. The Committee shall have the authority to
increase or decrease the amount of an incentive award to the extent the incentive award is not intended to qualify as
Performance-Based Compensation.
The maximum payment that may be made with respect to incentive awards under the AIP to any participant in any
one calendar year shall be $8,000,000; provided, however, that this limitation shall not apply with respect to any
incentive award that is paid in a calendar year prior to the year it would ordinarily be paid because of a Change in
Control or other transaction or event that provides for accelerated payment of an incentive award.
6.
Payment of Awards
Approved incentive awards shall be payable by the Company in cash to each participant, or to the participant’s estate
in the event of the participant’s death, as soon as practicable (and in any event no later than 2 1/2 months) after the
end of each Performance Period. No incentive award that is intended to qualify as Performance-Based
Compensation may be paid under the AIP until the Committee has certified in writing that the relevant Performance
Targets were achieved. If a participant is not an employee on the last day of the Performance Period, the Committee
shall have sole discretion to determine what portion, if any, the participant shall be entitled to receive with respect to
any award for the Performance Period; provided, however, that other than in the case of a participant’s death,
disability or in connection with a Change in Control (as described in Section 8), any payment in respect of an award
shall be subject to the satisfaction of the applicable Performance Targets for the Performance Period. The Committee
shall have the authority to adopt appropriate rules and regulations for the administration of the AIP in such
termination cases.
Notwithstanding the above, no incentive awards shall be paid under the AIP unless the AIP is approved by the
requisite shareholders of the Company.
7. Other Terms and Conditions
Any award made under this AIP shall be subject to the discretion of the Committee. No person shall have any legal
claim to be granted an award under the AIP and the Committee shall have no obligation to treat participants
uniformly. Except as may be otherwise required by law, incentive awards under the AIP shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution,
or levy of any kind, either voluntary or involuntary. Incentive awards granted under the AIP shall be payable from
the general assets of the Company, and no participant shall have any claim with respect to any specific assets of the
Company.
3
Nothing contained in the AIP shall give any participant the right to continue in the employment of the Company or
affect the right of the Company to terminate the employment of a participant.
The Company retains the right to deduct from any incentive awards paid under the AIP any Federal, state, local or
foreign taxes required by law to be withheld with respect to such payment. In addition, if the Company in its
reasonable judgment determines that a participant owes the Company any amount due to any loan, obligation or
indebtedness, including amounts owed under the Company’s tax equalization program or the Company’s policies
with respect to travel and business expenses, and the Participant has not satisfied these obligation(s), the Company
may withhold and/or deduct funds equal to the amount of the obligation from payments under the AIP due to the
Company from the participant to the maximum extent permitted by Code Section 409A.
If the participant is covered by the Company’s Clawback Policy, as may be in effect from time to time, the Awards
granted under the AIP will be subject to the policy and may be subject to recovery (in whole or in part) by the
Company.
8.
(i)
“Change in Control” means the occurrence of any of the following:
a person or group (as defined in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a
subsidiary of the Company or any employee benefit plan sponsored by the Company or a subsidiary) becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Act) of 30% or more of the outstanding
common stock of Xylem Inc. (the “Stock”);
(ii) any person or group (other than the Company or a subsidiary of the Company, or any employee benefit plan
sponsored by the Company or a subsidiary) purchases shares to acquire Stock (or securities convertible into
Stock) through a tender offer or exchange offer where after consummation of the offer, the person in question
will be the beneficial owner, directly or indirectly, of 30% or more of Stock;
(iii) the consummation of (A) any consolidation, business combination or merger involving the Company, except
where holders of Stock immediately prior to the consolidation, business combination or merger (x) continue to
hold 50% or more of the combined voting power of the Company (or the corporation resulting from the merger
or consolidation or the parent of such corporation) after the merger and (y) have the same proportionate
ownership of Stock of the Company (or the corporation resulting from the merger or consolidation or the
parent of such corporation), relative to other holders of Stock immediately after the transaction as immediately
before, or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions)
of all or substantially all the assets of the Company;
(iv)
there is a change in a majority of the members of the Board of Directors of the Company within a 12-month
period unless the election or nomination by the Company’s stockholders of each new director during such 12-
month period was approved by the vote of 2/3rds of the directors then still in office who (x) were directors at
the beginning of the 12-month period or (y) whose nomination or election as directors was recommended or
approved by a majority of the directors who were directors at the beginning of the 12-month period; or
(v) approval by the Company’s shareholders of a plan of complete liquidation or dissolution of the Company,
other than a plan of liquidation or dissolution which results in the acquisition of all or substantially all of the
assets by an Affiliate of the Company.
Upon the occurrence of a Change in Control, the Performance Measures for each Performance Period with respect to
which incentive awards may be payable under the AIP shall be deemed to be achieved at the greater of (i) the
Performance Target established for such Performance Measures or (ii) the Company’s actual achievement of such
Performance Measures as of the Change in Control. Payment of the incentive awards, for the full year, will be made
to each participant, in cash, within five (5) business days following such Change in Control.
9. Governing Law.
This AIP will be construed and governed in accordance with the laws of the State of New York.
4
DIRECTOR’S INDEMNIFICATION AGREEMENT
EXHIBIT 10.20
THIS AGREEMENT is made as of ________________ between Xylem Inc., an
Indiana corporation (the “Corporation”), and ______________(the “Indemnitee”).
WITNESSETH THAT:
WHEREAS, it is in the Corporation’s best interest to attract and retain capable
directors;
WHEREAS, both the Corporation and the Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors of public corporations in today’s
environment;
WHEREAS, it is now and has always been the policy of the Corporation to
indemnify the members of its Board of Directors so as to provide them with the maximum
possible protection available in accordance with applicable law;
WHEREAS, Article 4 of the Corporation’s Amended and Restated By-laws (“By-
laws”) and applicable law expressly recognize that the right of indemnification provided therein
shall not be exclusive of any other rights to which any indemnified person may otherwise be
entitled; and
WHEREAS, the Corporation’s By-laws, its Amended and Restated Articles of
Incorporation (“Articles of Incorporation”) and applicable law permit contracts between the
Corporation and the members of its Board of Directors covering indemnification;
NOW, THEREFORE, the parties hereto agree as follows:
1.
Indemnity. In consideration of the Indemnitee’s agreement to serve or
continue to serve as a Director of the Corporation, or, at the request of the Corporation, as a
director, officer, employee, fiduciary or agent of another corporation, partnership, limited
liability company, joint venture, trust or other enterprise, whether for profit or not, and including,
without limitation, any employee benefit plan (a “Designated Director”), if Indemnitee was or is
made or is threatened to be made a party to, or is otherwise involved in, as a witness or
otherwise, any threatened, pending or completed investigation, claim, action, suit, arbitration,
alternate dispute resolution mechanism or proceeding (brought in the right of the Corporation or
otherwise), whether civil, criminal, administrative, investigative (including, without limitation,
any internal corporate investigation) or otherwise, whether formal or informal, and including all
appeals thereto (a “Proceeding”), the Corporation hereby agrees to hold the Indemnitee harmless
and to indemnify the Indemnitee to the fullest extent now or hereafter permitted by applicable
law from and against any and all expenses (which term shall be broadly construed and include,
without limitation, all direct and indirect costs of any type or nature whatsoever (including,
without limitation, all attorneys’ fees and related disbursements, appeal bonds, and other out-of-
pocket costs) (“Expenses”), judgments, fines, amounts paid in settlement (with such judgments,
2
fines or amounts including, without limitation, all direct and indirect payments of any type or
nature whatsoever, as well as any penalties or excise taxes assessed on a person with respect to
an employee benefit plan), liabilities or losses actually and reasonably incurred by the
Indemnitee by reason of the fact such person is or was a Director of the Corporation or a
Designated Director, or by reason of any actual or alleged action or omission to act taken or
omitted in any such capacity. Notwithstanding any other provision of this Agreement, no
indemnification shall be paid to the Indemnitee with respect to a Proceeding, or part thereof,
commenced voluntarily by the Indemnitee (including claims and counterclaims, whether such
counterclaims are asserted by the Indemnitee, or the Corporation in a Proceeding commenced by
the Indemnitee), except a Proceeding pursuant to Section 9 hereof to enforce or interpret this
Agreement or a Proceeding commencing or continuing after a change in control (as defined in
the By-laws), unless the Board of Directors of the Corporation determines that indemnification is
appropriate.
2.
Maintenance of Insurance. (a) Subject only to the provisions of Section 2
(c) hereof, the Corporation hereby agrees that, so long as the Indemnitee shall continue to serve
as a Director of the Corporation, and thereafter so long as the Indemnitee shall be entitled to
indemnification hereunder, the Corporation will provide insurance coverage comparable to that
presently provided and at least as favorable to Indemnitee as the insurance coverage provided to
any other director or officer of the Corporation under the Corporation’s Directors’ and Officers’
Liability Insurance policies (the “insurance policies”) in effect at the date hereof.
(b)
At the time the Corporation receives notice from Indemnitee, or is
otherwise aware, of a Proceeding, the Corporation shall give prompt notice to the insurers in
accordance with the procedures set forth in the insurance policies. The Corporation shall
thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of
such insurance policy.
(c)
However, the Corporation shall not be required to maintain all or any of
such insurance policies or comparable insurance coverage if, in the business judgment of the
Board of Directors of the Corporation, (i) the premium cost for such insurance is substantially
disproportionate to the amount of coverage, or (ii) the coverage provided by such insurance is so
limited by exclusions that there is insufficient benefit from such insurance or (iii) such insurance
is otherwise not reasonably available.
(d)
In the event of any payment by the Corporation under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee with respect to any insurance policy. Indemnitee shall execute all papers required
and take all action necessary to secure such rights, including execution of such documents as are
necessary to enable the Corporation to bring suit to enforce such rights in accordance with the
terms of such insurance policy. The Corporation shall pay or reimburse all expenses actually and
reasonably incurred by Indemnitee in connection with such subrogation.
(e)
The Corporation shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has
3
otherwise actually received such payment under this Agreement or any insurance policy,
contract, agreement or otherwise.
3.
Additional Indemnity. Subject only to the exclusions set forth in Section 4
hereof, the Corporation hereby further agrees to hold harmless and indemnify the Indemnitee:
(a)
as in effect at the date hereof; and
to the fullest extent provided under Article 4 of the Corporation’s By-laws
(b)
to the extent permitted by applicable law, in the event the Corporation
does not maintain in effect the insurance coverage provided under Section 2 hereof, to the fullest
extent of the coverage which would otherwise have been provided for the benefit of the
Indemnitee pursuant to the insurance policies in effect at the date hereof.
4.
Limitations on Additional Indemnity. No indemnity pursuant to Section 3
hereof shall be paid by the Corporation:
(a)
except to the extent the aggregate of losses to be indemnified thereunder
exceed the amount of such losses for which the Indemnitee is indemnified or insured pursuant to
either Section 1 or 2 hereof;
(b)
for any conduct that was not in good faith and (i) in the case of conduct in
the Indemnitee’s official capacity with the Corporation, in a manner he or she reasonably
believed to be in the best interests of the Corporation, (ii) in all other cases, that the Indemnitee
reasonably believed his or her conducts conduct was at least not opposed to the Corporation’s
best interests and (iii) in the case of any criminal proceeding, the Indemnitee had reasonable
cause to believe his or her conduct was lawful or had no reasonable cause to believe that his or
her conduct was unlawful; or
(c)
in respect of acts or omissions which involve intentional misconduct or a
knowing violation of law by the Indemnitee.
5.
Continuation of Indemnity. All agreements and obligations of the
Corporation contained herein shall continue during the period the Indemnitee is a Director of the
Corporation and shall continue thereafter so long as the Indemnitee may be made or threatened
to be made a party to, or be otherwise involved in, as a witness or otherwise, any Proceeding, by
reason of the fact that the Indemnitee was a Director of the Corporation or a Designated Director,
or by reason of any action alleged to have been taken or omitted in any such capacity.
6.
Notification and Defense of Claim.
(a)
Promptly after receipt by the Indemnitee of notice of the commencement
of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Secretary of the Corporation in writing of the
commencement thereof and shall provide the Secretary with such documentation and
information as is reasonably available to Indemnitee and reasonably necessary to determine
4
whether and to what extent the Indemnitee is entitled to indemnification; but an omission to so
promptly notify the Corporation will not relieve it from any liability which it may have to the
Indemnitee (i) under this Agreement, except to the extent the Corporation is actually and
materially prejudiced in its defense of such Proceeding or (ii) otherwise than under this
Agreement, including, without limitation, its liability to indemnify the Indemnitee under the
Corporation’s By-laws.
(b) With respect to any such Proceeding:
(1)
the Corporation shall be entitled to participate therein at its own expense;
(2)
except as otherwise provided below, to the extent that it may wish, the
Corporation jointly with any other indemnifying party shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the
Indemnitee. After notice from the Corporation to the Indemnitee of its
election so to assume the defense thereof and approval by the Indemnitee
of such counsel (which approval shall not be unreasonably withheld), the
Corporation will not be liable to the Indemnitee under this Agreement for
any legal or other expenses subsequently incurred by the Indemnitee for
separate counsel in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. The
Indemnitee shall have the right to employ its counsel in such Proceeding
but the fees and expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof shall be at the
expense of the Indemnitee unless (i) the employment of such counsel by
the Indemnitee has been authorized by the Corporation, (ii) the Indemnitee
shall have reasonably concluded (with written notice to the Corporation
setting forth the basis for such conclusion) that there may be a conflict of
interest between the Corporation and the Indemnitee in the conduct of the
defense of such Proceeding, or (iii) the Corporation shall not in fact have
employed counsel to assume the defense of such Proceeding, in each of
which cases the fees and expenses of counsel shall be at the expense of the
Corporation. The Corporation shall not be entitled to assume the defense
of any Proceeding brought by or on behalf of the Corporation or as to
which the Indemnitee shall have made the conclusion provided for in (ii)
above; and
(3)
the Corporation shall not be liable to indemnify the Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding effected
without the Corporation’s written consent. The Corporation shall not
settle any Proceeding in any manner that would impose any penalty,
obligation or limitation on the Indemnitee without the Indemnitee’s
written consent. Neither the Corporation nor the Indemnitee will
unreasonably withhold their consent to any proposed settlement.
5
(c)
Except as otherwise required by applicable law, the determination of the
Indemnitee’s entitlement to indemnification shall be made pursuant to and in accordance with the
procedures set forth in the By-Laws in effect as of the date hereof, or any such procedures that
may be more favorable to the Indemnitee that are set forth in the By-Laws in effect on the date
Indemnitee provides the Secretary notice of the request for indemnification.
7.
Advancement and Repayment of Expenses. Upon receipt by the
Corporation of a statement from the Indemnitee requesting advancement or repayment of any
Expenses incurred in connection with any Proceeding involving the Indemnitee, all such
Expenses shall be paid promptly (and in any event within twenty (20) days of receipt of such
statement, which statement shall reasonably evidence the Expenses incurred or to be incurred) by
the Corporation in advance of the final disposition of such Proceeding. The Indemnitee agrees
that the Indemnitee will reimburse (without interest) the Corporation for all reasonable Expenses
advanced, paid or incurred by the Corporation on behalf of the Indemnitee in respect of a claim
against the Corporation under this Agreement in the event and only to the extent that it shall be
ultimately and finally determined that the Indemnitee is not entitled to be indemnified by the
Corporation for such Expenses under the provisions of applicable law, the Corporation’s Articles
of Incorporation or By-laws, this Agreement or otherwise. The Corporation’s obligations to
advance Expenses under this Section 7 shall not be subject to any conditions or requirements not
contained in this Section. Notwithstanding any other provision of this Agreement, no
advancement or repayment of Expenses shall be made to the Indemnitee with respect to a
Proceeding, or part thereof, commenced voluntarily by the Indemnitee (including claims and
counterclaims, whether such counterclaims are asserted by the Indemnitee, or the Corporation in
a Proceeding commenced by the Indemnitee), except a Proceeding pursuant to Section 9 hereof
to enforce or interpret this Agreement or a Proceeding commencing or continuing after a change
in control (as defined in the By-laws), unless the Board of Directors of the Corporation
determines that advancement or repayment is appropriate.
8.
Nonexclusivity. The provisions for indemnification and advancement and
reimbursement of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which Indemnitee may have under any provision of law, in any court in which a
proceeding is brought, the Corporation’s Articles of Incorporation or By-laws, other agreements
or otherwise, and Indemnitee’s rights hereunder shall inure to the benefit of the heirs, executors
and administrators of Indemnitee. No amendment or alteration of the Corporation’s Articles of
Incorporation or By-laws or another agreement shall adversely affect the rights provided to
Indemnitee under this Agreement. To the extent that a change in Indiana or other law, whether by
statute or judicial decision, permits greater indemnification or payment than would be afforded
currently under the Corporation’s Articles of Incorporation, By-laws or this Agreement, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change.
9.
Enforcement. If a claim under this Agreement is not paid in full by the
Corporation within 60 days after a written request for indemnification has been received by the
Corporation or within 20 days after a written request for advance for reasonable expenses
incurred has been received by the Corporation, the Indemnitee may at any time thereafter seek an
6
adjudication of his or her entitlement to payment in accordance with the procedures specified in
the By-Laws to recover the unpaid amount of the claim and, if successful in whole or in part, the
Indemnitee shall also be entitled to be indemnified for all expenses actually and reasonably
incurred by the Indemnitee in connection with the prosecution of such claim. Nothing in this
Section 9 is intended to limit the Corporation’s obligations with respect to the advancement or
repayment of expenses to Indemnitee in connection with any such Proceeding instituted by
Indemnitee to enforce or interpret this Agreement.
10.
Severability. If any provision of this Agreement shall be held to be or
shall, in fact, be invalid, inoperative or unenforceable as applied to any particular case or in any
particular jurisdiction, for any reason, such circumstances shall not have the effect of rendering
the provision in question invalid, inoperative or unenforceable in any other distinguishable case
or jurisdiction, or of rendering any other provision or provisions herein contained invalid,
inoperative or unenforceable to any extent whatsoever. The invalidity, inoperability or
unenforceability of any one or more phrases, sentences, clauses or Sections contained in this
Agreement shall not affect any other remaining part of this Agreement.
11.
Governing Law; Binding Effect; Amendment or Termination (a) This
Agreement shall be governed by and interpreted in accordance with the laws of the State of
Indiana.
(b)
This Agreement shall be binding upon the Indemnitee and upon the
Corporation and its successors and assigns, and shall inure to the benefit of the Indemnitee and
his or her heirs, personal representatives, executors and administrators, and to the benefit of the
Corporation and its successors and assigns.
(c)
This Agreement shall supersede and replace any prior indemnification
agreements entered into by and between the Corporation and the Indemnitee and any such prior
agreements shall be terminated upon execution of this Agreement.
(d)
No amendment, modification, termination or cancellation of this
Agreement shall be effective unless in writing signed by both parties hereto.
[Signature Page Follows]
7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
Corporation
XYLEM INC.
By:
Name:
Title:
Indemnitee
EXHIBIT 10.26
To the Borrower 1:
Xylem Holdings S.à r.l
11, Breedewues, L-1259 Senningerberg
Attention: Board of Managers
To the Borrower 2:
Xylem International S.à r.l.
11, Breedewues, L-1259 Senningerberg
Attention: Board of Managers
To the Guarantor:
Xylem Inc
1 International Drive,
Rye Brook, NY 10573, USA
Attention: General Counsel
DHL
Luxembourg, 3rd December 2015
JUOPS/MB/CAJ/jw/2015-3602
Subject:
XYLEM WATER TECHNOLOGIES (RSFF) (Serapis Nº 2012-0216, FI N° 81.921)
Finance contract between the European Investment Bank (the “Bank”) and Xylem
Holdings S.a.r.l. (as “Borrower 1”) and Xylem International S.a.r.l. (as “Borrower 2”)
and Xylem Inc. (as “Guarantor”), dated 14 December 2012 and as first amended and
restated on 4 December 2013 and as amended on 28 June 2014 and 20 April 2015 (the
“Finance Contract”).
(Borrower 1, Borrower 2 and the Guarantor, collectively the “Parties”.)
Amendment
Dear Sirs,
Reference is made to your request to extend by a further 3.6 months the Final Availabilty Date.
Unless otherwise defined in this letter, defined terms used in the Finance Contract shall have the same
meaning when used herein.
1. Amendments
The Bank and the Parties agree that the definition of the Final Availability Date in the Finance
Contract shall be amended to be 31 March 2016.
1
2. Governing law
Articles 11.01 and 11.02 of the Finance Contract shall apply to this letter, mutatis mutandis, as
if they were set out herein.
In order to indicate your agreement to the above, we kindly request you to initial each page of the five
originals of this Letter (other than the signatory page) and to date and duly sign each of the five originals.
Please return to us two originals at your earliest convenience, including evidence of authorisation of the
signatories of the Parties to sign and execute this letter. You may each retain one original for your records.
Yours faithfully,
EUROPEAN INVESTMENT BANK
Elina Kamenitzer Hanna Karczewska
Head of Division Head of Division
Agreed and accepted for and on behalf of:
Xylem Holdings S.à r.l. (as Borrower 1)
Name: Samir Patel
Title: Manager
Date: 8/12/2015
Danielle Kolbach
Manager
14/12/2015
Agreed and accepted for and on behalf of:
Xylem International S.à r.l. (as Borrower 2)
Name: Samir Patel
Title: Manager
Date: 8/12/2015
Danielle Kolbach
Manager
14/12/2015
Agreed and accepted for and on behalf of:
Xylem Inc. (as Guarantor)
Name: Samir Patel
Title: VP - Treasuer
Date: 8/12/2015
2
Ratio of Earnings to Fixed Charges
EXHIBIT 12
Years Ended December 31,
2015
2014
2013
2012
2011(a)
(In Millions Except Ratios)
Fixed Charges:
Interest Expense, Including Amortization of Deferred Finance
Fees
$
55 $
54 $
55 $
55 $
17
Interest Portion of Rental Expense (b)
Total Fixed Charges
19
74
24
78
25
80
24
79
21
38
Earnings Before Income Taxes, Discontinued Operations and
Fixed Charges:
Pre-tax income (before income or loss from equity investees)
403
421
298
388
379
Fixed Charges
74
78
80
79
38
Total Earnings Available For Fixed Charges
$ 477 $ 499 $ 378 $ 467 $ 417
Ratio of Earnings to Fixed Charges:
6.4
6.4
4.7
5.9
10.9
(a) This period includes 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
Aanderaa Data Instruments AS
Anadolu Flygt Pompa Pazarlama Ve Ticaret AS
ASE AS
Bellingham & Stanley Ltd.
Bombas Flygt de Venezuela S.A.
CMS Research Corporation
Dabbrook Services Limited
Evolutionary Concepts, Inc.
Faradyne Motors (Suzhou) Co. Ltd.
Flow Control LLC
Flowtronex PSI, LLC
Fluid Handling, LLC
Godwin Holdings Ltd.
Goulds Water Technology Philippines, Inc
Grindex AB
Grindex Pumps LLC
IMT B.V.
IMT Holding B.V.
IMT Lighting (UK) Ltd.
IMT Far East Pte. Ltd.
IMT Deutschland GmbH
Jabsco Marine Italia s.r.l.
Jabsco S. de R.L. De C.V.
Lowara s.r.l.
Lowara Vogel Polska SP ZOO
MultiTrode Inc.
Multitrode Pty Ltd
Multitrode UK Limited
Nova Analytics Europe LLC
O.I. Corporation
PCI Membrane Systems, Inc.
Pension Trustee Management Ltd
Portacel Inc.
Sensortechnik Meinsberg GmbH
SI Analytics GmbH
Texas Turbine LLC
Tideland Signal Canada Ltd.
Tideland Signal Coöperatief U.A.
Tideland Signal Corporation
Tideland Signal EMEA BV
Tideland Signal Limited
Jurisdiction of
Organization
Norway
Turkey
Norway
England & Wales
Venezuela
Alabama
England & Wales
California
China
Delaware
Nevada
Delaware
England & Wales
Philippines
Sweden
Delaware
Netherlands
Netherlands
England and Wales
Singapore
Germany
Italy
Mexico
Italy
Poland
Florida
Australia
England & Wales
Delaware
Oklahoma
Delaware
England & Wales
Pennsylvania
Germany
Germany
Delaware
Canada
Netherlands
Texas
Netherlands
England and Wales
Name Under Which Doing
Business
Lowara
OI Analytical
Xylem Texas Turbine LLC
*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
Godwin Pumps of America
Name
Tideland Signal Pte. Ltd.
Tideland Signal, LLC
Water Asset Management, Inc.
Water Company Ltd
Water Process Limited
Wissenschaftlich Technische Werkstaetten GmbH
Xylem (China) Company Limited
Xylem (Hong Kong) Limited
Xylem (Nanjing) Co., Ltd
Xylem Analytics Australia Pty Ltd.
Xylem Analytics France S.A.S.
Xylem Analytics Germany GmbH
Xylem Analytics LLC
Xylem Analytics UK LTD
Xylem ATI,LLC
Xylem Australia Holdings PTY LTD
Xylem Brasil Soluções para Água Ltda
Xylem Canada Company
Xylem Delaware, Inc.
Xylem Denmark Holdings ApS
Xylem Dewatering Solutions UK Ltd
Xylem Dewatering Solutions, Inc.
Xylem Europe GmbH
Xylem Financing S.a.r.l
Xylem Germany GmbH
Xylem Global S.a.r.l
Xylem Holdings S.a.r.l.
Xylem Industriebeteiligungen GmbH
Xylem Industries S.a.r.l.
Xylem International S.a.r.l.
Xylem IP Center S.a.r.l.
Xylem IP Holdings LLC
Xylem IP Management S.a.r.l
Xylem IP Management UK LP
Xylem IP UK S.a.r.l.
Xylem Lowara Limited
Xylem Luxembourg S.a r.l.
Xylem Management GmbH
Xylem Manufacturing Austria GmbH
Xylem Manufacturing Middle East Region FZCO
Xylem PCI Membranes Polska S.P. Z.O.O.
Xylem Russia LLC
Xylem Service Hungary Kft
Xylem Service Italia Srl Luxemburg Branch
Jurisdiction of
Organization
Singapore
Delaware
Delaware
England & Wales
United Kingdom
Germany
China
Hong Kong
China
Australia
France
Germany
Delaware
England
Delaware
New South Wales
Brazil
Nova Scotia
Delaware
Denmark
England & Wales
New Jersey
Switzerland
Luxembourg
Frankfurt am Main
Luxembourg
Luxembourg
Germany
Luxembourg
Luxembourg
Luxembourg
Delaware
Luxembourg
United Kingdom
Luxembourg
United Kingdom
Luxembourg
Germany
Austria
UAE
Poland
Russia
Hungary
Italy
*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
Flygt
Flygt
Flygt
Name
Xylem Services Austria GmbH
Xylem Services GmbH
Xylem Services Italia Srl
Xylem Technologies GmbH
Xylem Technologies & Partners S.C.S
Xylem Water Holdings Limited
Xylem Water Limited
Xylem Water Services Limited
Xylem Water Solutions (Hong Kong) Limited
Xylem Water Solutions Argentina S.A.
Xylem Water Solutions Australia Limited
Xylem Water Solutions Austria GmbH
Xylem Water Solutions Belgium
Xylem Water Solutions Chile S.A.
Xylem Water Solutions Colombia SAS
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
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 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.
Xylem Water Solutions Rugby Limited
Xylem Water Solutions Singapore PTE Ltd.
Jurisdiction of
Organization
Austria
Germany
Italy
Frankfurt am Main
Luxembourg
United Kingdom
England & Wales
United Kingdom
Hong Kong
Argentina
New South Wales
Austria
Belgium
Chile
Colombia
Denmark
Germany
Spain
Delaware
France
Sweden
Germany
France
India
Ireland
Italy
Korea
Lithuania
Hungary
Malaysia
Sweden
France
Mexico
UAE
Oman
Netherlands
New Zealand
Norway
Panama
Peru
Poland
Portugal
United Kingdom
Singapore
*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
Xylem Water Solutions South Africa (Pty) Ltd.
Xylem Water Solutions South Africa Holdings LLC
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.
Xylem Water Systems Australia PTY ltd.
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.
YSI (China) Limited
YSI (Hong Kong) Ltd.
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
South Africa
Delaware
Finland
Sweden
Delaware
United Kingdom
United Kingdom
Delaware
China
California
New South Wales
Hungary
Delaware
Japan
Mexico
Delaware
Delaware
Delaware
Japan
China
Hong Kong
Hong Kong
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.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-207672 on Form S-3 and
Registration Statement No. 333-177607 on Form S-8 of our reports dated February 26, 2016, relating to the
consolidated financial statements of Xylem Inc. and subsidiaries (the "Company"), and the effectiveness of the
Company's internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company
for the year ended December 31, 2015.
EXHIBIT 23.1
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 26, 2016
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Patrick K. Decker, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Xylem Inc. for the period ended December 31, 2015;
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 26, 2016
/s/ Patrick K. Decker
Patrick K. Decker
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Shashank Patel, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Xylem Inc. for the period ended December 31, 2015;
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 26, 2016
/s/ Shashank Patel
Shashank Patel
Interim 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, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Patrick K. Decker, 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/ Patrick K. Decker
Patrick K. Decker
President and Chief Executive Officer
February 26, 2016
A signed original of this written statement required by Section 906 has been provided to Xylem Inc. and will be
retained by Xylem Inc. 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, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Shashank Patel, Interim 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/ Shashank Patel
Shashank Patel
Interim Chief Financial Officer
February 26, 2016
A signed original of this written statement required by Section 906 has been provided to Xylem Inc. and will be
retained by Xylem Inc. and furnished to the Securities and Exchange Commission or its staff upon request.