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, 2017
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
2.250% Senior Notes due 2023
Name of each exchange on which registered
New York Stock Exchange
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,” “smaller reporting company,” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
company) Smaller reporting company
Accelerated Filer
Emerging growth company
Non-Accelerated Filer
(do not check if a smaller reporting
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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, 2017
was approximately $10.0 billion. As of February 16, 2018, there were 179,893,045 outstanding shares of the registrant’s
common stock, par value $0.01 per share.
Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Shareowners, to be held in May 2018, 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, 2017
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 the 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
16 Form 10-K Summary
Signatures
*
Included pursuant to Instruction 3 of Item 401(b) of Regulation S-K.
2
3
11
20
21
21
22
23
24
25
28
29
53
54
106
106
106
108
108
108
108
108
109
114
114
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 (now ITT LLC) and its consolidated subsidiaries (other than
Xylem Inc.) as of the applicable periods.
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,
which generally are not historical in nature. However, the absence of these words or similar expressions does not
mean that a statement is not forward-looking. These forward-looking statements include 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 in this Report 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 2017 revenue of $4.7 billion and approximately 16,200 employees, is a leading global water technology
company. We design, manufacture and service highly engineered solutions ranging across a wide variety of critical
applications primarily in the water sector, but also in electric and gas. Our broad portfolio of solutions addresses
customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection,
test and treatment of wastewater to the return of water to the environment.
We have differentiated market positions in core application areas including transport, treatment, test, smart
metering, smart infrastructure analytics, condition assessment and leak detection, building services and industrial
processing. Setting us apart is a unique set of global assets which include:
• Fortress brands with leading positions, some of which have been in use for more than 100 years
• Far-reaching global distribution networks consisting of direct sales forces and independent channel
3
partners that collectively serve a diverse customer base in approximately 150 countries
• A substantial installed base that provides for steady recurring revenue
• A strong financial position and cash generation profile that enables us to fund strategic organic and
inorganic growth initiatives, and consistently return capital to shareholders
Key pillars of our long-term strategy include (1) accelerate profitable growth; (2) increase profitability by driving
continuous improvement initiatives; (3) leadership and talent development; and (4) focus on execution and
accountability.
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. The Spin-off was completed pursuant to a Distribution Agreement,
dated as of October 25, 2011 (the “Distribution Agreement”), among ITT (now ITT LLC), Exelis Inc., acquired by
Harris Inc. on May 29, 2015, (“Exelis”) and Xylem.
On October 31, 2016, Xylem Inc. completed the acquisition of all of the direct and indirect subsidiaries of Sensus
Worldwide Limited (other than Sensus Industries) (“Sensus”), pursuant to the terms of the Share Purchase
Agreement dated as of August 15, 2016, and the first Amendment to the Share Purchase Agreement dated as of
October 31, 2016 (together, the “Purchase Agreement”). The aggregate consideration paid for the acquisition was
approximately $$1,766 million ($1,710 million net of cash acquired).
Our Industry
Our planet faces serious water challenges. Less than 1% of the total water available on earth is fresh water, and
these supplies are under threat due to factors such as the draining of aquifers, increased pollution and the effects of
climate change. 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, deteriorating pipe systems, theft or inaccurate meters result in approximately one out of every six
gallons of water being lost between the treatment plant and the end customer. This problem of "non-revenue" water
is a major financial challenge of many utilities globally, especially in developing markets where non-revenue water
can represent 15% to 60% or more of net water produced. These and other challenges create opportunities for
growth in the global water industry. We estimate the total addressable market size to be approximately $550 billion.
We compete in areas that are pivotal to improving 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. Our customers often face all three of these challenges, ranging from inefficient and 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”). Additionally, through the 2016 acquisition of Sensus, we also
provide solutions to enhance efficiency, improve safety and conserve resources to customers in the electric, gas,
and lighting sectors. Delivering value in these areas creates significant opportunity for the Company. We estimate
our total served market size to be approximately $54 billion.
The Global Water Industry Value Chain
The water industry value chain includes Equipment and Services companies, like Xylem, which address the unique
challenges and demands of a diverse customer base. This customer base includes utilities that supply water
through an infrastructure network, and engineering, procurement and construction or (EPC) firms, which work with
utilities to design and build water and wastewater infrastructure networks, as depicted below. 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. In
addition to utilities and EPC customers, Equipment and Service providers also provide distinct technologies to a
wide array of entities, including farms, mines, power plants, industrial facilities and residential and commercial
customers seeking to address similar trends.
4
Water Industry Supply Chain
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 accelerate growth, we are focusing on several 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 our innovation efforts with increased focus on
smart technologies and innovation that can significantly improve customers’ productivity, quality
and resilience.
Commercial Leadership - We are strengthening our capabilities by simplifying our commercial
processes and supporting 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 adjacent markets.
•
•
•
Drive Continuous Improvement. We seek to embed continuous improvement into our culture and simplify
our organization to make the Company more agile, more profitable and create room to reinvest in growth.
To accomplish this, we will continue to strengthen our lean six sigma and global procurement capabilities,
while also continuing to optimize our cost structure through business simplification, which aims to eliminate
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 with 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.
Business Segments, Distribution and Competitive Landscape
We have three reportable business segments that are aligned around the critical market applications they provide:
Water Infrastructure, Applied Water, and Measurement & Control Solutions. See Note 20, “Segment and
5
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.
Market
Applications
Water
Infrastructure
Transport
Treatment
Applied
Water
Industrial Water
Commercial
Building Services
Residential
Building Services
2017
Revenue
(in millions)
1,660
$
$
$
344
2,004
593
568
260
%
Revenue
83%
17%
100%
Major Products
Primary Brands
• Water and
wastewater pumps
• Filtration,
disinfection and
biological treatment
equipment
• Flygt
• Godwin
• Wedeco
• Sanitaire
• Leopold
42%
40%
18%
• Pumps
• Valves
• Heat exchangers
• Controls
• Dispensing
equipment systems
$
1,421
100%
Measurement
& Control
Solutions
Water
Test
Gas
Electric
Software as a
Service/Other
$
$
573
325
134
132
118
1,282
45%
25%
11%
10%
9%
100%
• Smart meters
• Networked
communication
devices
• Data analytics
• Test equipment
• Controls
• Sensor Devices
• Software &
managed services
• Goulds Water
Technology
• Bell & Gossett
• A-C Fire Pump
• Standard
Xchange
• Lowara
• Jabsco
• Flojet
• Sensus
• Smith Blair
• WTW
• Visenti
• YSI
Water Infrastructure
Our Water Infrastructure segment supports the process that collects water from a source, treats it and distributes it
to users, and then treats and returns the wastewater responsibly to the environment through two closely linked
applications: Transport and Treatment. The Transport application also includes sales and rental of specialty
dewatering pumps and related equipment and services, which provide the safe removal or draining of groundwater
and surface water from a riverbed, construction or other industrial sites and bypass pumping for the repair of aging
public utility infrastructure, as well as emergency water removal during severe weather events.
The customer base consists of two primary end markets: water utility and industrial. The water utility market
includes public, private and public-private entities that support water and wastewater networks. The industrial
market includes customers who require similar water and wastewater infrastructure networks to support various
industrial operations.
Water Infrastructure provides the majority of its sales through direct channels with remaining sales through indirect
channels and service capabilities. Both water 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 demand for this application expertise: (i) the increase in both the type and amount of contaminants
found in the 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 that has not been
systematically replaced at utilities and other end-user customers, and (v) the build-out of water infrastructure in the
emerging markets. We estimate our served market size in this sector to be approximately $17 billion.
Given the highly fragmented nature of the water industry, the Water Infrastructure segment competes with a large
number of businesses. We differentiate ourselves in the market by focusing on product performance, reliability
6
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 or rental of
products and provision of services, we benefit from our large installed base, which requires maintenance, repair
and replacement parts due to the critical application and nature of the products and the conditions under which
they operate. Timeliness of delivery, quality and the proximity of service centers are important customer
considerations when selecting a provider for after-market products and services as well as equipment rentals. In
geographic regions where we are locally positioned to provide a quick response, customers have historically
relied on us, rather than our competitors, for after-market products relating to our highly engineered and
customized solutions. Our key competitors within the Water Infrastructure segment include KSB Inc., Sulzer Ltd.,
Evoqua Water Technologies, United Rentals and Danaher Corporation.
Applied Water
Applied Water encompasses the uses of water and serves a diverse set of end markets including: residential,
commercial, and industrial. Residential consumers represent the end users in the residential market, while 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 includes OEMs,
exploration and production firms, and developers and managers of industrial facilities, such as electrical power
generators, chemical manufacturers, machine shops, clothing manufacturers, beverage dispensing and food
processing firms, and car washes.
In the Applied Water segment, end markets vary widely and, as a result, specialized distribution partners are often
preferred. As such, the Applied Water segment provides the majority of its sales through strong indirect channels
with the remaining sales going through our global direct sales 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.
We estimate our served market size in this sector to be approximately $19 billion. Population growth, urbanization
and regulatory requirements are macro growth drivers of these markets, driving the need for housing, food,
community services and retail goods within growing city centers.
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 enabled 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.
Measurement & Control Solutions
Measurement & Control Solutions develops advanced technology solutions that enable intelligent use and
conservation of critical water and energy resources. The segment delivers communications, smart metering,
measurement and control technologies and services that allow customers to more effectively use their distribution
networks for the delivery of critical resources such as water, electricity and natural gas. We also provide analytical
instrumentation used to measure water quality, flow and level in wastewater, surface water and coastal
environments. Additionally, we sell software and services including cloud-based analytics, remote monitoring and
data management, leak detection and pressure monitoring solutions, as well as smart lighting products and
solutions that improve efficiency and public safety efforts across communities.
At the heart of our leading technologies is automation and information. Communications networks automate and
optimize meter reading, monitor flow rates and detect and enable rapid response to unsafe conditions. In short,
they provide insight into operations and enable our customers to manage the entire scope of their operations
remotely through their networks. At the center of our offering is the FlexNet communication network, which
provides a common communications platform and infrastructure for essential services. This two-way
communication technology remotely connects a wide variety of smart points in a given network with protocols,
frequently on FCC licensed spectrum that enable reliable, resilient and secure transmissions. These technologies
allow our customers to remotely and continuously monitor infrastructure, prioritize and manage maintenance and
use data to optimize all aspects of their networks.
The majority of our sales in the U.S. is conducted through strong, long-standing relationships with leading
distributors and dedicated channel partners for water, gas and electric markets. Internationally, direct sales are
often made in markets without established distribution channels; however, some distribution channels are used in
7
more developed markets. A more direct sales approach, with key account management, is employed for large
utilities and government programs.
We estimate our served market size in this sector to be approximately $18 billion. Macro growth drivers include
increasing regulation and worldwide movement towards smart grid implementation. Water scarcity and
conservation, as well as the need to prevent revenue loss (via inaccurate meter readings, leaks or theft) are
among the drivers of smart meter and leak detection technologies.
Our Sensus-branded meters are well positioned in the smart metering sector, the fastest growing sector of the
global meter industry. We set ourselves apart in the industry by focusing on our communication network, new
product development and service offerings that are driving tangible savings of non-revenue water through
improved meter accuracy, reduced theft and identification of leaks. Our key competitors within the Measurement
& Control Solutions segment include Itron, Badger Meter, Landis+Gyr, Neptune (Roper) and Elster (Honeywell).
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
2017
$ Amount
2,161
$
1,335
611
600
4,707
$
Revenue
2016
2015
% of Total
$ Amount
% of Total
$ Amount
% of Total
46% $
28%
13%
13%
$
1,574
1,195
518
484
3,771
42% $
31%
14%
13%
$
1,490
1,179
482
502
3,653
41%
32%
13%
14%
In addition to the traditional markets of the United States and western Europe, opportunities in emerging markets
within Asia Pacific, eastern Europe, Latin America and other countries are growing. Revenue derived from emerging
markets comprised approximately 21% of our revenue in each of the last three years.
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
Supply and Seasonality
2017
Property, Plant & Equipment
2016
2015
$ Amount
258
$
259
85
41
643
$
% of Total
$ Amount
% of Total
$ Amount
% of Total
40% $
40%
13%
7%
$
255
237
87
37
616
41% $
39%
14%
6%
$
168
189
56
26
439
38%
43%
13%
6%
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, batteries, aluminum, plastics, PCBs and electronic components. While we may
recover some cost increases through operational improvements, we are still exposed to some pricing risk, including
increased pricing risk due to proposed duty and tariff assessments by the United States on foreign imports. 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 many of our
products we have existing alternate sources of supply, or such sources are readily available.
8
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 in the past several years that have had a significant adverse impact on our business as a
whole.
Our business segments experience a modest level of seasonality in their 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 Company. No individual customer accounted for more than 10% of our consolidated 2017,
2016 or 2015 revenue.
Backlog
Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery
schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject
to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total
backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign
currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and
deployment schedules and delays can occur from time to time. Total backlog was $1,513 million at December 31,
2017 and $1,292 million at December 31, 2016. The December 31, 2016 backlog balance has been revised to
include contractual agreements that Sensus has with customers that do not have minimum commitments but which
we believe will be executed upon over the terms of the contracts. We anticipate that over 60% of the backlog at
December 31, 2017 will be recognized as revenue during 2018.
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 into 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 continue to increase our R&D
investments as a percentage of revenue year over year, with 3.8% in 2017 when compared to 2.9% in 2016 and
2.6% in 2015.
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 products and solutions 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 globally.
Capitalized Software
We capitalize software developed for sale to external customers, which is included within "Other intangible assets,
net" on our Consolidated Balance Sheets. As of December 31, 2017 and 2016 we had net capitalized software for
sale to external customers of $89 million and $54 million, respectively.
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
9
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.
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. At December 31, 2017, we had estimated and accrued $4 million related to environmental
matters.
Commitment to Sustainability
At Xylem, sustainability is at the very center of who we are and what we do. As a leading global water technology
company, we deal with one of the world’s most urgent sustainability issues on a daily basis; responsible
stewardship of our shared water resources. We believe that technology is a key link in how the world can solve
water. We have a long history of innovation, but today, we’re focusing more than ever on the powerful capabilities of
smart technology, integrated management and big data. These solutions will allow us to transport, treat, test and
use water smarter, and more sustainably, than in the past. Our link to this enormous challenge informs how we think
about sustainability and drives us to become a more sustainable company.
Employees
As of December 31, 2017, Xylem had approximately 16,200 employees worldwide. We have approximately 5,400
employees in the United States, of whom approximately 16% are represented by labor unions. In certain foreign
countries, our employees are represented by work councils. We believe that our facilities are in favorable labor
markets with ready access to adequate numbers of workers and believe our relations with our employees are good.
Available Information
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.
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ITEM 1A.
RISK FACTORS
In evaluating our business, each of the following risks should be carefully considered, along with all of the other
information in this Report and in our other filings with the SEC. Should any of these risks and uncertainties develop
into actual events, our business, financial condition or results of operations could be materially and adversely
affected.
Risks Related to Operational and External Factors
Failure to compete successfully in our markets could adversely affect our business.
We 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. Our future growth rate depends upon a
number of factors, including our ability to (i) identify emerging technological trends in our target end-markets, (ii)
develop and maintain competitive products and defend our market share against an ever-expanding number of
competitors including many new and non-traditional competitors, (iii) enhance our products by adding innovative
features that differentiate our products from those of our competitors and prevent commoditization of our products,
(iv) develop, manufacture and bring compelling new products to market quickly and cost-effectively, and (v) attract,
develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to
develop new technologies and introduce new products.
We may not be successful in maintaining our competitive position. Our competitors or third parties from outside of
our industry may develop disruptive technologies or 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. The failure of our technologies or products to maintain and gain
market acceptance due to more attractive offerings could significantly reduce our revenues and adversely affect our
competitive standing and prospects. 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 2017, 46%, 26% and 21% of our total
revenue was from customers located in the United States, western 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 fiscal and trade policies;
the strength of the residential and commercial real estate markets; interest rates; availability of commercial
financing for our customers and end-users; the availability of funding for our public sector customers; and
unemployment rates. A slowdown or prolonged downturn in our markets 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 2017, 54% of our total revenue was from customers outside the United States, with 21% of total revenue
generated in emerging markets. We expect our sales from international operations 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:
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changes in trade protection measures, including tariff and trade barriers and import and export licensing
requirements;
potential negative consequences from changes to taxation policies;
unanticipated changes in other laws and regulations or in how such provisions are interpreted or
administered;
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potential disruptions in our global supply chain;
possibility of unfavorable circumstances arising from host country laws or regulations, including those
related to infrastructure and data transmission and privacy;
currency exchange rate fluctuations and restrictions on currency repatriation;
disruption of operations from labor and political disturbances;
regional safety and security considerations;
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
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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, our operations in emerging markets could involve additional
uncertainties for us, including risks that governments may impose limitations on our ability to repatriate funds;
governments may impose withholding or other taxes on remittances and other payments to us, or the amount of
any such taxes may increase; an outbreak or escalation of 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 events might have on our business, financial condition and
results of operations.
We may not achieve some or all of the expected benefits of our restructuring and transformation plans and
our restructuring may adversely affect our business.
In recent fiscal years, we have initiated restructuring, realignment and transformation plans in an effort to optimize
our cost structure and improve our operational efficiency and effectiveness. In 2017, we undertook steps to
advance a multi-year effort to transform many of our support functions and related technologies, including Finance,
Human Resources and Procurement. We may not be able to obtain the cost savings and benefits that were initially
anticipated in connection with our restructuring and transformation plans. Additionally, as a result of these plans ,
we may experience a loss of continuity, loss of accumulated knowledge or inefficiency during transitional periods.
Transformation, realignment 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, realignment and transformation actions are
critical to achieving our expected cost savings as well as effectively competing in the marketplace and positioning
us for future growth. Factors that may impede a successful implementation include the retention of key employees,
the impact of regulatory matters or matters involving certain third parties selected to assist us, and adverse
economic market conditions. If our restructuring actions are not executed successfully, it could have a material
adverse effect on our competitive position, business, financial condition and results of operations.
A material disruption to any of our facilities or operations may adversely affect our business.
If our facilities or operations were to be disrupted as a result of a significant equipment failure, natural disaster,
power outage, fire, explosion, terrorism, cyber-based attack, labor disputes, work stoppages or slowdowns,
adverse weather conditions or other reason, our financial performance could be adversely affected as a result
of our inability to meet customer demand. Interruptions could increase our costs and reduce our sales. Any
interruption in capability could require us to make substantial capital expenditures to remedy the situation, which
could negatively affect our profitability and financial condition. Any recovery under our insurance policies may
not offset the lost sales or increased costs that may be experienced during the disruption of operations, which
could adversely affect our business, financial condition and results of operations.
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Our business could be adversely affected by cyber threats or interruptions in information technology,
communications networks and operations.
Our business operations rely on information technology and communications networks, and operations that are
vulnerable to damage or disturbance from a variety of sources. Regardless of protection measures, essentially all
systems are susceptible to disruption due to failure, vandalism, denial-of-service, insider risk, computer viruses,
security breaches, natural disasters, power outages and other events. In addition, we have designed products and
services that connect to and are part of the “Internet of Things.” While we attempt to provide adequate security
measures to safeguard our products from cyber threats, the potential for an attack remains. A successful attack may
result in inappropriate access to our or our customers' information or an inability for our products to function
properly.
We, and some of our third party vendors, have experienced cybersecurity attacks in the past and may experience
them in the future, likely with more frequency and involving a broader range of devices. To date, none have resulted
in any material adverse impact to our business or operations. We have adopted measures designed 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 or operate through a concentration of operations on
certain sites, such as 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.
Additionally, to conduct our operations, we regularly move data across national borders, and consequently are
subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad
regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often
uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s
General Data Protection Regulation (“GDPR”), which greatly increases the jurisdictional reach of European Union
law and adds a broad array of requirements for handling personal data, including the public disclosure of significant
data breaches, becomes effective in May 2018. And other countries have enacted or are enacting data localization
laws that require data to stay within their borders. All of these evolving compliance and operational requirements
impose significant costs that are likely to increase over time.
Although we continue to assess these risks, implement controls, and perform business continuity and disaster
recovery planning, we cannot be sure that interruptions with material adverse effects will not occur.
Our strategy includes acquisitions, and we may not be able to make acquisitions of suitable candidates or
integrate acquisitions successfully.
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 may not 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. Failure to
successfully execute our acquisition strategy could adversely affect our business, financial condition or results of
operations.
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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, trade regulations, including 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. 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 business partners
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 significant movements in foreign currency exchange rates.
We conduct approximately 54% 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,
Polish Zloty, Canadian Dollar, British Pound 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,
Canadian Dollar, Swedish Krona 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 2017 revenue increased by
0.9% due to favorable foreign currency impacts. 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 sales growth in
future periods. Refer to Item 7A "Quantitative and Qualitative Disclosures about Market Risk" for additional
information on foreign exchange risk.
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.
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 our products could create product
safety, regulatory or environmental risks, including 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
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this insurance coverage will continue to be available to us at a reasonable cost or will be adequate to cover any
product liability claims. Manufacturing, design, software or service defects or inadequacies may also result in
contractual damages or credits being issued, which could impact our revenue. Recalls, removals and product
liability and quality claims can result in significant costs, as well as negative publicity and damage to our reputation
that could reduce demand for our products and have a material adverse effect on our business, financial condition
and results of operations.
Weather conditions and climate changes may adversely affect, or cause volatility in, our financial results.
Weather conditions, including heavy flooding, droughts and fluctuations in temperatures or weather patterns,
including as a result of climate change, can positively or negatively impact portions of our business. Within the
dewatering space, 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 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 a substantial 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.
Changes in our effective tax rates may adversely affect our financial results.
We sell our products in approximately 150 countries and 54% of our revenue was generated outside the United
States in 2017. Given the global nature of our business, a number of factors may increase our future effective tax
rates, including:
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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.
For example, compliance with the 2017 United States Tax Cut and Jobs Act (“Tax Act”) may require the collection
of information not regularly produced within our Company, the use of provisional estimates in our financial
statements, and the exercise of significant judgment in accounting for its provisions. Many aspects of the Tax Act
are unclear and may not be clarified for some time. As regulations and guidance evolve with respect to the Tax
Act, and as we gather more information and perform more analysis, our results may differ from previous estimates
and may materially affect our financial position. Our non-U.S. operations will be subject to alternative tax regimes
implemented under the Tax Act. 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.
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, and we expect that reliance to increase. Parts and raw
materials commonly used in our products include motors, fabricated parts, castings, bearings, seals, nickel, copper,
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batteries, 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 tariff
regimes, 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 indebtedness may affect our business and may restrict our operational flexibility.
As of December 31, 2017, our total outstanding indebtedness was $2,200 million as described under “Liquidity and
Capital Resources." Our indebtedness could:
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increase our vulnerability to general adverse economic and industry conditions;
limit our ability to obtain additional financing or borrow additional funds;
limit our ability to pay future dividends;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
require that a substantial portion of our cash flow from operations be used for the payment of interest on our
indebtedness instead of funding working capital, capital expenditures, acquisitions or other general corporate
purposes; and
increase the amount of interest expense that we must pay because some of our borrowings are at variable
interest rates, which, as interest rates increase, would result in higher interest expense.
In addition, there can be no assurance that future borrowings or equity financing will be available to us on favorable
terms or at all for the payment or refinancing of our indebtedness. If we incur additional debt or raise equity through
the issuance of preferred stock, the terms of the debt or preferred stock issued may give the holders rights,
preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation.
The terms of the debt may also impose additional and more stringent restrictions on our operations than we
currently have.
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 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. These
proceedings may seek remedies relating to environmental matters, acquisitions or divestitures, product liability and
personal injury claims, privacy, employment, labor and pension matters, and government contract issues and
commercial or contractual disputes. Our acquisition of Sensus and technology focused companies has increased
our exposure to intellectual property litigation and we expect that this risk will continue to increase as we execute on
our innovation and technology priorities.
It is not possible to predict with certainty the outcome of claims, investigations, and lawsuits, and we could in the
future incur judgments, fines or penalties or enter into settlements of lawsuits and claims that could have an
adverse effect on our business, results of operations and financial condition in any particular period. Additionally,
we may 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.
The global and diverse nature of our operations, coupled with the increase in regulation and enforcement in many
regions of the globe, means that legal and compliance risks will continue to exist and additional legal proceedings
and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time. In
addition, subsequent developments in legal proceedings may affect our assessments and estimates of loss
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contingencies recorded as a reserve and require us to make payments in excess of our reserves, which could have
an adverse effect on our results of operations and financial condition.
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.
A significant portion of our products and offerings in our Measurement & Control Solutions segment are
affected by the availability and regulation of radio spectrum and could be affected by interference with the
radio spectrum that we use.
A significant portion of the offering in our Measurement & Control Solutions segment use radio spectrum, which is
subject to government regulation. To the extent we introduce new products designed for use in the United States or
another country into a new market, such products may require significant modification or redesign in order to meet
frequency requirements and other regulatory specifications. In some countries, limitations on frequency availability
or the cost of making necessary modifications may preclude us from selling our products in those countries. The
regulations that govern our use of the radio spectrum may change and the changes may require us to modify our
products or seen new partnerships, either directly or due to interference caused by new consumer products allowed
under the regulations. The inability to modify our products to meet such requirements, the possible delays in
completing such modifications, and the cost of such modifications all could have a material adverse effect on our
business, financial condition, and results of operations. In addition, suitable partners for co-development may not
be able to be secured by us.
In the United States, our products are primarily designed to use licensed spectrum in the 900MHz range. If the
Federal Communications Commission (“FCC”) did not renew our existing spectrum licenses, our business could be
adversely affected. In addition, there may be insufficient available frequencies in some markets to sustain or
develop our planned operations at a commercially feasible price or at all.
Outside of the United States, certain of our products require the use of radio frequency and are subject to
regulations. In some jurisdictions, radio station licenses may be granted for a fixed term and must be periodically
renewed. Our advanced and smart metering systems offering typically transmit to (and receive information from, if
applicable) handheld, mobile, or fixed network reading devices in licensed bands made available to us through
strategic partnerships and are reliant to some extent on the licensed spectrum continuing to be available through
our partners or our customers. We may be unable to find partners or customers that have access to sufficient
frequencies in some markets to sustain or develop our planned operations or to find partners or customers that
have access to sufficient frequencies in the relevant markets at a commercially feasible price or at all.
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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, 2017, the net carrying value of our goodwill and other
indefinite-lived intangible assets totaled approximately $3 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, trade names and FCC licenses 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, a 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.
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 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.
Unforeseen environmental issues could impact our financial position or results of operations.
Our operations and products and offerings 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 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,
18
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.
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;
stock repurchases;
acquisitions and divestitures;
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 transformation, 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;
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, our articles
of incorporation and our by-laws, among other things, require advance notice for shareholder proposals and
nominations. In addition, our 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.
19
In connection with our Spin-off, ITT (now ITT LLC) and Exelis, acquired by Harris Inc., will indemnify us for
certain liabilities and we will indemnify ITT (now ITT LLC) or Exelis for certain liabilities. If we are required
to indemnify ITT (now ITT LLC) 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 (now ITT LLC) and Exelis, ITT (now
ITT LLC) and Exelis agreed to indemnify us from certain liabilities, and we agreed to indemnify ITT (now ITT LLC)
and Exelis for certain liabilities. Indemnities that we may be required to provide ITT (now ITT LLC) and Exelis may
be significant and could negatively impact our business. Third parties could also seek to hold us responsible for any
of the liabilities that ITT (now ITT LLC) or Exelis has agreed to retain. Further, there can be no assurance that the
indemnities from ITT (now ITT LLC) and Exelis will be sufficient to protect us against the full amount of such
liabilities, or that ITT (now ITT LLC) and Exelis will be able to fully satisfy their indemnification obligations.
Moreover, even if we ultimately were to succeed in recovering from ITT (now ITT LLC) 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 355 locations in more than 51 countries. These properties total approximately 12.2 million
square feet, of which more than 315 locations, or approximately 6.1 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 our significant locations by segment:
Location
Emmaboda
Stockholm
Bridgeport
Shenyang
Yellow Springs
Quenington
Morton Grove
Montecchio
Nanjing
Auburn
Stockerau
Lubbock
Strzelin
Cheektowaga
Ludwigshafen
Jiangdu City
Texarkana
Uniontown
DuBois
DuBois
State or
Country
Sweden
Sweden
NJ
China
OH
UK
IL
Italy
China
NY
Austria
TX
Poland
NY
Germany
China
AR
PA
PA
PA
Principal Business Activity
Water Infrastructure
Administration and Manufacturing
Administration and Research &
Development
Administration and Manufacturing
Manufacturing
Administration and Manufacturing
Manufacturing
Applied Water
Administration and Manufacturing
Administration and Manufacturing
Manufacturing
Manufacturing
Administration
Manufacturing
Manufacturing
Manufacturing
Measurement & Control Solutions
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Regional Selling Locations
Dubai
Nottinghamshire
Nanterre
Langenhagen
United Arab Emirates Manufacturing
United Kingdom
France
Germany
Sales Office
Sales Office
Sales Office
Approx.
Square
Feet
1,197,000
172,000
136,000
125,000
112,000
86,000
530,000
379,000
363,000
273,000
233,000
229,000
185,000
147,000
318,000
316,000
254,000
240,000
197,000
137,000
144,000
139,000
139,000
134,000
Owned or
Leased
Owned
Leased
Leased
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Rye Brook
NY
Administration
67,000
Leased
Corporate Headquarters
ITEM 3.
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings that are incidental to the operation of our businesses. These
proceedings may seek remedies relating to environmental matters, intellectual property matters, acquisitions or
divestitures, personal injury claims, employment and pension matters, government contract issues and commercial
or contractual disputes. 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 we are involved in.
21
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
22
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided regarding the executive officers of Xylem as of February 1, 2018:
NAME
Patrick K. Decker
AGE
53
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)
E. Mark Rajkowski
Tomas Brannemo
59
46
Senior VP and Chief Financial
Office (2016)
• Senior VP and Chief Financial Officer,
MeadWestvaco Corp. (worldwide
packaging company) (2004)
Senior VP and President,
Transport and Treatment (2017)
• Senior VP and President, Transport
(2014)
• VP, Transport (2013)
David Flinton
47
Senior VP and President,
Dewatering (2015)
• VP, Engineering and Marketing, Applied
Water Systems (2013)
Pak Steven Leung
61
Senior VP and President,
Emerging Markets (2015)
• VP, Global Sales, Valves and Controls,
Pentair Plc (diversified, worldwide
industrial manufacturing company) (2013)
Kenneth Napolitano
55
Senior VP and President,
Applied Water Systems and
Americas Commercial Team
(2017)
• Senior VP and President, Applied Water
Systems (2012)
Colin R. Sabol
50
Senior VP and President,
Measurement & Control
Solutions (2017)
Kairus Tarapore
56
Senior VP and Chief Human
Resources Officer (2015)
• Senior VP and President, Analytics and
Treatment (2015)
• Senior VP and President, Dewatering
(2013)
• Senior VP and Chief Administrative
Officer, Babcock & Wilcox Company
(energy and environmental technologies
and services) (2013)
23
NAME
Claudia S. Toussaint
AGE
54
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)
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 as of February 1, 2018:
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.
Jeanne Beliveau-Dunn
Vice President and General Manager, Cisco Systems, 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
Surya N. Mohapatra, Ph.D.
Former Chairman, President and Chief Executive Officer, Quest
Diagnostics Incorporated
Jerome A. Peribere
Former President and Chief Executive Officer, Sealed Air Corporation
24
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
2017 and 2016 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, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
50.66 $
55.68
64.80
69.88
41.33 $
46.67
52.71
54.99
46.67 $
48.81
54.08
62.24
31.67 $
40.54
44.44
45.60
0.1800
0.1800
0.1800
0.1800
0.1549
0.1549
0.1549
0.1549
The closing price of our common stock on the NYSE on January 31, 2018 was $72.26 per share. As of January 31,
2018, there were 11,681 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 2018, we declared a dividend of $0.21 per share to be paid on March 15, 2018 for shareholders of record
on February 15, 2018.
There were no unregistered offerings of our common stock during 2017.
25
Fourth Quarter 2017 Share Repurchase Activity
The following table summarizes our purchases of our common stock for the quarter ended December 31, 2017:
(in millions, except per share amounts)
Period
10/1/17 - 10/31/17
11/1/17 - 11/30/17
12/1/17 - 12/31/17
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)
$413
—
—
—
—
—
—
$413
$413
(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.
There were no shares repurchased under this program during the three months ended December 31, 2017. There are up
to $413 million in shares that may still be purchased under this plan as of December 31, 2017.
26
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 December 31, 2012 through December 31, 2017 and assumes
that $100 was invested on December 31, 2012 in our common stock, the S&P 500 and the S&P 500 Industrials with
the reinvestment of any dividends.
December 31, 2012
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
XYL
S&P 500
S&P 500
Industrials
Index
100
130
145
141
194
271
100
132
150
153
171
208
100
141
154
150
179
215
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.
27
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the five years ended December 31, 2017. 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.
(in millions, except per share data)
Results of Operations Data:
Revenue
Gross profit
Gross margin
Operating income
Operating margin
Net income attributable to Xylem
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
Total debt
2017 (a)
2016 (a)
Year Ended
December 31,
2015
2014
2013
$ 4,707
1,851
$ 3,771
1,461
$ 3,653
1,404
$ 3,916
1,513
$ 3,837
1,499
39.3%
556
11.8%
331
38.7%
406
10.8%
260
38.4%
449
12.3%
340
38.6%
463
11.8%
337
39.1%
363
9.5%
228
$
1.84
1.83
179.6
180.9
$0.7200
$
414
873
6,860
2,200
$
1.45
1.45
179.1
180.0
$0.6196
$
308
878
6,474
2,368
$
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
*
The Company calculates Working capital as follows: net accounts receivable + inventories - accounts payable -
customer advances.
(a) The amounts for the years ended December 31, 2017 and December 31, 2016 reflect the acquisition of Sensus. Refer
to Notes 3 and 20 to Consolidated Financial Statements for further information regarding Sensus.
28
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, 2017. 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 global water technology company. We design, manufacture and service highly engineered
solutions ranging across a wide variety of critical applications. Our broad portfolio of solutions addresses customer
needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test and
treatment of wastewater to the return of water to the environment. Our product and service offerings are organized
into three reportable segments that are aligned around the critical market applications they provide: Water
Infrastructure, Applied Water and Measurement & Control Solutions (formerly Sensus & Analytics).
As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving
Xylem’s Analytics business from our Water Infrastructure segment to combine it with our Sensus and Visenti
businesses, which were acquired in the fourth quarter of 2016, to form Measurement & Control Solutions. We
believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will
lead to operating efficiencies by integrating the supply chain process and moving to a leaner functional structure.
Accordingly, our reportable segments have changed. Beginning with the second quarter of 2017, the Company now
reports the financial position and results of operations of its Analytics, Sensus and Visenti businesses as one new
reportable segment, which is called Measurement & Control Solutions. Our Water Infrastructure reportable segment
no longer includes the results of our Analytics business. The Company has recast certain historical amounts
between the Company's Water Infrastructure and Measurement & Control Solutions reportable segments, however
this change had no impact on the Company's historical consolidated financial position or results of operations. The
recast financial information does not represent a restatement of previously issued financial statements. Our Applied
Water reportable segment remains unchanged.
• 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 also provide sales and rental of specialty dewatering pumps and related equipment and
services. In the Water Infrastructure segment, we provide the majority of our sales directly to customers
with strong applications 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, 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 and pumps for dairy operations. In the Applied Water segment, we
provide the majority of our sales through long-standing relationships with many of the leading independent
distributors in the markets we serve, with the remainder going directly to customers.
• Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by
delivering communications, smart metering, measurement and control technologies and services that allow
customers to more effectively use their distribution networks for the delivery of critical resources such as
water, electricity and natural gas. In the Measurement & Control Solutions segment, we also provide
analytical instrumentation used to measure water quality, flow and level in wastewater, surface water and
coastal environments. Additionally, we sell software and services including cloud-based analytics, remote
monitoring and data management, leak detection and pressure monitoring solutions. We also sell smart
lighting products and solutions that improve efficiency and public safety efforts across communities. In the
Measurement & Control Solutions segment, we generate our sales through a combination of long-standing
relationships with leading distributors and dedicated channel partners as well as direct sales depending on
the regional availability of distribution channels and the type of product.
29
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and
margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or
"adjusted") 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. Excluding revenue, Xylem provides guidance only
on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP
earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how
management views our business and are used to make financial, operating and planning decisions. 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 operating activities
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 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 impacts
is determined by translating current period and prior period activity using the same currency conversion
rate.
"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.
"adjusted operating income", "adjusted segment operating Income", "adjusted net income" and “adjusted
EPS” defined as operating income, segment operating income, net income and earnings per share,
adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs, gain or loss from
sale of businesses, special charges and tax-related special items, as applicable. A reconciliation of adjusted
net income is provided below.
(in millions, except per share data)
Net income attributable to Xylem
Restructuring and realignment, net of tax of $13, $13 and $5,
respectively
Sensus acquisition related costs, net of tax of $8 and $15,
respectively
Special charges, net of tax of $4, $7 and $0, respectively
Tax-related special items
Loss (gain) from sale of businesses, net of tax benefit of $2 and
net of tax of $0, respectively
Adjusted net income
Weighted average number of shares diluted
Earnings per share - diluted
Adjusted earnings per share
2017
2016
2015
$
331 $
260 $
340
28
14
8
40
12
433 $
34
38
11
21
—
364 $
180.9
180.0
1.83 $
2.40 $
1.45 $
2.03 $
15
—
5
(15)
(9)
336
181.7
1.87
1.85
$
$
$
"operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and
special charges" defined as operating expenses, adjusted to exclude restructuring and realignment costs,
Sensus acquisition related costs and special charges.
“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.
"Sensus acquisition related costs" defined as costs incurred by the Company associated with the acquisition
of Sensus that are being reported within operating income. These costs include integration costs, acquisition
30
costs, costs related to the recognition of the backlog intangible asset amortization and inventory step-up
recoded in purchase accounting.
“special charges" defined as costs incurred by the Company, such as non-cash impairment charges, due
diligence costs, initial acquisition and integration costs not related to Sensus and other special non-operating
items, as well as interest expense related to the early extinguishment of debt and financing costs on the
bridge loan entered into for the Sensus acquisition during 2016.
"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax
exam impacts, tax law change impacts, significant reserves for cash repatriation, excess tax benefits/losses
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 which
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
Cash paid for Sensus acquisition related costs
Free cash flow, excluding Sensus acquisition related costs
2017
2016
2015
$
$
$
686 $
(170)
516 $
28
497 $
(124)
373 $
13
544 $
386 $
464
(117)
347
—
347
“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense. “Adjusted
EBITDA” reflects adjustments to EBITDA to exclude share-based compensation charges, restructuring and
realignment costs, Sensus acquisition related costs, gain or loss from sale of businesses and special
charges.
(in millions)
Net Income
Income tax expense
Interest expense (Income), net
Depreciation
Amortization
EBITDA
Share-based compensation
Restructuring and realignment
Sensus acquisition related costs
Special charges
Loss (gain) from sale of business
Adjusted EBITDA
2017
2016
2015
$
$
330 $
136
79
109
125
779 $
21
41
14
13
10
260 $
340
80
68
87
64
63
53
88
45
559 $
589
18
47
46
5
—
15
20
—
5
(9)
620
$
878 $
675 $
31
Executive Summary
Xylem reported revenue of $4,707 million for 2017, an increase of $936 million or 24.8% from $3,771 million
reported in 2016. Revenue increased 23.9% on a constant currency basis mostly due to $790 million of revenue
related to acquisitions and organic revenue growth of $122 million driven by growth in all end markets.
Operating income for 2017 was $556 million, reflecting an increase of $150 million or 36.9% compared to $406
million in 2016. Operating margin was 11.8% for 2017 versus 10.8% for 2016, an increase of 100 basis points. The
increase in operating margin was primarily due to cost reductions resulting from progress in our global procurement
and productivity initiatives, a decrease in Sensus acquisition related costs, restructuring savings and a decrease in
restructuring and realignment charges. These favorable impacts on operating margin were partially offset by cost
inflation increases, Sensus purchase accounting impacts and an increase in special charges.
Adjusted operating income was $630 million, with an adjusted operating margin of 13.4% in 2017 as compared to
adjusted operating income of $511 million with an adjusted operating margin of 13.6% in 2016. The decrease in
adjusted operating margin was mostly due to cost inflation increases, increased spending on strategic investments
and Sensus purchase accounting impacts, which were largely offset by cost savings from our global procurement
and productivity initiatives and restructuring savings. The non-cash Sensus purchase accounting impact on
adjusted operating margin for the year was 50 basis points, which if excluded would bring the adjusted operating
margin to 13.9%, a 30 basis point increase over the prior year.
Additional financial highlights for 2017 include the following:
• Net income attributable to Xylem of $331 million, or $1.83 per diluted share ($433 million or $2.40 per diluted
share on an adjusted basis, up 19% from 2016)
• Cash from operating activities of $686 million, and free cash flow, excluding Sensus acquisition related costs,
of $544 million up 40.9% from 2016.
• Orders of $4,868 million, up 27.3% from $3,824 million in 2016 (up 6.8% on an organic basis)
• Dividends paid to shareholders increased 16% in 2017.
2018 Business Outlook
We anticipate total revenue growth in the range of 8% to 10% in 2018, with the recently announced acquisition of
Pure Technologies contributing approximately 2% of that growth. Organic revenue growth is anticipated to be 4% to
6%. The following is a summary of our 2017 organic revenue performance and 2018 organic revenue outlook by
end market.
• Public utilities increased approximately 3% for 2017 on an organic basis driven by growth in the United
States and Asia Pacific. For 2018, we expect organic growth in the mid-single-digit range driven by solid
growth in the U.S. from water and wastewater spending and stable low-single-digit growth in Europe.
Additionally, we expect high-single-digit growth from the smart meter market. A healthy infrastructure
investment focus in the emerging markets will continue broadly in China and India.
•
•
•
Industrial increased by roughly 2% for 2017 on an organic basis driven by growth in the emerging markets,
specifically in China and Latin America, and a recovery in global oil and gas and mining markets. For 2018,
we expect organic growth in the low to mid-single-digits. We believe that market conditions in the U.S. and
Europe will continue to improve modestly and oil and gas and mining markets will continue to stabilize in
North America. We expect conditions in the emerging markets to be mixed as strength in China and India
will be offset by softening conditions in the Middle East and Latin America.
In the commercial markets, organic growth was around 5% for 2017 primarily driven by strength in the
United States. For 2018, we expect continued organic growth in the low to mid-single-digit range. The U.S.
market is expected to see low, stable growth while growth in Europe is expected to moderate after strong
performance. Strength in the emerging markets will be driven by initiatives in India, the building market in
China and large project wins in the Middle East from product localization.
In residential markets, organic growth increased by about 12% in 2017 primarily driven by strength in Asia
Pacific and the United States. For 2018, we expect mid-single-digit growth primarily driven by solid mid-
single-digit growth in the U.S. market. Market share gains from an increased selling focus in Europe, along
with an increased demand in China and other Asia Pacific countries for a secondary clean water source,
are also expected to contribute to this growth.
32
We will continue to strategically execute restructuring and realignment actions primarily to reposition our European
and North American businesses in an effort to optimize our cost structure and improve our operational efficiency
and effectiveness. During 2017, we incurred $20 million and $21 million in restructuring and realignment costs,
respectively. As a result of these actions in 2017, we realized $6 million of net savings and expect to realize
approximately $10 million of incremental net savings in 2018. We expect additional incremental savings to be
realized in 2019 and beyond as we complete these actions. During 2018, we currently expect to incur
approximately $35 million in restructuring, realignment and integration costs.
We plan to continue to take actions and focus spending in 2018 on actions that allow us to make progress on our
top strategic priorities. The priority of accelerating profitable growth encompass our initiatives to drive commercial
excellence, grow in emerging markets and strengthen innovation and technology through creation of new centers of
excellence, a streamlined approach to product development and smart acquisitions. The priority of driving
continuous improvement is an area where we will continue to work to create new opportunities to unlock savings by
eliminating waste and increasing efficiencies, which is supported by efforts to expand and further deepen our talent
pool. We plan to continue to deploy capital in smart, disciplined ways to develop and acquire solutions to address
our customers’ challenges. Finally, we continue to work to improve cash performance and generate capital to return
to our shareholders.
33
Results of Operations
(in millions)
Revenue
Gross profit
Gross margin
Total operating expenses
Expense to revenue ratio
Restructuring and realignment costs
Sensus acquisition related charges
Special charges
Operating expenses excluding restructuring
and realignment costs, Sensus acquisition
related costs and special charges
Expense to revenue ratio
Operating income
Operating margin
Interest and other non-operating expense
(income), net
(Loss)/gain from sale of businesses
Income tax expense
Tax rate
Net income
NM Not Meaningful
2017 versus 2016
Revenue
$
2017
4,707
1,851
$
2016
3,771
1,461
$
2015
3,653
1,404
39.3%
1,295
27.5%
(41)
(22)
(11)
1,221
25.9%
556
11.8%
80
(10)
136
29.2%
330
$
38.7%
1,055
28.0%
(47)
(53)
(5)
950
25.2%
406
10.8%
66
—
80
23.5%
260
$
38.4%
955
26.1%
(20)
—
(5)
930
25.5%
449
12.3%
55
9
63
15.6%
340
$
2017 v. 2016
24.8 %
26.7 %
60bp
22.7 %
(50)bp
(12.8 )%
(58.5 )%
120.0 %
2016 v. 2015
3.2 %
4.1 %
30bp
10.5 %
190bp
135.0 %
NM
— %
28.5 %
70bp
36.9 %
100bp
21.2 %
NM
70.0 %
570bp
26.9 %
2.2 %
(30)bp
(9.6 )%
(150)bp
20.0 %
NM
27.0 %
790bp
(23.5 )%
Revenue generated for 2017 was $4,707 million, an increase of $936 million, or 24.8%, compared to $3,771 million
in 2016. On a constant currency basis, revenue grew 23.9%. This increase in revenue was primarily driven by
additional revenue of $790 million from acquisitions. There was also strong organic growth of $122 million during
the year, driven primarily by North America as well as strength in the emerging markets, particularly in China and
India. Additionally, to a lesser extent, Europe contributed to this organic growth despite ongoing weakness in the
United Kingdom during the year.
The following table illustrates the impact on 2017 revenue from organic growth, recent acquisitions and divestitures,
and foreign currency translation in relation to revenue.
Water Infrastructure
Applied Water
Measurement &
Control Solutions
Total Xylem
(in millions)
2016 Revenue
Organic Growth
$ Change % Change
$ 1,932
56
2.9%
Acquisitions/(Divestitures)
Constant Currency
Foreign currency
translation (a)
Total change in revenue
2017 Revenue
$ Change % Change
$ Change % Change
$ Change % Change
$ 1,393
$
446
$ 3,771
34
2.4 %
(10)
(0.7)%
24
4
28
1.7 %
0.3 %
2.0 %
32
790
822
14
836
7.2%
177.1%
184.3%
3.1%
187.4%
122
780
902
34
936
3.2%
20.7%
23.9%
0.9%
24.8%
—
56
16
72
—%
2.9%
0.8%
3.7%
$ 2,004
$ 1,421
$ 1,282
$ 4,707
(a)
Foreign currency translation impact primarily due to strength in the value of the Euro, Canadian dollar, Russian Ruble,
Australian dollar, South African Rand and various other currencies, partially offset by weakness in the British Pound
against the U.S. Dollar.
34
Water Infrastructure
Water Infrastructure’s revenue increased $72 million, or 3.7%, in 2017 (2.9% increase on a constant currency basis)
compared to 2016. Revenue benefited from $16 million of foreign currency translation for the year and included
organic growth of $56 million, or 2.9%.
Organic growth for the year was driven by strength in the industrial end market, and to a lesser extent in the public
utility end market. The growth in both of these end markets was driven by strength from Asia Pacific and North
America.
From an application perspective, organic revenue growth was driven primarily by our transport application. The
transport application grew in the industrial end market due to strength in the dewatering business which benefited
from the recovery of the industrial construction market, particularly within the distribution channel and recovery of oil
and gas and mining markets in North America and Latin America. The transport application also grew in the public
utility end market driven by increased municipal spending in North America and increased projects in the Middle
East and India. Organic revenue from our treatment application also contributed to the segment's growth primarily
from growth in China from industrial treatment project deliveries as well as growth in Europe from municipal
treatment projects.
Applied Water
Applied Water’s revenue increased $28 million, or 2.0%, in 2017 (1.7% increase on a constant currency basis)
compared to 2016. Revenue benefited from $4 million of foreign currency translation for the year and the constant
currency increase included organic growth of $34 million, or 2.4%.
Organic growth for the year was driven by strength in the residential and commercial end markets in the United
States, Asia Pacific and western Europe, which were partially offset by declines in the industrial market.
From an application perspective, growth in residential building services was primarily driven by strength in the
United States, where we benefited from the timing of promotions and market share gains, and continued strength in
Asia Pacific. Commercial building services also grew, primarily in North America, western Europe and Asia Pacific,
driven by new product traction and sales channel investments. This growth was partially offset by a decline in
industrial applications, primarily driven by unfavorable weather conditions impacting the agriculture business in the
United States, partially offset by strength in western Europe.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $836 million, or 187.4%, in 2017 (184.3% on a constant
currency basis) compared to 2016. The revenue increase for the year was almost entirely from $790 million of
revenue related to acquisitions that we did not have in the prior year. Most of the additional revenue contributed by
the Sensus business was generated in the United States with additional revenue coming primarily from western
Europe and China. The majority of the Sensus business revenue came from water applications with gas and
electric applications making up most of the remaining sales for the year. Organic revenue growth in the
Measurement & Control Solutions segment was $32 million, or 7.2%, for the year. Organic growth was driven
primarily by growth across all applications, except electric which had slight declines. Much of the organic revenue
increase was in the water application, which had increased AMI deployments in North America as well as higher
demand for iPerl product in eastern Europe and the Middle East. Organic revenue also increased in the gas
application, primarily due to AMI deployments in North America, as well as in the software and services application,
primarily driven by a couple of major contract upgrades. The test application also contributed to the increase in
organic revenue as a result of strength from the environmental monitoring business in the United States.
Orders/Backlog
Orders received during 2017 increased by $1,044 million, or 27.3%, to $4,868 million (26.4% increase on a
constant currency basis). The order growth on a constant currency basis was primarily driven by additional orders
from recent acquisitions, primarily Sensus, of $762 million. Organic order growth was $260 million, or 6.8%, over
the prior year.
Water Infrastructure segment orders increased $155 million, or 7.9%, to $2,112 million (7.1% growth on a constant
currency basis). Orders benefited from $16 million of foreign currency translation for the year and included organic
growth of $139 million, or 7.1%. The majority of the organic order growth for the segment came from the transport
application, driven by the public utility sector in the United States, as well as strong project orders in China and
India. Additionally, dewatering distributor orders increased driven by storm related activity and the strengthening of
the oil and gas markets. Treatment applications also had strong order intake, primarily from projects in the
emerging markets, Latin America and North America.
35
Orders increased in our Applied Water segment by $71 million, or 5.1%, to $1,476 million (4.8% increase on a
constant currency basis). The order increase was primarily due to organic order growth of $79 million, or 5.6%,
driven by strength in the emerging markets and strong commercial building and industrial performance in North
America, which was partially offset by the loss of orders related to divested businesses of $11 million.
Orders increased in our Measurement & Control Solutions segment by $818 million, or 177.1%, to $1,280 million
(174% growth on a constant currency basis). This increase included orders from recent acquisitions, primarily
Sensus, of $762 million and organic order growth of $42 million, or 9.1%, primarily from Sensus order increases in
North America for most applications, as well as increased orders from test application strength in the United States
and China.
Backlog includes contractual customer commitments as well as orders on hand as of the end of the period.
Delivery schedules vary from customer to customer based upon their requirements. Annual or multi-year contracts
are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such,
beginning total backlog, plus orders, minus revenues will not equal ending total backlog due to contract
adjustments, foreign currency fluctuations and other factors. Typically, large projects require longer lead production
cycles and deployment schedules, and delays can occur from time to time. Total backlog was $1,513 million at
December 31, 2017 and $1,292 million at December 31, 2016, an increase of 17%. The December 31, 2016
backlog balance has been revised to include contractual agreements that Sensus has with customers that do not
have minimum commitments but which we believe will be executed upon over the terms of the contracts. This year
over year increase in backlog of $221 million is due to strong order growth in the fourth quarter across all of our
segments as well as benefits from currency translation impacts. We anticipate that over 60% of our total backlog at
December 31, 2017 will be recognized as revenue during 2018.
Gross Margin
Gross margins as a percentage of consolidated revenue increased to 39.3% in 2017 from 38.7% in 2016. The gross
margin increase was primarily due to the benefits realized from cost reductions from global procurement and
continuous improvement initiatives, as well as a decrease in the inventory step-up charge for Sensus in 2017.
These positive impacts on gross margin were partially offset by cost inflation and unfavorable product mix.
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 and asset impairment charges
Operating expenses
Expense to revenue ratio
Selling, General and Administrative Expenses
2017
2016
Change
$
1,090
$
23.2%
180
3.8%
25
915
24.3%
110
2.9%
30
$
1,295
$
1,055
27.5%
28.0%
19.1 %
(110)bp
63.6 %
90bp
(16.7 )%
22.7 %
(50)bp
SG&A increased by $175 million (increase of 19.1%) to 23.2% of revenue in 2017, as compared to 24.3% of
revenue in 2016. The increase in SG&A expenses includes approximately $160 million of incremental SG&A
spending for the Sensus business that we did not have prior to the acquisition in the fourth quarter of 2016. The
remaining increases in SG&A expenses were primarily due to inflation, investments in regional sales channels and
operational capabilities and foreign currency impacts, which were partially offset by savings from restructuring and
other cost actions.
Research and Development Expenses
R&D spending increased $70 million or 63.6% to 3.8% of revenue in 2017 as compared to 2.9% of revenue in 2016
primarily due to additional R&D spend from our recent acquisitions and investments in new products and
technologies.
36
Restructuring Charges and Asset Impairment
Restructuring Charges
During 2017, we incurred restructuring costs of $7 million, $8 million and $5 million in our Water Infrastructure,
Applied Water and Measurement & Control Solutions segments, respectively. We incurred these charges related to
actions taken in 2017 primarily as a continuation of our efforts to reposition our European and North American
businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges
included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure
segments, as well as headcount reductions within our Measurement & Control Solutions segment.
During 2016, we recognized restructuring costs of $12 million, $10 million, $6 million and $2 million in our Water
Infrastructure, Applied Water, Measurement & Control Solutions and Corporate, 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.
The following table presents expected restructuring spend:
Water
Infrastructure
Applied Water
Measurement
& Control
Solutions
Corporate
Total
(in millions)
Actions Commenced in 2017:
Total expected costs
Costs incurred during 2017
Total expected costs remaining
Actions Commenced in 2016:
Total expected costs
Costs incurred during 2016
Costs incurred during 2017
Total expected costs remaining
Actions Commenced in 2015:
Total expected costs
Costs incurred during 2015
Costs incurred during 2016
Total expected costs remaining
$
$
$
$
$
$
19 $
5
14 $
13 $
11
2
— $
4 $
3
1
— $
12 $
4
8 $
2 $
2
— $
1 $
—
1 $
14 $
10 $
2 $
10
4
6
3
2
—
— $
1 $
— $
1 $
1
—
— $
1 $
— $
1
—
—
—
— $
— $
—
34
11
23
39
29
9
1
6
5
1
The Water Infrastructure, Applied Water, Measurement & Control Solutions, and Corporate actions commenced in
2017 consist primarily of severance charges and are expected to continue through the end of 2018. The Water
Infrastructure, Applied Water, Measurement & Control Solutions and Corporate actions commenced in 2016 consist
primarily of severance charges and are largely complete. The Water Infrastructure, Applied Water and
Measurement & Control Solutions actions commenced in 2015 consist primarily of severance charges and are
complete. As a result of these actions initiated in 2017, we achieved savings of approximately $4 million in 2017
and estimate annual future net savings beginning in 2018 of approximately $9 million, resulting in $5 million of
incremental savings from the 2017 actions.
Asset Impairment Charges
During the first quarter of 2017 we determined that certain assets within our Applied Water segment, including a
tradename, were impaired. Accordingly we recognized an impairment charge of $5 million. Refer to Note 10,
"Goodwill and Other Intangible Assets," for additional information.
Operating Income
We generated operating income of $556 million (operating margin of 11.8%) during 2017, reflecting an increase of
$150 million, or 36.9%, when compared to operating income of $406 million (operating margin of 10.8%) during the
prior year. This increase in operating income was largely driven by the inclusion of Sensus operating income for the
37
full year in 2017. Sensus acquisition related costs and restructuring and realignment costs decreased $31 million
and $6 million, respectively, while special charges increased $6 million when compared to the prior year period.
Excluding these costs, adjusted operating income was $630 million (adjusted operating margin of 13.4%) for 2017
as compared to $511 million (adjusted operating margin of 13.6%) for 2016. The decrease in adjusted operating
margin was mostly due to cost inflation increases, increased spending on strategic investments and Sensus
purchase accounting impacts, which were largely offset by cost savings from our global procurement and
productivity initiatives and restructuring savings. The non-cash Sensus purchase accounting impact on adjusted
operating margin for the year was 50 basis points.
The table below provides a reconciliation of 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
Operating margin
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Applied Water
Operating income
Operating margin
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Measurement & Control Solutions
Operating income
Operating margin
Sensus acquisition related costs
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Corporate and other
Operating loss
Restructuring and realignment costs
Sensus acquisition related costs
Special charges
Adjusted operating loss
Total Xylem
Operating income
Operating margin
Restructuring and realignment costs
Sensus acquisition related costs
Special charges
Adjusted operating income
Adjusted operating margin
NM Not Meaningful
38
2017
2016
Change
$
$
$
$
$
$
$
$
$
$
308
15.4%
16
—
324
16.2%
197
13.9%
17
5
219
15.4%
110
8.6%
15
8
—
133
10.4%
(59)
—
7
6
(46)
556
11.8%
41
22
11
630
13.4%
291
15.1%
16
2
309
16.0%
188
13.5%
16
—
204
14.6%
—
—%
25
13
3
41
9.2%
(73)
2
28
—
(43)
406
10.8%
47
53
5
511
13.6%
5.8 %
30 bp
— %
(100.0) %
4.9 %
20 bp
4.8 %
40 bp
6.3 %
NM
7.4 %
80 bp
NM
NM
(40.0) %
(38.5) %
(100.0) %
224.4 %
120 bp
(19.2) %
(100.0) %
(75.0) %
NM
7.0 %
36.9 %
100 bp
(12.8) %
(58.5) %
120.0 %
23.3 %
(20) bp
$
$
$
$
$
$
$
$
$
$
Water Infrastructure
Operating income for our Water Infrastructure segment increased $17 million, or 5.8%, with operating margin also
increasing from 15.1% to 15.4%, a 30 basis point increase as compared to the prior year. Operating margin was
positively impacted year over year by special charges of $2 million in 2016 that did not recur, while restructuring and
realignment costs remained flat. Excluding these items, adjusted operating income increased $15 million, or 4.9%,
with adjusted operating margin increasing from 16.0% to 16.2%, a 20 basis point increase as compared to the prior
year. The increase in adjusted operating margin was primarily due to cost reductions from global procurement and
continuous improvement initiatives as well as restructuring savings and favorable volume. These drivers were
partially offset by increases in cost inflation and spending on strategic investments, as well as unfavorable
transactional foreign currency impacts.
Applied Water
Operating income for our Applied Water segment increased $9 million, or 4.8%, with operating margin also
increasing from 13.5% to 13.9%, a 40 basis point increase as compared to the prior year. Operating margin was
negatively impacted by higher special charges for a non-cash impairment of $5 million and a $1 million increase in
restructuring and realignment costs. Excluding these items, adjusted operating income increased $15 million, or
7.4%, with adjusted operating margin increasing from 14.6% to 15.4%, an 80 basis point increase as compared to
the prior year. The increase in adjusted operating margin was primarily due to cost reductions from global
procurement and continuous improvement initiatives and restructuring savings, which were partially offset by
increases in cost inflation and unfavorable mix.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment increased $110 million (operating margin of
8.6%) for the year as compared to operating income and margin of zero in 2016. Operating margin was positively
impacted by decreases in Sensus acquisition related costs, restructuring and realignment costs and special
charges of $10 million, $5 million and $3 million, respectively. Excluding these items, adjusted operating income
increased $92 million, or 224.4%, with most of the increase coming from the inclusion of the incremental adjusted
operating income for Sensus in 2017. Adjusted operating margin increased from 9.2% to 10.4%, a 120 basis point
increase as compared to the prior year. The increase in adjusted operating margin was primarily due to cost
reductions from global procurement and continuous improvement initiatives, restructuring savings and favorable
volume impacts. These drivers were partially offset by the inclusion of Sensus margins, which were negatively
impacted by purchase accounting. Non-cash Sensus purchase accounting negatively impacted the segment's full
year adjusted operating margin by 200 basis points.
Corporate and other
Operating expense for corporate and other decreased $14 million, or 19.2%, compared to the prior year, primarily
due to a $21 million decrease in Sensus acquisition related costs and a $2 million decrease in restructuring and
realignment costs. This was partially offset by $6 million of special charges incurred during the year which we did
not have in the prior year. Excluding these costs, adjusted operating expense increased $3 million compared to the
prior year, driven mostly by employee related costs.
Interest Expense
Interest expense was $82 million and $70 million for 2017 and 2016, respectively. The increased interest expense
for the the year includes additional interest expense in 2017 related to debt entered into in the fourth quarter of
2016 to fund our acquisition of Sensus. The increase in interest expense was partially offset by the reduction in
special interest charges incurred in 2016 of $8 million in connection with the early extinguishment of our Senior
Notes due in 2016 and $5 million of financing charges on the bridge loan related to the Sensus acquisition, neither
of which recurred in 2017, as well as a lower interest rate on the Senior Notes due 2023 which effectively replaced
the Senior Notes due in 2016. See Note 13, "Credit Facilities and Debt" of our consolidated financial statements for
a description of our credit facilities and long-term debt and related interest.
Income Tax Expense
The income tax provision for 2017 was $136 million at an effective tax rate of 29.2% compared to $80 million at an
effective tax rate of 23.5% in 2016. The 2017 effective tax rate is higher than 2016 due to the provisional one time
deemed repatriation transition tax under the newly enacted Tax Cuts and Jobs Act, partially offset by the benefit
from the remeasurement of deferred tax assets and liabilities and the release of valuation allowances.
39
Tax Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the
Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code,
including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2)
requiring companies to pay a one-time transition tax on certain unrepatriated foreign earnings of foreign
subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring
a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5)
eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized;
(6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible
interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created
in tax years beginning after December 31, 2017.
In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional tax expense of
$46 million as a discrete item. This net income tax expense primarily consists of a tax benefit for the corporate tax
rate reduction of $107 million related to the remeasurement of deferred tax assets and liabilities and a tax expense
for the repatriation transition tax of $153 million. As permitted under SAB 118, we have not completed our
accounting for the income tax effects of certain elements of the Tax Act, and have recorded provisional estimates
related to these items. For certain items, a provisional estimate could not be determined, and therefore, we have
continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act.
See Note 6, "Income Taxes" of our consolidated financial statements for further discussion of the Tax Act.
Other Comprehensive Income
Other comprehensive income was $108 million in 2017 as compared to an $80 million loss in 2016. This increase
was driven primarily by favorable foreign currency translation impacts, primarily due to the strengthening of the
Euro, Great British Pound, Chinese Yuan, Polish Zloty, amongst other various currencies, against the U.S. Dollar as
compared to the weakening of these same currencies in the prior year. Partially offsetting these favorable
movements, was the Euro movement on the Company's net investment hedge as compared to the prior year. The
tax impact on the foreign currency translation related to the net investment hedge also contributed to the year over
year increase. Finally, year over year movement in foreign currency translation on postretirement benefit plans
partially offset the increase in other comprehensive income.
2016 versus 2015
Revenue
Revenue generated for 2016 was $3,771 million, an increase of $118 million, or 3.2%, compared to $3,653 million
in 2015. On a constant currency basis, revenue grew 5.3%. This increase in revenue was primarily driven by
additional revenue of $163 million from acquisitions. Additionally, we had strong organic growth, driven by strength
within the public utility, industrial and commercial end markets in western Europe, particularly in the United
Kingdom, as well as large project deliveries in emerging markets, including India and Asia. Partially offsetting this
growth were declines in the United States primarily due to ongoing weakness in the industrial end market.
The following table illustrates the impact on 2016 revenue from organic growth, recent acquisitions/divestitures, and
foreign currency translation in relation to revenue.
(in millions)
2015 Revenue
Organic Growth
Acquisitions
Constant Currency
Foreign currency translation
(a)
Total change in revenue
2016 Revenue
Water Infrastructure
Applied Water
Measurement &
Control Solutions
Total Xylem
$ Change % Change
$ 1,940
44
2.3 %
—
44
(52)
(8)
$ 1,932
— %
2.3 %
(2.7)%
(0.4)%
$ Change % Change
$ Change % Change
$ Change % Change
$ 1,422
$
291
$ 3,653
(9)
—
(9)
(0.6)%
— %
(0.6)%
(20)
(29)
(1.4)%
(2.0)%
$ 1,393
(6)
(2.1)%
163
157
56.0 %
54.0 %
29
163
192
0.8 %
4.5 %
5.3 %
(2)
(0.7)%
(74)
(2.0)%
155
446
$
53.3 %
118
3.2 %
$ 3,771
(a)
Foreign currency translation impact primarily due to fluctuations in the value of the British Pound, Chinese Yuan,
Argentinian Peso and other various currencies against the U.S. Dollar.
40
Water Infrastructure
Water Infrastructure’s revenue decreased $8 million, or 0.4%, in 2016 (2.3% increase on a constant currency basis)
compared to 2015. The constant currency increase included organic growth of $44 million, or 2.3%.
Organic growth in our treatment and transport applications primarily reflect increases in the public utility end market
where we have been gaining share. Organic growth in the transport application in the public utility end markets in
the United States and India was largely offset by declines in the industrial dewatering business in the United States
due to continued challenges in the oil and gas market, as well as weakness in the Middle East driven by slower
government funding. Organic growth in the treatment application was driven primarily by strong backlog execution
and project deliveries in the United States public utility market.
Applied Water
Applied Water’s revenue decreased $29 million, or 2.0%, in 2016 (0.6% decrease on a constant currency basis)
compared to 2015. The decline on a constant currency basis was entirely attributable to organic revenue decline of
$9 million, or 0.6%, which was driven by declines in the United States, partially offset by growth in western Europe
and, to a lesser extent, the emerging markets.
From an applications perspective, the decrease in organic revenue was predominately due to declines in the United
States across all applications, particularly industrial water which saw continued weakness in the oil and gas
markets. These declines were partially offset by strength in western Europe due to several large projects combined
with strength in commercial building services as well as general industrial applications. Agricultural applications
declined in the United States primarily due to market weakness.
Measurement & Control Solutions
Measurement & Control Solutions' revenue increased $155 million, or 53.3%, in 2016 (54.0% increase on a
constant currency basis) compared to 2015. The constant currency increase included contributions from
acquisitions of $163 million which was partially offset by an organic decline of $6 million, or 2.1%, due to weakness
from test applications in the United States primarily as a result of lower government agency spending and
weakness in the mining and oil and gas markets.
Orders/Backlog
Orders received during 2016 increased by $113 million, or 3.0%, to $3,824 million (5.1% increase on a constant
currency basis). The order growth on a constant currency basis was primarily made up of orders from recent
acquisitions, primarily Sensus, of $179 million and organic order growth of $12 million, or 0.3%, over the prior year.
Water Infrastructure segment orders decreased $52 million, or 2.6%, to $1,957 million (0.1% growth on a constant
currency basis). Orders were unfavorably impacted by $55 million from foreign currency translation, while orders
were up slightly year over year on an organic basis. Organic orders for the treatment application increased by 5%
over the prior year reflecting continued growth in the public utility market with a large ozone project in China and
order increases in Europe; however, these orders are largely project based with longer lead times for delivery and
recognition of revenue. Largely offsetting the organic order growth in the treatment application were declines in the
transport application, primarily due to decreased dewatering orders impacted by the continued weakness in oil and
gas, as well as mining, which were partially offset by public utility water and wastewater transport order strength in
Europe, particularly in the Nordic region.
Orders decreased in our Applied Water segment by $10 million, or 0.7%, to $1,405 million (0.7% increase on a
constant currency basis). The order increase on a constant currency basis was due to organic order growth of 0.7%
driven by strength in Europe from new product launches that was partially offset by weakness in the United States.
The Measurement & Control Solutions segment orders increased $175 million, or 61.0%, to $462 (62.0% increase
on a constant currency basis). The order growth on a constant currency basis was primarily orders from recent
acquisitions of $179 million. Organic orders from test applications were flat versus the prior year.
Backlog includes contractual customer commitments as well as purchase orders on hand as of the end of the
period. Delivery schedules vary from customer to customer based upon their requirements. Annual or multi-year
contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts.
As such, beginning total backlog, plus orders, minus revenues will not equal ending total backlog due to contract
adjustments, foreign currency fluctuations and other factors. Typically, large projects require longer lead production
cycles, and delays can occur from time to time. Total backlog was $1,292 million at December 31, 2016 and $716
million at December 31, 2015. The December 31, 2016 backlog balance has been revised to include contractual
agreements that Sensus has with customers that do not have minimum commitments but which we believe will be
41
executed upon over the terms of the contracts. This increase is primarily attributable to the acquisition of the
Sensus business which had a backlog balance of $599 million at December 31, 2016.
Gross Margin
Gross margins as a percentage of consolidated revenue increased to 38.7% in 2016 from 38.4% in 2015. The gross
margin increase was primarily due to the benefits realized from cost saving initiatives through global sourcing and
lean six sigma, partially offset by material and labor inflation headwinds and unfavorable currency impacts and mix.
Operating Expenses
(in millions)
Selling, general and administrative expenses
SG&A as a % of revenue
Research and development expenses
R&D as a % of revenue
Restructuring charges
Operating expenses
Expense to revenue ratio
Selling, General and Administrative Expenses
2016
2015
Change
$
915
$
24.3%
110
2.9%
30
$
1,055
$
28.0%
854
23.4%
95
2.6%
6
955
26.1%
7.1 %
90bp
15.8 %
30bp
400.0 %
10.5 %
190bp
SG&A increased by $61 million (increase of 7.1%) to 24.3% of revenue in 2016, as compared to 23.4% of revenue
in 2015. The increase in SG&A expenses includes $28 million of Sensus acquisition related costs. The remaining
increases in SG&A expenses were primarily due to additional operating expenses from recent acquisitions,
investments in regional sales channels and operational capabilities and inflation, which were partially offset by
savings from restructuring and other cost actions.
Research and Development Expenses
R&D spending increased $15 million or 15.8% to 2.9% of revenue in 2016 as compared to 2.6% of revenue in 2015
primarily due to additional R&D spend from our recent acquisitions and investments in new products and
technologies.
Restructuring Charges
During 2016, we incurred restructuring costs of $12 million, $10 million, $6 million and $2 million in our Water
Infrastructure, Applied Water, Measurement & Control Solutions and Corporate and other 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 2015, we recognized restructuring costs of $4 million, $1 million, and $1 million in our Water Infrastructure,
Applied Water, and Monitoring & Control Solutions 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.
42
The following table presents expected restructuring spend:
(in millions)
Actions Commenced in 2016:
Total expected costs
Costs incurred during 2016
Total expected costs remaining
Actions Commenced in 2015:
Total expected costs
Costs incurred during 2015
Costs incurred during 2016
Total expected costs remaining
Water
Infrastructure
Applied Water
Measurement
& Control
Solutions
Corporate
Total
$
$
$
$
13 $
11
2 $
4 $
3
1
— $
14 $
10
4 $
1 $
1
—
— $
10 $
6
4 $
2 $
2
— $
1 $
— $
1
—
—
—
— $
— $
39
29
10
6
5
1
—
Approximate total expected costs associated with actions that commenced during 2016 are $13 million for Water
Infrastructure, $14 million for Applied Water, $10 million for Measurement & Control Solutions, and $2 million for
Corporate. These costs primarily comprise severance charges. The Water Infrastructure and Applied Water actions
are expected to continue through the end of 2017. The Measurement & Control Solutions actions are expected to
continue through 2018. All of the costs associated with the Corporate actions have been incurred. As a result of
these actions initiated in 2016, we achieved savings of approximately $8 million in 2016 and estimate annual future
net savings beginning in 2017 of approximately $28 million, resulting in $20 million of incremental savings from the
2016 actions.
Operating Income
We generated operating income of $406 million during 2016, reflecting a decrease of $43 million or 9.6% from $449
million during the prior year. Operating income as a percentage of revenue was 10.8% for 2016 versus 12.3% for
2015, a decrease of 150 basis points. This decrease in operating margin was primarily due to Sensus acquisition
related costs of $53 million, increases in restructuring and realignment costs of $27 million and increases in special
charges of $4 million. Excluding these costs, adjusted operating income was $511 million, with an adjusted
operating margin of 13.6%, reflecting an increase of $41 million or 8.7% and 70 basis points, respectively, as
compared with 2015 adjusted operating income of $470 million (adjusted operating margin of 12.9%). This
increase in adjusted operating income was driven by strong progress in our productivity initiatives and cost saving
actions, which more than offset cost inflation, spending on strategic investments in new products and technologies
and unfavorable mix.
43
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
Operating margin
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Applied Water
Operating income
Operating margin
Restructuring and realignment costs
Adjusted operating income
Adjusted operating margin
Measurement & Control Solutions
Operating income
Operating margin
Sensus acquisition related costs
Restructuring and realignment costs
Special charges
Adjusted operating income
Adjusted operating margin
Corporate and other
Operating loss
Restructuring and realignment costs
Sensus acquisition related costs
Adjusted operating loss
Total Xylem
Operating income
Operating margin
Restructuring and realignment costs
Sensus acquisition related costs
Special charges
Adjusted operating income
Adjusted operating margin
NM Not Meaningful
$
$
$
$
$
$
$
$
$
2016
2015
Change
291
$
15.1%
16
2
309
$
16.0%
188
$
13.5%
16
204
14.6%
$
— $
—%
25
13
3
41
$
$
261
13.5%
11
1
273
11.5 %
160 bp
45.5 %
100.0 %
13.2 %
14.1%
190 bp
190
13.4%
7
197
13.9%
42
14.4%
—
2
—
44
(1.1) %
10 bp
128.6 %
3.6 %
70 bp
NM
NM
NM
NM
NM
(6.8) %
9.2%
15.1%
(590) bp
(73)
$
$
$
2
28
(43)
406
10.8%
47
53
5
(44)
—
—
(44)
449
12.3%
20
—
1
470
65.9 %
NM
NM
(2.3) %
(9.6) %
(150) bp
135.0 %
100.0 %
NM
8.7 %
70 bp
$
511
$
13.6%
12.9%
44
Water Infrastructure
Operating income for our Water Infrastructure segment increased $30 million or 11.5%, with operating margin also
increasing from 13.5% to 15.1%, a 160 basis point increase as compared to the prior year. Operating margin was
negatively impacted by a $5 million increase in restructuring and realignment costs and a $1 million increase for
special charges. Excluding restructuring and realignment costs and special charges, adjusted operating income
increased $36 million or 13.2%, with adjusted operating margin increasing from 14.1% to 16.0%, a 190 basis point
increase as compared to the prior year. The increase in adjusted operating margin was due to global procurement
and continuous improvement initiatives, which more than offset cost inflation and increased spending in growth
initiatives.
Applied Water
Operating income for our Applied Water segment decreased $2 million or 1.1%, with operating margin increasing
slightly from 13.4% to 13.5%. Operating margin was negatively impacted by increased restructuring and
realignment costs of $9 million. Excluding restructuring and realignment costs, adjusted operating income
increased $7 million or 3.6%, with adjusted operating margin increasing from 13.9% to 14.6%, a 60 basis point
increase as compared to the prior year. The increase in adjusted operating margin was due to global procurement
and productivity gains, which more than offset cost inflation, strategic investments and unfavorable mix.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment was $0 million, a decrease of $42 million.
Operating income was negatively impacted by $25 million of Sensus acquisition related costs in 2016 and increases
in restructuring and realignment and special charges of $11 million and $3 million, respectively. Excluding these
costs, adjusted operating income decreased $3 million, or 6.8%, with adjusted operating margin decreasing from
15.1% to 9.2%, a 590 basis point decrease as compared to the prior year. The decrease in operating margin was
largely due to negative impacts from acquisitions as well as increased spending on strategic investments.
Corporate and other
Operating loss for corporate and other increased $29 million or 65.9% (decreased $1 million or 2.3% on an adjusted
basis) compared to the prior year, primarily due to $28 million of Sensus acquisition related costs and increased
restructuring costs of $2 million.
Interest Expense
Interest expense was $70 million and $55 million for 2016 and 2015, respectively, primarily related to interest on
our Senior Notes, including a make-whole interest premium of $7 million that was paid in the second quarter of
2016 and fees of $5 million related to the Bridge Facility entered into for the Sensus acquisition. See Note 13,
“Credit Facilities and Long-Term Debt,” for further details.
Income Tax Expense
The income tax provision for 2016 was $80 million at an effective tax rate of 23.5% compared to $63 million at an
effective tax rate of 15.6% in 2015. The 2016 effective tax rate is higher than 2015 due to an increase in valuation
allowance and impact of repatriation of foreign earnings offset by a favorable settlement with the tax authorities.
Other Comprehensive (Loss) Income
Other comprehensive loss before tax of $57 million in 2016 as compared to $130 million loss in 2015 was primarily
due to foreign currency translation loss of $65 million in 2016 compared to a loss of $180 million for 2015.
Contributing to this decreased loss was a lower translation loss of $115 million primarily due to less weakening of
the Swedish Krona and the Canadian Dollar against the U.S. Dollar, partially offset by the additional weakening of
the Euro and the Great British Pound against the U.S. Dollar. Additionally, there were net investment hedges in
place that more than offset the weakening of the Euro against the U.S. Dollar, contributing a net Euro gain into
comprehensive income in 2016. Other items offsetting the lower translation loss of $115 million were net changes
in postretirement benefit plan gains/losses of $43 million.
45
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,
2017
2016
2015
$
$
686 $
(181)
(421)
22
106 $
497 $
(1,886)
1,034
(17)
(372) $
464
(132)
(262)
(53)
17
(a) 2017 impact is primarily due to the strengthening of the Euro and the Chinese Yuan against the U.S. Dollar. 2016 impact
is primarily due to the weakness of the Euro and the Chinese Yuan against the U.S. dollar. 2015 impact is primarily due to
the weakness of the Euro against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
During 2017, net cash provided by operating activities was $686 million, compared to $497 million in 2016. The
$189 million year-over-year increase was primarily driven by increased cash from operating activities of the Sensus
business acquired in the fourth quarter of 2016 and strong operating cash performance across the rest of the
business.
During 2016, net cash provided by operating activities was $497 million, compared to $464 million in 2015. The $33
million year-over-year increase was primarily driven by continued improvement in working capital levels. The
improvement in working capital includes significant contribution from the acquisition of Sensus during the fourth
quarter of 2016 which has positively impacted our working capital efficiency.
Investing Activities
Cash used in investing activities was $181 million in 2017, compared to $1,886 million in 2016. This decrease of
$1,705 million was primarily driven by the $1,782 million spent on the acquisition of Sensus and two other
businesses in 2016 as compared to the $33 million spent for acquisitions in 2017. This impact is partially offset by
increased spending of $46 million over the prior year on capital projects, including spending on capitalized software
in the Sensus business.
Cash used in investing activities was $1,886 million in 2016 compared to $132 million in 2015. The increase of
$1,754 million was primarily due to $1,782 million spent on the acquisition of Sensus and two other businesses in
2016 as compared to $18 million in 2015. Cash provided from other investing activities partially offset the usage.
Financing Activities
Cash used by financing activities was $421 million in 2017, compared to cash generated by financing activities of
$1,034 in 2016. In 2017, the net decrease in cash provided was primarily due to the issuance of long term and short
term debt related to acquisition financing in 2016 versus the net repayment of short-term debt in 2017 (see Note 13,
"Credit Facilities and Long-Term Debt" of our consolidated financial statements for a full discussion of debt
activities). Also contributing to the decrease in cash generated by financing activities were increased share
repurchases and higher dividend payments in 2017.
Cash generated by financing activities was $1,034 million in 2016. In 2015, financing activities used $262 million of
cash. In 2016, the net increase in cash provided was due to the issuance of long term and short term debt related
to acquisition financing and a reduction in share repurchases. This increase was partially offset by net repayments
of short term debt (see Note 13, "Credit Facilities and Long-Term Debt" of our consolidated financial statements for
a full discussion of debt activities) and higher dividend payments.
46
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, strategic investments
and dividends. 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.
We monitor our global funding requirements and seek to meet our liquidity needs on a cost effective basis. 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.
Credit Facilities & Long-Term Contractual Commitments
See Note 13, "Credit Facilities and Long-Term Debt" of our consolidated financial statements for a description of our
credit facilities and long-term debt.
Non-U.S. Operations
For 2017 and 2016, we generated 54% and 58% of our revenue from non-U.S. operations, respectively. While the
addition of Sensus increases our revenue profile in the U.S., we continue to grow our operations in the emerging
markets and elsewhere outside of the United States. As such, we expect to continue to generate significant revenue
from non-U.S. operations and expect a substantial portion of 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 and reassess whether there is a need to
repatriate funds held internationally to support our U.S. operations. As of December 31, 2017, we have provided a
deferred tax liability of $20 million for foreign withholding taxes and state income taxes on $769 million expected to
be repatriated to the U.S. parent as deemed necessary.
Contractual Obligations
The following table summarizes our contractual commitments as of December 31, 2017:
(in millions)
Debt and capital lease obligations (1)
$
Interest payments (1) (2)
Operating lease obligations
Purchase obligations (3)
Other long-term obligations reflected on
the balance sheet
2018
2019 - 2020
2021 - 2022
Thereafter
Total
— $
77
65
141
12
— $
600 $
1,622 $
2,222
153
95
7
27
124
52
1
15
499
45
—
32
853
257
149
86
Total commitments
$
295 $
282 $
792 $
2,198 $
3,567
In addition to the amounts presented in the table above, we have recorded liabilities for net investment hedges of $64 million and
employee severance indemnity of $16 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 deferred income tax liabilities
and uncertain tax positions are presented in Note 6, "Income Taxes" of the consolidated financial statements, and as such, these
obligations are 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 $2 million to $3 million per year on environmental investigation and remediation and approximately $6 million to
47
$7 million per year on workers' compensation and general liability. At December 31, 2017, we had estimated and accrued $4
million and $30 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 short-term and
long-term debt including current maturities and exclude unamortized discounts.
(2) Amounts represent estimates of future interest payments on short-term and long-term debt outstanding as of
December 31, 2017.
(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.
Off-Balance Sheet Arrangements
As of December 31, 2017, 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, 2017, the amount of stand-by letters of credit, bank guarantees and surety bonds was $240 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. Generally, these elements are satisfied within the same reporting period although certain contracts
may be completed over 6 months. The allocation of sales price between elements may impact the timing of
48
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.
We adopted the new accounting guidance regarding revenue from contracts with customers January 1, 2018 using
the modified retrospective approach (refer to Note 2 “Recently Issued Accounting Pronouncements”). Adoption of
the guidance did not have a material impact on our financial statements.
Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the
financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which
we expect the differences will reverse. Based on the evaluation of available evidence, we recognize future tax
benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than not we will
realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets
and reflect any changes to our estimate of the amount we are more likely than not to realize in the valuation
allowance, with a corresponding adjustment to earnings or other comprehensive income, as appropriate.
In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary
differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future
taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and
changes to future taxable income estimates.
Due to U.S. Tax Reform, we have recorded provisional amounts of foreign withholding taxes and state income taxes
on earnings that are expected to be repatriated to the U.S. parent. The Company intends to distribute a portion of
the earnings taxed under the Tax Act. We have not recorded any deferred taxes on the amounts that the Company
currently does not intend to distribute as the determination of any deferred taxes on this amount is not practicable.
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.
Business Combinations. We record acquisitions using the purchase method of accounting. All of the assets
acquired, liabilities assumed, contractual contingencies and contingent consideration is recorded at fair value as of
the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and
intangible assets acquired is recorded as goodwill. The application of the purchase method of accounting for
business combinations requires management to make significant estimates and assumptions in the determination
of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price
consideration between assets that are depreciated and amortized from goodwill. These assumptions and estimates
include a market participant’s use of the asset and the appropriate discount rates for a market participant. Our
estimates are based on historical experience, information obtained from the management of the acquired
companies and, when appropriate, includes assistance from independent third-party appraisal firms. Significant
assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in
the future, the cost to build/recreate certain technology, the appropriate weighted-average cost of capital, and the
cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and
49
unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or
validity of such estimates.
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. For goodwill, 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. If
the carrying value of the reporting unit exceeds its estimated fair value, then an impairment charge is recognized for
that excess up to the amount of recorded goodwill. 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.
During the fourth quarter of 2017, 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 2017. However, future indefinite-lived intangible impairment tests could
result in a charge to earnings. We will continue to evaluate indefinite-lived intangibles 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.
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.
50
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, 2017 and
2016 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.
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 2017 and 2016.
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
2017
2016
U.S.
Int’l
U.S.
Int’l
3.75%
NM
4.25%
8.00%
NM
2.43%
2.93%
2.63%
7.20%
2.76%
4.25%
NM
4.27%
8.00%
NM
2.63%
2.76%
3.44%
7.25%
3.29%
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
2017
2016
2015
7.30%
5.70%
7.32%
12.20%
7.38%
3.51%
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 2018 is estimated at 7.30%. 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
51
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, 2018, is 2.58%. 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, 2018, our expected rate of future compensation is 3.03% 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 8.72% for
2018, decreasing ratably to 4.50% in 2026. 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.
We currently anticipate making contributions to our pension and postretirement benefit plans in the range of $20
million to $30 million during 2018, of which $6 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 $31 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, 2017 and 2016 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 $29 million.
New Accounting Pronouncements
See Note 2, “Recently Issued Accounting Pronouncements,” of the consolidated financial statements for a complete
discussion of recent accounting pronouncements.
52
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 54% 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, Polish Zloty, Canadian
Dollar, British Pound, 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, Canadian Dollar, Swedish Krona 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 5% and 6%
impact on Xylem's consolidated revenue and income, respectively, 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 we continually review our domestic and foreign
cash profile, expected future cash generation and investment opportunities and reassess whether there is a need
repatriate funds held internationally to support our U.S. operations. Accordingly, 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, 2017, our long term debt portfolio is primarily comprised of four series of fixed-rate senior notes
that total $2.1 billion. The senior notes are not exposed to interest rate risk as the bonds are at a fixed-rate until
maturity. 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.
53
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, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and
2015
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017,
2016 and 2015
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
54
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82
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85
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95
97
99
100
102
103
105
105
105
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Xylem Inc.
Rye Brook, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Xylem Inc. and subsidiaries (the "Company")
as of December 31, 2017 and 2016, 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, 2017, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2017,
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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, 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 23, 2018, expressed an unqualified
opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 23, 2018
We have served as the Company's auditor since 2010.
55
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, net
(Loss)/gain on sale of businesses
Income before taxes
Income tax expense
Net income
Less: Net loss attributable to non-controlling interests
Net income attributable to Xylem
Earnings per share:
Basic
Diluted
Weighted average number of shares:
Basic
Diluted
Dividends declared per share
2017
2016
2015
4,707 $
2,856
1,851
1,090
180
25
556
82
2
(10)
466
136
330
(1)
331 $
3,771 $
2,310
1,461
915
110
30
406
70
4
—
340
80
260
—
260 $
1.84 $
1.83 $
1.45 $
1.45 $
3,653
2,249
1,404
854
95
6
449
55
—
9
403
63
340
—
340
1.88
1.87
179.6
180.9
0.7200 $
179.1
180.0
0.6196 $
180.9
181.7
0.5632
$
$
$
$
$
See accompanying notes to consolidated financial statements.
56
XYLEM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
Year Ended December 31,
Net income
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment
Foreign currency gain reclassified into net income
Net change in derivative hedge agreements:
Unrealized gain (loss)
Amount of (gain) loss reclassified into net income
Net change in postretirement benefit plans:
Net (loss) gain
Prior service credit
Amortization of prior service credit cost
Amortization of net actuarial loss into net income
Settlement
Foreign currency translation adjustment
Other comprehensive income (loss), before tax
Income tax (benefit) expense related to other comprehensive loss
Other comprehensive income (loss), net of tax
Comprehensive income
2017
2016
2015
$
330 $
260 $
340
79
—
9
(5)
(19)
1
(3)
13
1
(18)
58
(50)
108
438 $
$
(65)
—
—
(2)
(20)
1
(3)
13
—
19
(57)
23
(80)
(180)
(8)
(22)
20
23
1
(3)
18
—
21
(130)
9
(139)
180 $
201
See accompanying notes to consolidated financial statements.
57
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 $35
and $30 in 2017 and 2016, 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, net
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 192.3 and 191.4 shares in 2017 and 2016,
respectively
Capital in excess of par value
Retained earnings
Treasury stock – at cost 12.4 shares and 11.9 shares in 2017 and 2016,
respectively
Accumulated other comprehensive loss
Total stockholders’ equity
Non-controlling interest
Total equity
Total liabilities and stockholders’ equity
2017
2016
$
414 $
308
$
$
956
524
177
2,071
643
2,768
1,168
210
6,860 $
549 $
551
—
1,100
2,200
442
252
347
843
522
166
1,839
616
2,632
1,201
186
6,474
457
521
260
1,238
2,108
408
352
161
4,341
4,267
2
1,912
1,227
(428)
(210)
2,503
16
2,519
6,860 $
$
2
1,876
1,033
(403)
(318)
2,190
17
2,207
6,474
See accompanying notes to consolidated financial statements.
58
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
Loss/(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 businesses
Cash received from investments
Cash paid for investments
Other, net
Net Cash — Investing activities
Financing Activities
Short-term debt issued
Short-term debt repaid, net
Long-term debt issued, net
Long-term debt repaid
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)
2017
2016
2015
$
330 $
260 $
340
109
125
(33)
21
25
10
19
(28)
(33)
(79)
27
50
28
104
11
686
(170)
1
(33)
16
10
(11)
6
(181)
—
(282)
—
—
(25)
16
—
(130)
—
(421)
22
106
308
414 $
87
64
14
18
30
—
6
(16)
(27)
(6)
(15)
61
13
(13)
21
497
(124)
1
(1,782)
—
—
—
19
(1,886)
274
(80)
1,540
(608)
(4)
24
—
(112)
—
1,034
(17)
(372)
680
308 $
78 $
57 $
49 $
78 $
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
52
75
$
$
$
See accompanying notes to consolidated financial statements.
59
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)
Treasury
Stock
Non-
Controlling
Interest
Total
Balance at December 31, 2014
$
2
$
1,796
$
Net income
Other comprehensive loss, net
Dividends declared ($0.5632 per
share)
Stock incentive plan activity
Repurchase of common stock
Balance at December 31, 2015
Net income
Other comprehensive loss, net
Dividends declared ($0.6196 per
share)
Stock incentive plan activity
Repurchase of common stock
Acquisition activity
38
$
2
$
1,834
$
42
$
648
340
(103)
$
885
260
(112)
(99) $
(220) $
— $ 2,127
(139)
(179)
340
(139)
(103)
38
(179)
(238) $
(399) $
— $ 2,084
(80)
(4)
Balance at December 31, 2016
$
2
$
1,876
$
1,033
$
(318) $
(403) $
Cumulative effect of change in
accounting principle
Net income
Other comprehensive income,
net
Dividends declared ($.72 per
share)
Stock incentive plan activity
Repurchase of common stock
(7)
331
(130)
36
108
(5)
(20)
Balance at December 31, 2017
$
2
$
1,912
$
1,227
$
(210) $
(428) $
16
$ 2,519
See accompanying notes to consolidated financial statements.
60
17
17
(1)
260
(80)
(112)
42
(4)
17
$ 2,207
(7)
330
108
(130)
31
(20)
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.
As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving
Xylem’s Analytics business from our Water Infrastructure segment to combine it with our Sensus and Visenti
businesses, which were acquired in the fourth quarter of 2016, to form Measurement & Control Solutions. We
believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will
lead to operating efficiencies by integrating the supply chain process and moving to a leaner functional structure.
Accordingly, our reportable segments have changed. Beginning with the second quarter of 2017, the Company now
reports the financial position and results of operations of its Analytics, Sensus and Visenti businesses as one new
reportable segment, which is called Measurement & Control Solutions. Our Water Infrastructure reportable segment
no longer includes the results of our Analytics business. The Company has recast certain historical amounts
between the Company's Water Infrastructure and Measurement & Control Solutions reportable segments, however
this change had no impact on the Company's historical consolidated financial position or results of operations. The
recast financial information does not represent a restatement of previously issued financial statements. Our Applied
Water reportable segment remains unchanged.
Xylem operates in three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. The
Water Infrastructure segment focuses on the transportation and treatment of water, offering a range of products
including water and wastewater pumps, treatment equipment, and controls and systems. The Applied Water
segment serves many of the primary uses of water and focuses on the residential, commercial and industrial
markets. The Applied Water segment’s major products include pumps, valves, heat exchangers, controls and
dispensing equipment. The Measurement & Control Solutions segment focuses on developing advanced
technology solutions that enable intelligent use and conservation of critical water and energy resources as well as
analytical instrumentation used in the testing of water. The Measurement & Control Solutions segment's major
products include smart metering, networked communications, measurement and control technologies, software and
services including cloud-based analytics, remote monitoring and data management, leak detection and pressure
monitoring solutions and testing 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 (now ITT LLC),
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 (now ITT LLC) 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.
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, valuation of intangible assets, goodwill and indefinite lived intangible impairment
testing and contingent liabilities. Actual results could differ from these estimates.
61
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.
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. Generally, these elements are satisfied within the same
reporting period although certain contracts may be completed over 6 months. 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 unit awards and performance share unit 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 awards, the
calculated compensation cost is adjusted based on an estimate of awards ultimately expected to vest and our
62
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 unit awards is determined using the closing price of our
common stock on date of grant. The fair value of Return on Invested Capital ("ROIC") performance share units at
100% target is determined using the closing price of our common stock on date of grant. The fair value of Total
Shareholder Return ("TSR") performance share units is calculated on the date of grant using a Monte Carlo
simulation model utilizing several key assumptions, including expected Company and peer company share price
volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other
award design features.
Research and Development
We conduct research and development activities, which consist primarily of the development of new products,
product applications, and manufacturing processes. These costs are charged to expense as incurred.
Exit and Disposal Costs
We periodically initiate management-approved restructuring activities to achieve cost savings through reduced
operational redundancies and to position ourselves strategically in the market in response to prevailing economic
conditions and associated customer demand. Costs associated with restructuring actions can include severance,
infrastructure charges to vacate facilities or consolidate operations, contract termination costs and other related
charges. For involuntary separation plans, a liability is recognized when it is probable and reasonably estimable.
For voluntary separation plans, a liability is recognized when the employee irrevocably accepts the voluntary
termination. For one-time termination benefits, such as additional severance pay or benefit payouts, and other exit
costs, such as lease termination costs, the liability is measured and recognized initially at fair value in the period in
which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of
change.
Deferred Financing Costs
Deferred financing costs represent costs incurred in conjunction with our debt financing activities and are
capitalized in 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.
Due to U.S. Tax Reform, we have recorded provisional amounts of foreign withholding taxes and state income taxes
on earnings that are expected to be repatriated to the U.S. parent. The Company intends to distribute a portion of
the earnings taxed under the Tax Cuts and Jobs Act (the "Tax Act"). We have not recorded any deferred taxes on
the amounts that the Company currently does not intend to distribute as the determination of any deferred taxes on
this amount is not practicable.
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
63
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.
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, returns 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, 2017 and
2016 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 net realizable
value 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,
64
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 25 years and is
included in cost of revenue or selling, general and administrative expense. Certain of our intangible assets, namely
certain brands and trademarks, as well as FCC licenses, have an indefinite life and are not amortized.
Long-Lived Asset Impairment
Long-lived assets, including intangible assets with finite lives, are amortized and tested for impairment whenever
events or changes in circumstances indicate their carrying value may not be recoverable. We assess the
recoverability of long-lived assets based on the undiscounted future cash flow the assets are expected to generate
and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use
of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the
asset. When an impairment is identified, we reduce the carrying amount of the asset to its estimated fair value
based on a discounted cash flow approach or, when available and appropriate, to comparable market values.
Goodwill and indefinite-lived intangible assets are not amortized, but rather are tested for impairment annually (or
more frequently if impairment indicators arise, such as changes to the reporting unit structure, significant adverse
changes in the business climate or an adverse action or assessment by a regulator). We conduct our annual
impairment testing on the first day of our fourth quarter. For goodwill, the 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. If the carrying value of the reporting unit exceeds
its estimated fair value, then an impairment charge is recognized for that excess up to the amount of recorded
goodwill. 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 discounted at an appropriate rate.
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”) to be 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. Acquisition-related expenses and
restructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.
65
Derivative Financial Instruments
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of
derivatives depends on whether we have elected to designate a derivative in a hedging relationship and apply
hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge
accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an
asset, liability, or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives
designated and qualifying as a hedge of the exposure to variability in expected future cash flows, including
forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the
foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the
matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in
the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the
earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts
that are intended to hedge certain risks economically, even though hedge accounting does not apply or we elect not
to apply hedge accounting.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of
foreign exchange risk is recorded in other comprehensive income ("OCI") and is subsequently reclassified into
either revenue or cost of revenue (hedge of sales classified into revenue and hedge of purchases classified into
cost of revenue) in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of the
change in fair value of the derivative is recognized directly in selling, general and administrative expenses. Our
policy is to de-designate cash flow hedges at the time forecasted transactions are recognized as assets or liabilities
on a business unit’s balance sheet and report subsequent changes in fair value through selling, general and
administrative expenses where the gain or loss due to movements in currency rates on the underlying asset or
liability is revalued. If it becomes probable that the originally forecasted transaction will not occur, the gain or loss
related to the hedge recorded within accumulated other comprehensive income ("AOCI") 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 AOCI 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.
66
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, 2017 and
2016 were uninsured. Foreign cash balances at December 31, 2017 and 2016 were $373 million and $242 million,
respectively.
Fair Value Measurements
We determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We use a hierarchical structure to
prioritize the inputs to valuation techniques used to measure fair value into three broad levels 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) as an alternative to the fair value hierarchy as discussed above.
Note 2. Recently Issued Accounting Pronouncements
Pronouncements Not Yet Adopted
In February 2018, the Financial Accounting Standards Board (“FASB”) issued amended guidance on the
reclassification of certain tax impacts from Accumulated Other Comprehensive Income ("AOCI"). The amendment
allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the Tax Act. The guidance also requires certain disclosures related to stranded tax effects.
This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those
annual periods. Early adoption is permitted. The guidance may be applied either in the period of adoption or
retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax
rate in the Tax Act is recognized. We are evaluating the impact of the guidance on our financial condition and
results of operations.
In August 2017, the FASB issued amended guidance on hedging activities. The amendment better aligns a
company’s risk management activities and financial reporting for hedging relationships through changes to both the
designation and measurement guidance for qualifying for hedging relationships and the presentation of hedge
results. Specifically, the guidance:
(1) Eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment
hedges
(2) Eliminates the benchmark interest rate concept of variable - rate instruments in cash flow hedges and
allows companies to designate the contractually specified interest rate as the hedged risk
67
(3) Requires a company to present the earnings effect of the hedging instrument in the same income statement
line item in which the earnings effect of the hedged item is reported
(4) Provides the ability to perform subsequent hedge effectiveness tests qualitatively
This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those
annual periods. Early adoption is permitted with the effect of adoption reflected as of the beginning of the fiscal year
of adoption. For cash flow and net investment hedges existing at the date of adoption, a cumulative-effect
adjustment related to eliminating the separate measurement of ineffectiveness is required. Other presentation and
disclosure guidance is required only prospectively. We are evaluating the impact of the guidance on our financial
condition and results of operations.
In March 2017, the FASB issued amended guidance on presentation of net periodic benefit costs. The amendment
requires that an employer report the service cost component in the same line item or items as other compensation
costs arising from services rendered by the pertinent employees during the period. The other components are
required to be presented in the income statement separately and outside a subtotal of income from operations, if
one is presented. The amendment also requires entities to disclose the income statement lines that contain the
other components if they are not appropriately described. This guidance is effective retrospectively for periods
beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is
permitted. The adoption of this guidance is expected to impact the presentation between operating income and
other non operating income within Xylem's Consolidated Income Statement but is not expected to have a material
impact on our consolidated financial condition or results of operations.
In June 2016, the FASB issued guidance amending the accounting for the impairment of financial instruments,
including trade receivables. Under current guidance, credit losses are recognized when the applicable losses are
probable of occurring and this assessment is based on past events and current conditions. The amended guidance
eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast
information when estimating expected credit losses. Generally, this should result in a more timely recognition of
credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 with
early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of
the amended guidance should be applied using a modified retrospective approach except for debt securities, which
require a prospective transition approach. We are evaluating the impact of the guidance on our financial condition
and results of operations.
In February 2016, the 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 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 using a modified retrospective approach with the cumulative effect
recognized as of the date of initial application. Early adoption is permitted for interim and annual reporting periods
beginning after December 15, 2016. We adopted this guidance effective January 1, 2018 using the modified
retrospective approach. The adoption of this guidance did not have a material impact on our financial condition or
results of operations.
Recently Adopted Pronouncements
In May 2017, the FASB issued guidance, which amends the scope of modification accounting guidance for share-
based payment arrangements. The guidance outlines the types of changes to the terms or conditions of share-
based payment arrangements that would require the use of modification accounting. Specifically, modification
accounting would not apply if the fair value, vesting conditions, and classification of the award as equity or liability
are the same immediately before and after the modification. This guidance is effective prospectively for interim and
annual reporting periods beginning December 15, 2017 and early adoption is permitted. We elected to early adopt
68
this guidance effective the second quarter of 2017. The adoption of this guidance did not impact our financial
condition or results from operations.
In January 2017, the FASB issued guidance amending the impairment testing of goodwill. Under current guidance,
the testing of goodwill for impairment is performed at least annually using a two-step test. Step one involves
comparing the fair value of a “reporting unit” to its carrying amount. If the applicable book value exceeds the
reporting unit’s fair value then step two must be performed. Step two involves comparing the fair value of the
reporting unit’s goodwill to the applicable carrying amount of the asset and recognizing an impairment charge equal
to the amount by which the carrying amount of the goodwill exceeds its implied fair value. The amended guidance
eliminates step two of the impairment test and allows an entity to record an impairment charge equal to the amount
that the carrying amount of the applicable reporting unit exceeds its fair value, up to the value of the recorded
goodwill. This guidance is effective prospectively for interim and annual goodwill impairment tests beginning after
December 15, 2019 with early adoption permitted for interim or annual tests after January 1, 2017. We elected to
early adopt this guidance effective the first quarter of 2017. The adoption of this guidance did not impact our
financial condition or results of operations.
In October 2016, the FASB issued guidance amending the accounting for income taxes. Under current guidance the
recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has
been sold to an outside party. The amended guidance eliminates the prohibition against immediate recognition of
current and deferred income tax amounts associated with intra-entity transfers of assets other than inventory. This
guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption
permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have
not been issued or made available for issuance. The requirements of the amended guidance should be applied on
a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the
beginning of the period of adoption. We elected to early adopt this guidance effective the first quarter of 2017. As a
result of adopting the amended guidance, prepaid tax assets were reduced by $14 million, long-term deferred tax
assets increased $3 million, and accrued taxes were reduced by $4 million. The net impact of these adjustments
on retained earnings was a decrease of $7 million.
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 adopted this guidance effective the first quarter of 2017. The
adoption of this guidance did not impact our financial condition or results of operations.
In March 2016, the FASB issued an update on accounting for share-based payments. The guidance simplifies
several aspects of the accounting for employee share-based payment transactions, including the accounting for
income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits
in the Consolidated Statements of Cash Flows. This standard is effective for annual reporting periods beginning
after December 15, 2016. The Company elected to early adopt this standard in the quarter ended June 30, 2016
retroactively to January 1, 2016. The impact of the early adoption resulted in the following:
• The Company recorded tax benefits of $3 million within income tax expense for the year ended December
31, 2016 related to the excess tax benefit on share-based awards. Prior to adoption this amount would
have been recorded as an increase of capital in excess of par value. This change could create volatility in
the Company's effective tax rate.
• The Company no longer reflects the cash received from the excess tax benefit within cash flows from
financing activities but instead now reflects this benefit within cash flows from operating activities in the
Consolidated Statements of Cash Flows. The Company elected to apply this change in presentation
prospectively and thus prior periods have not been adjusted.
• The Company elected not to change its policy on accounting for forfeitures and continues to estimate the
total number of awards for which the requisite service period will not be rendered.
• At this time, the Company has not changed its policy on statutory withholding requirements and will
continue to allow the employee to withhold up to the Company's minimum statutory withholding
requirements.
69
• The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares
in the computation of our diluted earnings per share for the year ended December 31, 2016. This increased
diluted weighted average common shares outstanding by less than 300,000 shares for the aforementioned
period.
In March 2016, the FASB amended the guidance regarding the use of the equity method to record certain
investments. Under current guidance, if an investor increases its level of ownership interest in a company and
consequently qualifies for the equity method, the investor must retroactively adjust its investment, results of
operations and retained earnings to reflect balances that would have arisen if the equity method had been in effect
during all previous periods that the investment was held. The amended guidance eliminates the need to
retroactively adjust balances and instead allows for the prospective application of the equity method. This guidance
is effective prospectively for interim and annual reporting periods beginning after December 15, 2016. We elected to
early adopt this guidance effective January 2016. The adoption of this guidance did not impact our financial
condition or results of operations.
In March 2016, in response to inconsistency in practice, the FASB issued guidance regarding the ability to maintain
hedge accounting for a derivative instruments when one party to the instrument has been replaced by a new party
(“a novation”). The new guidance states that a novation does not preclude the continued application of hedge
accounting to a derivative assuming all other hedge accounting criteria continue to be met. This guidance is
effective using either a prospective or a modified retrospective approach, for interim and annual reporting periods
beginning after December 15, 2016. We elected to early adopt this guidance on a prospective basis effective
January 2016. The adoption of this guidance did not impact our financial condition or results of operations.
In March 2016, the FASB issued guidance clarifying what steps need to be followed when evaluating if call or put
options are not clearly and closely related to their debt hosts, and therefore must be accounted for as separate
derivatives. The guidance prescribes a four step process to assess whether an event that triggers the ability to
exercise a call or put option is clearly and closely related to the debt host. The four step decision sequence requires
an entity to consider whether (1) the payoff is adjusted based on changes in an index; (2) the payoff is indexed to
an underlying other than interest rates or credit risk; (3) the debt involves a substantial premium or discount; and (4)
the call or put option is contingently exercisable. This guidance is effective using a modified retrospective approach,
for interim and annual reporting periods beginning after December 15, 2016. We elected to early adopt this
guidance effective January 2016. The adoption of this guidance did not impact our financial condition or results of
operations.
Note 3. Acquisitions and Divestitures
Pure Technologies
On January 31, 2018, we acquired all the issued and outstanding shares of Pure Technologies Ltd. (“Pure”), a
leader in intelligent leak detection and condition assessment solutions for water distribution networks. In connection
with this acquisition we had cash disbursements of approximately $415 million, net of cash received. Pure,
headquartered in Calgary, Canada, has approximately 500 employees and annual revenue in accordance with
International Financial Reporting Standards of approximately $100 million. Due to the timing of this transaction,
purchase accounting has just commenced and is preliminary.
2017 Acquisitions and Divestitures
Acquisition Activity
During 2017 we spent approximately $33 million on acquisition activity, including the acquisition of EmNet LLC
(“EmNet”), a developer of software and data analytics solutions for municipalities.
Divestitures
On October 31, 2017, we divested our Flowtronex and Water Equipment Technologies (WET) businesses for
$6M. The sale resulted in a gain of approximately $1 million, which is reflected in gain from sale of business in our
Condensed Consolidated Income Statement. The business, which was part of our Applied Water segment, provided
turf and reverse osmosis packages to customers in the agricultural and industrial sectors. The business reported
approximately $9M of revenue in the first 10 months of the year.
On February 17, 2017, we divested our United Kingdom and Poland based membranes business for approximately
$10 million. The sale resulted in a gain of $5 million, which is reflected in gain from sale of business in our
Condensed Consolidated Income Statement. The business, which was part of our Applied Water segment, provided
70
membrane filtration products primarily to customers in the municipal water and industrial sectors. The business
reported 2016 annual revenue of approximately $8 million.
Assets Held for Sale
During the fourth quarter of 2017 two of our businesses qualified as held for sale treatment. Accordingly an
estimated loss of $16 million was recognized.
2016 Acquisition
Sensus Worldwide Limited
On October 31, 2016, we acquired all of the outstanding equity interests of Sensus Worldwide Limited (other than
Sensus Industries Limited) (“Sensus”) effective October 31, 2016 for $1,766 million ($1,710 million net of cash
acquired), including a $6 million payment in 2017 for a working capital adjustment. Sensus develops advanced
technology solutions that enable intelligent use and conservation of critical water and energy resources. Sensus'
major products include smart metering, networked communications, measurement and control technologies,
software and services including cloud-based analytics, remote monitoring and data management. The Company
acquired Sensus because it believes that, within its market category, its products have superior qualities and
usefulness to customers. The Company also acquired Sensus on the strength of its developed technology that we
plan to leverage across our existing base of products and customers.
Acquisition costs of $19 million were reflected as a component of selling, general and administrative expenses in
our Consolidated Income Statements.
Sensus results of operations were consolidated with the Company effective November 1, 2016 and it is part of the
Measurement & Control Solutions segment. Refer to Note 20 "Segment and Geographic Data" for Measurement &
Control Solutions segment information.
The Sensus purchase price allocation as of October 31, 2016 is shown in the following table.
(in millions)
Cash
Receivables
Inventories
Prepaid and other current assets
Property, plant and equipment
Intangible assets
Other long-term assets
Accounts payable
Accrued and other current liabilities
Deferred income tax liabilities
Accrued post retirement benefits
Other non-current accrued liabilities
Total identifiable net assets
Goodwill
Non-controlling interest
Total consideration
Amount
$
56
104
79
19
176
782
5
(69)
(90)
(198)
(84)
(60)
720
1,063
(17)
1,766
$
In the third quarter of 2017 we finalized the Sensus purchase price allocation. The fair values of Sensus assets and
liabilities were determined based on estimates and assumptions which management believes are reasonable.
Goodwill arising from the acquisition consists largely of synergies and economies of scale expected from combining
the operations of Sensus and Xylem. All of the goodwill was assigned to the Measurement & Control Solutions
segment and is not deductible for tax purposes.
71
The estimate of the fair value of Sensus identifiable intangible assets was determined primarily using the “income
approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-
period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions
inherent in the development of intangible asset values include: the amount and timing of projected future cash
flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the
intangible asset’s life cycle, as well as other factors. The following table summarizes key information underlying
identifiable intangible assets related to the Sensus acquisition:
Category
Customer and Distributor Relationships
Tradenames
Internally Developed Network Software
FCC Licenses
Technology
Other
Total
Life
2 - 18 years
10 - 25 years
7 years
Indefinite lived
5 - 15 years
1 - 16 years
$
$
Amount
(in millions)
543
98
60
24
39
18
782
The following table summarizes, on an unaudited proforma basis, the condensed combined results of operations of
the Company for the years ended December 31, 2016 and 2015 assuming the acquisition of Sensus was made on
January 1, 2015.
(in millions)
Revenue
Net income
Year Ended December 31,
2016
2015
$
$
4,528 $
286 $
4,507
423
The foregoing unaudited proforma results are for informational purposes only and are not necessarily indicative of
the actual results of operations that might have occurred had the acquisition occurred on January 1, 2015, nor are
they necessarily indicative of future results. The pro forma financial information includes the impact of purchase
accounting and other nonrecurring items directly attributable to the acquisition, which include:
• Adjustments to revenue resulting from the valuation of the acquired deferred revenue balance to fair value
as part of purchase accounting
• Amortization expense of acquired intangibles
• Amortization of the fair value step-up in inventory
• Adjustments to the depreciation of property, plant and equipment reflecting the impact of the calculated fair
value of those assets in accordance with purchase accounting
• Amortization of the fair value adjustment for warranty liabilities
• Adjustments to interest expense to remove historical Sensus interest costs and reflect Xylem's current debt
profile
• The related tax impact of the above referenced adjustments
The pro forma results do not include any cost savings or operational synergies that may be generated or realized
due to the acquisition of Sensus. Additionally, the pro forma results for the 2016 and 2015 both include the
operating results for the three months ended March 31, 2016 due to the use of Sensus’ annual statement of
operations for the fiscal year-ended March 31, 2016 in the twelve months ended December 31, 2015 pro forma
numbers. This practice results in the recognition of a $16 million tax valuation release and a $27 million reduction to
warranty expense in both the 2016 and 2015 pro forma results. Additionally, the pro forma results for 2015 include a
tax valuation release of $64 million.
72
For the two month period ended December 31, 2016 Sensus had revenue and net loss of $132 million and $13
million, respectively.
Visenti Pte. Ltd
On October 18, 2016, we acquired Visenti Pte. Ltd. (“Visenti”), a smart water analytics company focused on leak
detection and pressure monitoring solutions to help water utilities manage their water networks for $8 million.
Visenti, a privately-owned company headquartered in Singapore, has approximately 25 employees. Our
consolidated financial statements include Visenti's results of operations prospectively from October 18, 2016 within
the Measurement & Control Solutions segment.
Tideland Signal Corporation
On February 1, 2016, we acquired Tideland Signal Corporation (“Tideland”), a leading producer of analytics
solutions in the coastal and ocean management sectors, for $70 million. Tideland, a privately-owned company
headquartered in Texas, has approximately 160 employees. Our consolidated financial statements include
Tideland's results of operations prospectively from February 1, 2016 within the Water Infrastructure segment.
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.
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 business in our Consolidated Income Statement.
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 2017,
2016 and 2015, the costs incurred primarily relate to an effort to reposition our European and North American
businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges
included the reduction of headcount and consolidation of facilities within our Applied Water,Water Infrastructure, and
Measurement & Control Solutions segments, as well as Corporate headcount reductions. The components of
restructuring charges incurred during each of the previous three years ended are presented below.
(in millions)
By component:
Severance and other charges
Lease related charges
Other restructuring charges
Reversal of restructuring accruals
Total restructuring charges
Asset impairment charges
Total restructuring and asset impairment charges
By segment:
Water Infrastructure
Applied Water
Measurement & Control Solutions
Corporate and other
73
Year Ended December 31,
2017
2016
2015
$
20 $
—
2
(2)
20
5
25
28 $
2
1
(1)
30
—
30
$
7 $
12 $
13
5
—
10
6
2
7
—
—
(1)
6
—
6
4
1
1
—
Restructuring
The following table displays a rollforward of the restructuring accruals, presented on our Consolidated Balance
Sheets within accrued and other current liabilities, for the years ended December 31, 2017 and 2016.
(in millions)
Restructuring accruals - January 1
Restructuring charges
Cash payments
Foreign currency and other
Restructuring accruals - December 31
By segment:
Water Infrastructure
Applied Water
Measurement & Control Solutions
Regional selling locations (a)
Corporate and other
$
$
$
2017
2016
15 $
20
(28)
—
7 $
1 $
1
2
3
—
3
30
(16)
(2)
15
2
5
4
2
2
(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, 2017 and 2016.
Planned reductions - January 1
Additional planned reductions
Actual reductions and reversals
Planned reductions - December 31
The following table presents expected restructuring spend:
2017
2016
188
151
(292)
47
82
612
(506)
188
74
Water
Infrastructure
Applied Water
Measurement
& Control
Solutions
Corporate
Total
(in millions)
Actions Commenced in 2017:
Total expected costs
Costs incurred during 2017
Total expected costs remaining
Actions Commenced in 2016:
Total expected costs
Costs incurred during 2016
Costs incurred during 2017
Total expected costs remaining
Actions Commenced in 2015:
Total expected costs
Costs incurred during 2015
Costs incurred during 2016
Total expected costs remaining
$
$
$
$
$
$
19 $
5
14 $
13 $
11
2
— $
4 $
3
1
— $
12 $
4
8 $
2 $
2
— $
1 $
—
1 $
14 $
10 $
2 $
10
4
6
3
2
—
— $
1 $
— $
1 $
1
—
— $
1 $
— $
1
—
—
—
— $
— $
—
34
11
23
39
29
9
1
6
5
1
The Water Infrastructure, Applied Water, Measurement & Control Solutions, and Corporate actions commenced in
2017 consist primarily of severance charges and are expected to continue through the end of 2019. The Water
Infrastructure, Applied Water, Measurement & Control Solutions and Corporate actions commenced in 2016 consist
primarily of severance charges and are largely complete. The Water Infrastructure, Applied Water and
Measurement & Control Solutions actions commenced in 2015 consist primarily of severance charges and are
complete.
Asset Impairment Charges
During the first quarter of 2017 we determined that certain assets within our Applied Water segment, including a
tradename, were impaired. Accordingly we recognized an impairment charge of $5 million. Refer to Note 10,
"Goodwill and Other Intangible Assets," for additional information.
Note 5. Other Non-Operating Income, Net
The components of other non-operating income, net are as follows:
(in millions)
Interest income
Income from joint ventures
Other expense – net
Total other non-operating income, net
Year Ended December 31,
2017
2016
2015
$
$
3 $
3
(4)
2 $
2 $
3
(1)
4 $
2
3
(5)
—
75
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,
2017
2016
2015
$
$
$
$
$
$
$
$
$
$
162
304
466
109
9
51
169
(29)
10
(14)
(33)
136
29.2%
$
$
$
$
$
80
260
340
19
5
42
66
19
1
(6)
14
80
23.5%
116
287
403
32
6
34
72
1
1
(11)
(9)
63
15.6%
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
Rate change
Effective income tax rate
Year Ended December 31,
2017
2016
2015
35.0%
35.0%
35.0%
1.6
1.6
3.3
(10.6)
(6.7)
37.0
(6.6)
(2.5)
(22.9)
29.2%
0.8
(6.4)
18.5
(14.3)
(7.9)
5.9
(8.9)
0.8
—
23.5%
1.0
0.5
8.6
(13.1)
(7.2)
0.2
(7.8)
(1.6)
—
15.6%
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.
76
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,
2017
2016
$
$
$
$
108 $
34
419
8
24
593
(350)
243 $
300 $
20
57
49
426 $
126
53
387
6
—
572
(311)
261
434
4
61
48
547
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, 2017, a
valuation allowance of $350 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 (a)
Current year operations
Foreign currency and other (b)
Acquisitions
Valuation allowance — December 31
2017
2016
2015
$
$
311 $
(28)
48
19
—
350 $
248 $
17
38
(32)
40
311 $
427
(5)
39
(213)
—
248
(a) Decrease in assessment in 2017 is primarily attributable to Foreign Tax Credit utilization resulting from the Tax Act.
Increase in assessment in 2016 is primarily attributable to Foreign Tax Credits resulting from additional indebtedness from
the Sensus acquisition.
(b) 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 follows:
(in millions)
Non-current assets
Non-current liabilities
Total net deferred tax liabilities
December 31,
2017
2016
$
$
69 $
(252)
(183) $
66
(352)
(286)
77
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
State tax credits
Foreign net operating loss
December 31, 2017
8
$
124
12
2
1,523
First Year of Expiration
December 31, 2024
December 31, 2017
December 31, 2024
Indefinitely
December 31, 2018
The Company intends to distribute a portion of the earnings taxed under the Tax Act and, as of December 31, 2017,
has provided a provisional deferred tax liability of $20 million for foreign withholding taxes and state income taxes
on $769 million of earnings expected to be repatriated to the U.S. parent. The Company currently does not intend to
distribute approximately $2 billion taxed under the Tax Act, and has not recorded any deferred taxes related to such
amounts as the determination of the amount is not practicable.
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
Current year tax positions
Prior year tax positions
Acquisitions
Settlements
Unrecognized tax benefits — December 31
2017
2016
2015
$
$
67 $
56
7
—
—
130 $
47 $
12
(22)
30
—
67 $
44
4
1
—
(2)
47
The amount of unrecognized tax benefits at December 31, 2017 which, if ultimately recognized, will reduce our
annual effective tax rate is $130 million. We do not believe that the unrecognized tax benefits will significantly
change within the next 12 months.
The following table summarizes our earliest open tax years by major jurisdiction:
Jurisdiction
Italy
Luxembourg
Sweden
Germany
United Kingdom
United States
Switzerland
Earliest Open Year
2012
2014
2012
2010
2010
2014
2012
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, 2017 and 2016 was $4 million.
Tax Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the
Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code,
including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2)
requiring companies to pay a one-time transition tax on certain unrepatriated foreign earnings of foreign
subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring
a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5)
eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized;
(6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible
78
interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created
in tax years beginning after December 31, 2017.
The SEC staff issued SAB118, which expresses views of the staff regarding application of ASC740 in the reporting
period that includes December 22, 2017. SAB118 provides a measurement period that should not extend beyond
one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance
with SAB118, a company must reflect the income tax effects of those aspects of the Act for which the accounting
under ASC740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act
is incomplete but it is able to record a reasonable estimate, it must record a provisional estimate in the financial
statements. If a company cannot determine a provisional estimate to be included in the financial statements, it
should continue to apply ASC740 on the basis of the provisions of the tax laws that were in effect immediately
before the enactment of the Tax Act.
We are still performing our accounting for the tax effects of the Tax Act because all the necessary information is not
currently available, prepared, or analyzed. As permitted by SAB118, we have made a reasonable estimate of the
effects of the Tax Act on our financial results (see below). As we perform our analysis of the accounting for the tax
effects of enactment of the Tax Act, we will recognize additional provisional amounts or adjustments to provisional
amounts as discrete items in the periods in which the respective analyses are performed.
In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional tax expense of
$46 million as a discrete item. This net income tax expense primarily consists of a provisional tax benefit for the
corporate tax rate reduction of $107 million and a provisional tax expense for the repatriation transition tax of $153
million. For various reasons that are discussed in detail below, we have completed our accounting for the income
tax effects of certain elements of the Tax Act, and therefore, have recorded provisional estimates related to these
items. For certain items, a provisional estimate could not be determined, and therefore, we have continued
accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act.
Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable
estimates for these elements and, therefore, recorded provisional adjustments as follows:
Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21 percent, effective
January 1, 2018. Consequently, we have adjusted our deferred taxes to account for the rate change, and have
recorded a provisional decrease related to net deferred tax liabilities (DTLs) of $107 million, respectively, with a
corresponding net adjustment to deferred tax benefit for the year ended December 31, 2017. Additional work is
necessary for a more detailed analysis of our deferred tax assets and liabilities.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (Transition Tax) is a tax on
previously untaxed accumulated and current earnings and profits (E&P) of certain foreign subsidiaries. To
determine the amount of the Transition Tax, we determined in addition to other factors, the amount of post 1986
E&P of the relevant subsidiaries, as well as the amount of the non-U.S. income taxes paid on such earnings. We
are able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax liability of
$153 million. This provisional amount may materially change due to additional analysis, changes in interpretations
and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the
Company may take as a result of the Tax Act.
Our accounting for the following elements of the Tax Act is incomplete, and we have not yet been able to make
reasonable estimates of the effects. Therefore, no provisional adjustments were recorded as of December 31,
2017.
Global intangible low taxed income (GILTI): The Tax Act creates a new requirement that certain income (i.e., GILTI)
earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S.
shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible
income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s
pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder
over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act
and the application of ASC740. According to clarifications from FASB, we are allowed to make an accounting policy
choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current
period-expense when incurred (the “period cost method”) or (2) factoring such amounts into measurement of
deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax
rules will depend, in part, on analyzing our global income to determine any future U.S. inclusions in taxable income
related to GILTI and the related impact. Because whether we expect to have future U.S. inclusions in taxable
79
income related to GILTI depends on not only our current structure and estimated future results of global operations
but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably
estimate the effects of this provision of the Tax Act. Therefore, as of December 31, 2017, we have not made any
adjustments related to potential GILTI tax in our financial statements and have not yet made a policy decision
regarding whether to record deferred taxes on GILTI.
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 attributable to Xylem (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 units and performance share units
Weighted average common shares outstanding — Diluted
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2017
2016
2015
$
331 $
260 $
340
179,602
27
179,629
712
516
180,857
179,069
37
179,106
499
433
180,038
$
$
1.84 $
1.83 $
1.45 $
1.45 $
180,854
39
180,893
465
379
181,737
1.88
1.87
(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 units and performance share units are computed by the treasury
stock method. The weighted average shares listed below were not included in the computation of diluted earnings per
share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the
treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options
and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds
from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units
are included in the treasury stock calculation of diluted earnings per share based upon achievement of underlying
performance and market conditions at the end of the reporting period, as applicable. See Note 15, "Stock-Based
Compensation Plans" for further detail on the performance share units.
(in thousands)
Stock options
Restricted stock units
Performance share units
Note 8. Inventories
The components of total inventories are summarized as follows:
Year Ended December 31,
2017
2016
2015
1,626
379
504
1,892
514
373
2,616
723
181
(in millions)
Finished goods
Work in process
Raw materials
Total inventories
December 31,
2017
2016
$
$
223 $
42
259
524 $
220
42
260
522
80
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,
2017
2016
$
$
329 $
799
241
101
85
21
1,576
933
643 $
299
731
218
95
76
19
1,438
822
616
Depreciation expense was $109 million, $87 million, and $88 million for 2017, 2016, and 2015, respectively.
Note 10. Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill by reportable segment during the years ended December 31, 2017 and
2016 are as follows:
(in millions)
Balance as of December 31, 2015
Activity in 2016
Acquired (a)
Foreign currency and other
Balance as of December 31, 2016
Activity in 2017
Divested/acquired
Foreign currency and other
Balance as of December 31, 2017
Water
Infrastructure
$
660 $
Applied Water
518
—
(20)
640 $
—
27
667 $
—
(13)
505
(3)
24
526
$
$
Measurement
& Control
Solutions
Total
$
$
$
406 $
1,584
1,106
(25)
1,487 $
1,106
(58)
2,632
10
78
1,575 $
7
129
2,768
(a) On February 1, 2016, we acquired Tideland and recorded $38 million of goodwill. On October 18, 2016, we acquired
Visenti and recorded $6 million of goodwill. On October 31, 2016, we acquired Sensus and recorded $1,062 million of
goodwill. Refer to Note 3, "Acquisitions and Divestitures" for additional information.
During the fourth quarter of 2017, 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.
81
Other Intangible Assets
Information regarding our other intangible assets is as follows:
(in millions)
December 31, 2017
December 31, 2016
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor
relationships
Proprietary technology and
patents
Trademarks
Software
Other
163
138
277
26
Indefinite-lived intangibles
Other intangibles
161
$ 1,671 $
$
906 $
(241) $
665 $
891 $
(168) $
(75)
(37)
(130)
(20)
—
(503) $
88
101
147
6
161
1,168 $
156
139
218
26
154
(61)
(23)
(118)
(13)
—
1,584 $
(383) $
1,201
723
95
116
100
13
154
We determined that no impairment of the indefinite-lived intangibles existed as of the measurement date of our
annual impairment assessment in 2017 or 2016. 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 14 years, 16 years, 12 years, 5 years and 5 years,
respectively.
Total amortization expense for intangible assets was $125 million, $64 million, and $45 million for 2017, 2016 and
2015, respectively.
Estimated amortization expense for each of the five succeeding years is as follows:
(in millions)
2018
2019
2020
2021
2022
$
121
116
107
91
86
During the first quarter of 2017 we determined that the intended use of a finite lived trade name within our Applied
Water segment had changed. Accordingly we recorded a $4 million impairment charge. The charge was calculated
using the 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 Statements.
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 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.
82
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.
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, and Australian
Dollar. We had foreign exchange contracts with purchase notional amounts totaling $455 million as of December
31, 2017. As of December 31, 2017, our most significant foreign currency derivatives included contracts to
purchase Swedish Krona and sell Euro, sell U.S. Dollar and purchase Euro, sell British Pound and purchase Euro,
purchase Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar and to sell Canadian Dollar and
purchase Euro. The purchase notional amounts associated with these currency derivatives were $149 million, $147
million, $66 million, $34 million, $28 million and $25 million, respectively. As of December 31, 2016 we did not hold
any foreign exchange contracts.
Hedges of Net Investments in Foreign Operations
We are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.
Cross Currency Swaps
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 $446 million and $391 million as of December 31, 2017 and 2016, respectively.
Foreign Currency Denominated Debt
On March 11, 2016, we issued 2.250% Senior Notes of € 500 million aggregate principal amount due March 2023.
We designated the entirety of the outstanding balance, or $592 million and $517 million as of December 31, 2017
and 2016, respectively, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.
Forward Contracts
On September 23, 2016, we entered into forward contacts with a total notional amount of €300 million to manage
our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. The contracts were designated as net
investment hedges and were settled in 2016.
83
The table below presents the effect of our derivative financial instruments on the Consolidated Income Statements
and Consolidated Statements of Comprehensive Income.
(in millions)
Derivatives in Cash Flow Hedges
Foreign Exchange Contracts
Amount of (loss) gain recognized in OCI (a)
Amount of (gain) loss reclassified from OCI into revenue (a)
Amount of loss reclassified from OCI into cost of revenue (a)
Derivatives in Net Investment Hedges
Cross Currency Swaps
Amount of (loss) gain recognized in OCI (a)
Foreign Currency Denominated Debt
Amount of (loss) gain recognized in OCI (a)
Forward Contracts
Amount of gain recognized in OCI (a)
(a) Effective portion
Year Ended December 31,
2017
2016
2015
9 $
(6)
1
— $
(2)
—
(5)
19
1
(53) $
19 $
(17)
(74) $
28 $
— $
9 $
—
—
$
$
$
$
As of December 31, 2017, $3 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 2017, 2016, and 2015.
As of December 31, 2017, 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 2017.
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.
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
December 31,
2017
2016
$
3 $
—
(1)
(64)
—
(6)
The fair value of our long-term debt, due in 2023, designated as a net investment hedge was $638 million and $555
million as of December 31, 2017 and 2016, respectively.
84
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)
4.875% Senior Notes due 2021 (a)
2.250% Senior Notes due 2023 (a)
3.250% Senior Notes due 2026 (a)
4.375% Senior Notes due 2046 (a)
Commercial paper
Research and development facility agreement
Research and development finance contract
Term loan
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,
2017
2016
203 $
119
55
75
99
551 $
182
80
64
63
132
521
December 31,
2017
2016
600
597
500
400
—
—
125
—
(22)
2,200
—
2,200 $
600
522
500
400
65
38
110
157
(24)
2,368
260
2,108
$
$
$
(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 2021 (as defined below) was $648
million and $651 million as of December 31, 2017 and 2016, respectively. The fair value of our Senior Notes due 2023 (as
defined below) was $638 million and $555 million as of December 31, 2017 and 2016, respectively. The fair value of our
Senior Notes due 2026 (as defined below) was $498 million and $487 million as of December 31, 2017 and 2016,
respectively. The fair value of our Senior Notes due 2046 (as defined below) was $431 million and $397 million as of
December 31, 2017 and 2016, 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 4.875% Senior Notes of $600 million aggregate principal amount due October
2021 (the "Senior Notes due 2021"). On March 11, 2016, we issued 2.250% Senior Notes of € 500 million aggregate
principal amount due March 2023 (the "Senior Notes due 2023"). On October 11, 2016, we issued 3.250% Senior
Notes of $500 million aggregate principal amount due October 2026 (the “Senior Notes due 2026”) and 4.375%
Senior Notes of $400 million aggregate principal amount due October 2046 (the “Senior Notes due 2046” and,
together with the Senior Notes due 2021, the Senior Notes due 2023 and the Senior Notes due 2026, the “Senior
Notes”).
The Senior Notes include covenants that 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. We may also redeem the Senior Notes in certain other
circumstances, as set forth in the applicable Senior Notes indenture.
If a change of control triggering event (as defined in the applicable Senior Notes indenture) occurs, we will be
85
required to make an offer to purchase the Senior Notes at a price equal to 101% of their principal amount plus
accrued and unpaid interest to the date of repurchase.
Interest on the Senior Notes due 2021 is payable on April 1 and October 1 of each year. Interest on the Senior
Notes due 2023 is payable on March 11 of each year. Interest on the Senior Notes due 2026 and the Senior Notes
due 2046 is payable on May 1 and November 1 of each year beginning on May 1, 2017. As of December 31, 2017,
we were in compliance with all covenants for the Senior Notes.
We used the net proceeds of the Senior Notes due 2026 and the Senior Notes due 2046, together with cash on
hand, proceeds from issuances under our existing commercial paper program and borrowings under the Term
Facility (as described below), to fund the acquisition of Sensus (refer to Note 3 for further information on the Sensus
acquisition).
Credit Facilities
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 half of 1% or (c) the Eurodollar rate determined by reference to
LIBOR, adjusted for statutory reserve requirements, in each case, plus an applicable margin.
In accordance with the terms of an amendment to the Credit Facility dated August 30, 2016, we may not exceed a
maximum leverage ratio of 4.00 to 1.00 (based on a ratio of total debt to earnings before interest, taxes,
depreciation and amortization) for a period of 12-months following the Sensus acquisition and a maximum leverage
ratio of 3.50 to 1.00 through the rest of 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, 2017 the Credit Facility was undrawn and we are in compliance with all covenants.
European Investment Bank - R&D Finance Contract
On October 28, 2016, the Company entered into a Finance Contract (the “Finance Contract”) with the European
Investment Bank (the “EIB”). 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 Finance Contract and Xylem Inc. is the Guarantor. The
Finance Contract provides for up to €105 million (approximately $125 million) to finance research, development
and innovation projects in the field of sustainable water and wastewater solutions during the period from 2017
through 2019 in Sweden, Germany, Italy, UK, Hungary and Austria. The Company has unconditionally guaranteed
the performance of the borrowers under the Finance Contract. Under the Finance Contract, the borrowers are able
to draw loans on or before April 28, 2018, with a maturity of no longer than 11 years.
Both the Finance Contract and the R&D Facility Agreement (described below) are subject to the same leverage
ratio as the Credit Facility. Both agreements also contain limitations on, among other things, incurring debt, granting
liens, and entering into sale and leaseback transactions, as well as other terms and conditions, such as customary
representations and warranties, additional covenants and customary events of default.
Both the Finance Contract and the R&D Facility Agreement provide for fixed rate loans and floating rate loans.
Under the Finance Contract, 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 is 59 basis points (0.59%). As of December 31, 2017 and December 31,
2016, $125 million and $110 million were outstanding under the Finance Contract, respectively.
European Investment Bank - R&D Facility Agreement
86
On December 3, 2015, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D
Facility Agreement") with the EIB to amend the maturity date. The Facility provides an aggregate principal amount
of up to €120 million (approximately $143 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.
Under the R&D Facility Agreement, the borrower was able to draw loans on or before March 31, 2016 with a
maturity of no longer than 12 years. As of December 31, 2017 and December 31, 2016 $0 million and $38 million
were outstanding, respectively, under the R&D Facility Agreement. On December 15, 2017, the R&D Facility
Agreement was settled for $44 million.
Term Loan Facility
On October 24, 2016, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month
€150 million term loan facility (the “Term Facility”) the terms of which are set forth in a term loan agreement, among
the borrower, the Company, as parent guarantor and ING Bank. The Company has entered into a parent guarantee
in favor of ING Bank also dated October 24, 2016 to secure all present and future obligations of the borrower under
the Term Loan Agreement. The Term Facility was used to partially fund the acquisition of Sensus. As of December
31, 2016, $157 million was outstanding under the Term Loan Facility. The Term Facility matured on October 26,
2017.
Commercial Paper
Our commercial paper program generally serves as a means of short-term funding and has a combined outstanding
limit of $600 million inclusive of the Five-Year Revolving Credit Facility. As of December 31, 2017, none of the
Company's $600 million commercial paper program was outstanding. As of December 31, 2016, $65 million of the
Company's $600 million commercial paper program was outstanding at a weighted average interest rate of 1.12%.
We will periodically borrow under this program and may borrow under it in future periods.
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 eligible 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 $0 million and $1
million at December 31, 2017 and 2016, 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)
2017
2016
2015
Defined Contribution
38
35
32
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 344 thousand and 391 thousand shares of Xylem Inc. common stock in the Xylem Stock Fund at
December 31, 2017 and 2016, 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 2017 and 2016, we made several amendments to plans that had no material impact to the Company's
financial statements.
87
In connection with the Sensus acquisition, the Company acquired one U.S. and three German defined benefit
pension plans. The four plans added $96 million in projected benefit obligation and $9 million in assets on October
31, 2016.
Effective December 30, 2016, the Company merged its six U.S. pension plans into one plan to simplify
administration and reduce costs. There was no impact to the participants' benefits and no impact to the Company's
financial statements.
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, 2017
December 31, 2016
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
628 $
(950)
(322) $
— $
628 $
562 $
(55)
(1,005)
(854)
(55) $
(377) $
(292) $
— $
(64)
(64) $
562
(918)
(356)
81 $
— $
81 $
67 $
— $
67
(13)
(390)
(322) $
(251) $
(1)
(252) $
(3)
(52)
(55) $
(24) $
12
(12) $
(16)
(442)
(377) $
(11)
(348)
(4)
(60)
(292) $
(64) $
(275) $
11
(264) $
(220) $
(32) $
1
12
(219) $
(20) $
(15)
(408)
(356)
(252)
13
(239)
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 2017 and expected to be
recognized in net periodic benefit cost during 2018 is $14 million ($11 million, net of tax). The prior service credit
included in accumulated other comprehensive income to be recognized in 2018 is $4 million ($3 million, net of tax).
88
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:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial loss (gain)
Plan amendments, settlements and curtailments
Acquisitions
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
Acquisitions
Foreign currency translation/Other
Fair value of plan assets at end of year
Unfunded status of the plans
$
$
$
$
$
Domestic Plans
December 31,
International Plans
December 31,
2017
2016
2017
2016
100 $
3
4
(5)
5
1
—
(1)
107 $
69
10
10
(5)
—
—
—
84 $
(23) $
86 $
754 $
3
4
(4)
(2)
(1)
13
1
100 $
57 $
4
4
(4)
—
9
(1)
69 $
(31) $
12
21
(30)
10
(2)
—
78
843 $
493 $
20
21
(30)
(3)
—
43
544 $
(299) $
693
10
21
(26)
52
(1)
83
(78)
754
502
20
64
(26)
—
—
(67)
493
(261)
The following table provides a rollforward of the projected benefit obligation for the other postretirement employee
benefit plans:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial gain/(loss)
Plan Amendment and other
Benefit obligation at the end of year
2017
2016
$
$
64 $
1
2
(3)
(5)
(4)
55 $
61
1
3
(4)
3
—
64
The accumulated benefit obligation (“ABO”) for all the defined benefit pension plans was $916 million and $827
million at December 31, 2017 and 2016, 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,
2017
2016
$
528 $
499
126
474
453
116
89
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 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,
2017
2016
2015
$
$
$
$
$
3 $
4
(6)
2
3 $
12 $
21
(34)
9
1
9 $
12 $
3 $
4
(5)
2
4 $
10 $
21
(30)
8
—
9 $
13 $
Other changes in assets and benefit obligations recognized in other comprehensive loss, as they pertain to our
defined benefit pension plans are as follows:
(in millions)
Domestic defined benefit pension plans:
Net (gain) loss
Prior service cost
Amortization of net actuarial loss
(Gains) losses recognized in other comprehensive loss
International defined benefit pension plans:
Net (gain) loss
Prior service credit
Amortization of net actuarial loss
Settlement
Foreign Exchange
(Gains) losses recognized in other comprehensive loss
Total (gains) losses recognized in other comprehensive loss
Total (gains) losses recognized in comprehensive income
$
$
$
$
$
$
Year Ended December 31,
2017
2016
2015
1 $
1
(2)
— $
23 $
1
(9)
(1)
19
33 $
33 $
45 $
(1) $
—
(2)
(3) $
18 $
(1)
(8)
—
(20)
(11) $
(14) $
(1) $
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,
2017
2016
2015
$
$
1 $
2
(3)
2
2 $
1 $
3
(3)
3
4 $
90
3
4
(5)
2
4
12
22
(32)
13
—
15
19
2
—
(2)
—
(29)
—
(13)
—
(21)
(63)
(63)
(44)
1
2
(3)
3
3
Other changes in benefit obligations recognized in other comprehensive loss, 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
Foreign Exchange/Other
Losses (gains) recognized in other comprehensive loss
Total losses (gains) recognized in comprehensive income
Assumptions
Year Ended December 31,
2017
2016
2015
(5) $
(3)
3
(2)
(1)
(8) $
(6) $
3 $
—
3
(3)
1
4 $
8 $
4
(1)
3
(3)
—
3
6
$
$
$
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
2017
2016
2015
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
3.75%
2.43%
4.25%
2.63%
4.27%
3.44%
NM
2.93%
NM
2.76%
NM
3.29%
4.25%
2.63%
4.27%
3.44%
4.01%
3.14%
8.00%
7.20%
8.00%
7.25%
8.00%
7.31%
NM
2.76%
NM
3.29%
NM
3.34%
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 2018 is estimated at 7.30%.
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
91
calculating the net periodic benefit costs.
Expected long-term rate of return on plan assets
Actual rate of return on plan assets
2017
2016
2015
7.30%
5.70%
7.32%
12.20%
7.38%
3.51%
The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 8.72% for
2018, decreasing ratably to 4.50% in 2026. 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.
On April 3, 2017 the liquid assets in two UK Plans transitioned into a new fund structure. The restructuring involved
transferring a portion of the assets into pooled diversified growth funds, while some investments were sold off and
some were kept in place. The pooled funds make up 64% of the assets of the two UK Plans. Liability hedging and
illiquid assets remain outside of this arrangement.
The following table provides the actual asset allocations of plan assets as of December 31, 2017 and 2016, 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
2017
2016
35.6%
23.4%
17.0%
1.6%
22.4%
24.2%
32.7%
31.7%
2.4%
9.0%
Target
Allocation
Ranges
20-50%
10-40%
0-40%
0-30%
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
92
the fair value hierarchy. Hedging Instruments are collateralized daily with either cash or government bonds,
have daily liquidity and pricing based on observable inputs from over-the-counter markets, and are classified as
Level 2.
• 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. All of the hedge funds held have
lockups and/or gates. Hedge funds have unfunded commitments of $5 million and $5 million at December 31,
2017 and 2016, respectively.
• 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 $7
million at December 31, 2017 and 2016, respectively.
•
Insurance contracts and other — Primarily comprised of insurance contracts and cash. Insurance contracts are
valued at contract 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.
93
The following table provides the fair value of plan assets held by our pension benefit plans by asset class.
2017
2016
(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
Diversified Growth
and Income Funds
Fixed income
Corporate bonds
Government bonds
Hedging Instruments
Diversified Growth
and Income Funds
Hedge funds
Private equity
Insurance contracts and
other
Total plan assets
subject to leveling
$ 101 $ — $ — $
29 $ 130 $
87 $ — $ — $
6 $ 93
—
—
—
24
48
5
—
—
—
90
—
—
—
—
—
36
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
92
8
5
—
3
—
92
32
53
41
20
107
10
20
107
10
17
33
140
4
4
—
22
88
—
—
—
—
26
—
—
—
—
—
45
—
—
—
—
—
—
—
—
—
—
—
—
—
24
36
—
—
18
11
—
40
4
—
40
99
45
—
178
13
—
178
13
—
50
$ 268 $
36 $
17 $
307 $ 628 $ 231 $
45 $
24 $
262 $ 562
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, 2015
Purchases, sales, settlements
Currency impact
Balance, December 31, 2016
Purchases, sales, settlements
Currency impact
Balance, December 31, 2017
Insurance Contracts
and Other
$
$
$
25
1
(2)
24
(8)
1
17
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 $33 million and $27 million to our pension and postretirement
defined benefit plans during 2017 and 2016, respectively. A discretionary $6 million contribution was made to the
U.S. Plan in Q3 2017 to increase the funding ratio and reduce regulatory fees. We currently anticipate making
contributions to our pension and postretirement defined benefit plans in the range of $20 million to $30 million
during 2018, of which approximately $6 million is expected to be made in the first quarter.
94
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as
follows:
(in millions)
2018
2019
2020
2021
2022
Years 2023 - 2027
$
Pension
Other Benefits
3
3
4
4
4
19
36 $
36
38
38
39
212
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 unit awards and
performance share unit awards. Under the 2011 Omnibus Incentive Plan, the number of shares initially available for
awards was 18 million. As of December 31, 2017, there were approximately 7 million shares of common stock
available for future grants.
Total share-based compensation costs recognized for 2017, 2016 and 2015 were $21 million, $18 million, and $15
million, respectively. The unamortized compensation expense at December 31, 2017 related to our stock options,
restricted share units and performance share units was $6 million, $17 million and $13 million, respectively, and is
expected to be recognized over a weighted average period of 1.8, 1.8 and 1.8 years, respectively.
The amount of cash received from the exercise of stock options was $16 million for 2017 with a tax benefit of $10
million realized associated with stock option exercises and vesting of restricted stock units. We classify as an
operating activity the cash flows attributable to excess tax benefits arising from stock option exercises and restricted
stock unit vestings.
Stock Option Grants
Options are awarded with a contractual term of ten years and generally vest over a three-year period and are
exercisable within the contractual term, 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, 2017, there were options to purchase an aggregate of 2.1 million shares of common stock. The
following is a summary of the changes in outstanding stock options for 2017:
Outstanding at January 1, 2017
Granted
Exercised
Forfeited and expired
Outstanding at December 31, 2017
Options exercisable at December 31, 2017
Vested and non-vested expected to vest as of
December 31, 2017
Share units
(in thousands)
Weighted
Average
Exercise
Price / Share
33.71
48.43
31.95
42.60
37.44
33.07
2,126 $
501 $
(494) $
(57) $
2,076 $
1,147 $
1,997 $
36.52
Weighted Aver
age
Remaining
Contractual
Term (Years)
6.9
Aggregate
Intrinsic
Value
(in millions)
7.0 $
5.8 $
6.8 $
64
40
62
The amount of non-vested options outstanding was 0.9 million, 1.0 million and 1.0 million at a weighted average
grant date fair value of $42.84, $37.10 and $35.65 as of December 31, 2017, 2016 and 2015, 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 2017, 2016 and 2015 was $14 million, $12 million and $9 million,
respectively.
95
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
2017, 2016, and 2015:
Dividend yield
Volatility
Risk-free interest rate
Expected term (in years)
Weighted-average fair value per share
2017
2016
2015
1.49%
25.39%
2.07%
5.10
1.63%
28.87%
1.41%
5.60
$
10.66
$
9.05
$
1.57%
27.77%
1.64%
5.58
8.49
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 Unit Grants
Restricted shares granted to employees in 2017 vest over a three-year period. Restricted shares granted to
employees prior to 2017 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 unit and related accrued dividends are forfeited. If an employee retires, a pro rata portion of the
restricted stock unit may vest in accordance with the terms of the grant agreements. Restricted stock units granted
to Board members become fully vested upon the day prior to the next annual meeting. Our restricted stock units
activity was as follows for 2017:
Outstanding at January 1, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2017
Performance Share Units
Share Units
(in thousands)
Weighted Average
Grant Date Fair
Value / Share
899 $
344
(396)
(68)
779
37.67
49.72
38.16
41.00
35.39
Performance share units granted under the long-term incentive plan 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 share units 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 for ROIC performance share units and a relative
TSR performance for TSR performance share units. The calculated compensation cost for ROIC performance
share units is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the
probable outcome of the performance condition.
ROIC Performance Share Unit Grants
The fair value of the ROIC performance share unit awards at 100% target is determined using the closing price of
our common stock on date of grant.
96
Our ROIC performance share unit activity was as follows for 2017:
Outstanding at January 1, 2017
Granted
Forfeited
Outstanding at December 31, 2017
TSR Performance Share Unit Grants
The following is a summary of our TSR performance share unit grants for 2017.
Outstanding at January 1, 2017
Granted
Forfeited
Outstanding at December 31, 2017
Share units
(in thousands)
Weighted Average
Grant Date Fair
Value / Share
250 $
117
(69)
298
37.11
49.15
38.62
41.48
Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value /
Share
108 $
117
(12)
213
46.15
47.79
44.19
47.04
The fair value of TSR performance share units was calculated on the date of grant using a Monte Carlo simulation
model utilizing several key assumptions, including expected Company and peer company share price volatility,
correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design
features. The following are weighted-average assumptions for 2017 grants.
Volatility
Risk-free interest rate
Note 16. Capital Stock
30.24 %
1.50 %
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 $0.7200, $0.6196 and $0.5632 during 2017, 2016 and 2015,
respectively.
The changes in shares of 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
2017
2016
2015
179,367
985
(490)
179,862
178,377
1,085
(95)
179,367
182,300
1,280
(5,203)
178,377
For the year ended December 31, 2017 the Company repurchased 0.5 million shares for $25 million of common
stock. Repurchases include both share repurchase programs approved by the Board of Directors and repurchases
in relation to settlement of employee withholding obligations due as a result of the vesting of restricted stock units.
The detail of repurchases by each program are as follows:
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. For the year ended December 31, 2017 we repurchased 0.1 million shares for $7
million. There were no shares repurchased under this program during 2016. There are up to $413 million in shares
that may still be purchased under this plan as of December 31, 2017.
97
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. As of December 31, 2015, we exhausted the authorized amount to repurchase
shares under this plan.
On August 18, 2012, the Board of Directors authorized the repurchase of up to 2.0 million shares of common stock
with no expiration date. The program's objective is to offset dilution associated with various Xylem employee stock
plans by acquiring shares in the open market from time to time. For the year ended December 31, 2017 we
repurchased 0.3 million shares for $13 million. There were no shares repurchased under this program during 2016.
As of June 2017, we have exhausted the authorized amount to repurchase shares under this plan.
Aside from the aforementioned repurchase programs, we repurchased 0.1 million and 0.1 million shares for $5
million and $4 million during 2017 and 2016, respectively, in relation to settlement of employee tax withholding
obligations due as a result of the vesting of restricted stock units. These repurchases are included in the stock
incentive plan net activity in the above table.
98
Note 17. Accumulated Other Comprehensive Loss
The following table provides the components of accumulated other comprehensive loss for 2017, 2016 and 2015:
Foreign Currency
Translation
Postretirement
Benefit Plans
Derivative
Instruments
Total
(231) $
(13) $
$
145 $
(180)
(8)
(in millions)
Balance at January 1, 2015
Foreign currency translation adjustment
Foreign currency gain reclassified into gain on
sale of business
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, 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
$
Foreign currency translation adjustment
Income tax impact on 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 income, net
Income tax impact on amortization of
postretirement benefit plan items
Reclassification of unrealized gain on derivative
hedge agreements into revenue
24
(10)
21
4
9
1
1
(4)
(22)
6
19
1
(185) $
(1)
(10) $
(43) $
(65)
(21)
(19)
3
19
3
6
1
(5)
(2)
99
(99)
(180)
(8)
24
(10)
21
4
9
1
1
(4)
(22)
6
19
1
(1)
(238)
(65)
(21)
(19)
3
19
3
6
1
(5)
(2)
(in millions)
Reclassification of unrealized loss on net
investment hedge, net of tax
Balance at December 31, 2016
$
Foreign currency translation adjustment
Income tax impact on foreign currency
translation adjustment
Changes in postretirement benefit plans
Foreign currency translation adjustment for
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
Other non-operating income, net
Restructuring
Income tax impact on amortization of
postretirement benefit plan items
Unrealized gain on derivative hedge
agreements
Reclassification of unrealized (gain) loss on
foreign exchange agreements into revenue
Reclassification of unrealized (gain) loss on
foreign exchange agreements into cost of
revenue
Balance at December 31, 2017
$
Note 18. Commitments and Contingencies
Legal Proceedings
Foreign Currency
Translation
Postretirement
Benefit Plans
Derivative
Instruments
Total
(177) $
11
(1) $
(11)
(140) $
79
46
(18)
(18)
7
2
7
1
1
(3)
9
(6)
—
(318)
79
46
(18)
(18)
7
2
7
1
1
(3)
9
(6)
—
(15) $
(198) $
1
3 $
1
(210)
From time to time we are involved in legal proceedings that are incidental to the operation of our businesses. These
proceedings may seek remedies relating to environmental matters, intellectual property matters, acquisitions or
divestitures, personal injury claims, employment and pension matters, government contract issues and commercial
or contractual disputes.
From time to time claims may be asserted against Xylem alleging injury caused by any of 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 Corporation (now ITT LLC), Exelis
and Xylem, ITT Corporation (now ITT LLC) 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.
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 $10 million and $11 million as of December 31, 2017 and 2016, respectively for
these general legal matters.
Indemnifications
As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC), Exelis Inc. and Xylem will
indemnify, defend and hold harmless each of the other parties with respect to such parties’ assumed or retained
100
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
in the ordinary course of business when required under contracts or to satisfy insurance related requirements. As of
December 31, 2017, the amount of stand-by letters of credit, bank guarantees and surety bonds was $240 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
$4 million as of December 31, 2017 and 2016, 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. We often pay
maintenance, insurance and tax expense related to leased assets. Total rent expense for the three years ended
December 31, 2017 was as follows:
(in millions)
2017
2016
2015
Total
70
63
59
101
At December 31, 2017, we are obligated to make minimum rental payments under operating leases which are as
follows:
(in millions)
Minimum rental payments
2018
2019
2020
2021
$
65 $
53 $
42 $
29 $
2022
Thereafter
45
23 $
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 $28 million, $32 million, and $32 million for 2017, 2016 and 2015,
respectively. The table below provides changes in the combined current and non-current product warranty accruals
over each period.
(in millions)
Warranty accrual – January 1
Net charges for product warranties in the period
Settlement of warranty claims
Warranty accrual acquired
Foreign currency and other
Warranty accrual – December 31
Note 19. Related Party Transactions
2017
2016
$
$
99 $
28
(48)
—
3
82 $
33
32
(31)
66
(1)
99
Sales to and purchases from unconsolidated joint ventures for 2017, 2016 and 2015 are as follows:
(in millions)
Sales to unconsolidated affiliates
Purchases from unconsolidated affiliates
2017
2016
2015
$
12 $
17
11 $
22
11
19
102
Note 20. Segment and Geographic Data
Our business has three reportable segments: Water Infrastructure, Applied Water and Measurement & Control
Solutions. When determining the reportable segments, the Company aggregated operating segments based on
their similar economic and operating characteristics. The Water Infrastructure segment focuses on the
transportation and treatment of water, offering a range of products including water and wastewater pumps,
treatment equipment, and controls and systems. The Applied Water segment serves many of the primary uses of
water and focuses on the residential, commercial and industrial markets. The Applied Water segment's major
products include pumps, valves, heat exchangers, controls and dispensing equipment. The Measurement & Control
Solutions segment focuses on developing advanced technology solutions that enable intelligent use and
conservation of critical water and energy resources as well as analytical instrumentation used in the testing of water.
The Measurement & Control Solutions segment's major products include smart metering, networked
communications, measurement and control technologies, software and services including cloud-based analytics,
remote monitoring and data management, leak detection and pressure monitoring solutions and testing equipment.
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
Measurement & Control Solutions
Total
Operating income:
Water Infrastructure
Applied Water
Measurement & Control Solutions
Corporate and other
Total operating income
Interest expense
Other non-operating income (expense)
(Loss)/gain from sale of businesses
Income before taxes
Depreciation and amortization:
Water Infrastructure
Applied Water
Measurement & Control Solutions
Regional selling locations (a)
Corporate and other
Total
Capital expenditures:
Water Infrastructure
Applied Water
Measurement & Control Solutions
Regional selling locations (b)
Corporate and other
Total
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
$
$
2,004 $
1,421
1,282
4,707 $
308 $
197
110
(59)
556
82
2
(10)
466 $
64 $
23
122
17
8
234 $
58 $
20
69
18
5
170 $
1,932 $
1,393
446
3,771 $
291 $
188
—
(73)
406
70
4
—
340 $
66 $
24
41
11
9
1,940
1,422
291
3,653
261
190
42
(44)
449
55
—
9
403
71
26
17
11
8
151 $
133
62 $
21
13
24
4
62
22
5
23
5
124 $
117
103
(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.
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,
2017
2016
2015
$
$
2,998 $
1,709
4,707 $
2,888 $
883
3,771 $
2,917
736
3,653
(a) Other includes treatment equipment, analytical instrumentation, heat exchangers, valves, controls and smart meters.
The following table contains the total assets for each reportable segment as of December 31, 2017, 2016 and 2015.
(in millions)
Water Infrastructure
Applied Water
Measurement & Control Solutions
Regional selling locations (a)
Corporate and other (b)
Total
2017
Total Assets
2016
2015
$
$
1,232 $
1,002
3,198
1,119
309
6,860 $
1,179 $
990
3,102
965
238
1,265
1,054
759
905
674
6,474 $
4,657
(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.
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,
2016
2015
2017
2,161 $
1,335
611
600
4,707 $
1,574 $
1,195
518
484
3,771 $
1,490
1,179
482
502
3,653
Property, Plant & Equipment
2017
December 31,
2016
2015
258 $
259
85
41
643 $
255 $
237
87
37
616 $
168
189
56
26
439
$
$
$
$
104
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)
2017
2016
2015
$
$
21 $
5
(1)
25 $
22 $
4
(5)
21 $
24
4
(6)
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 attributable to Xylem
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
Pure Technologies
Dec. 31
Sept. 30
June 30
Mar. 31
2017 Quarter Ended
1,277 $
509
179
71 $
0.40 $
0.40 $
1,195 $
471
152
105 $
0.58 $
0.58 $
1,164 $
459
139
99 $
0.55 $
0.55 $
1,071
412
86
56
0.31
0.31
Dec. 31
Sept. 30
June 30
Mar. 31
2016 Quarter Ended
1,095 $
406
109
50 $
0.28 $
0.28 $
897 $
357
109
73 $
0.41 $
0.41 $
932 $
369
109
71 $
0.39 $
0.39 $
847
329
79
66
0.37
0.37
$
$
$
$
$
$
$
$
On January 31, 2018, we acquired all the issued and outstanding shares of Pure Technologies Ltd. (“Pure”), a
leader in intelligent leak detection and condition assessment solutions for water distribution networks. See Note 3,
"Acquisitions and Divestitures", for further detail.
Term Loan
On January 26, 2018, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month
€225 million (approximately $280 million) term loan facility (the “Term Facility”) the terms of which are set forth in a
term loan agreement, among the borrower, the Company, as parent guarantor and ING Bank. The Company has
entered into a parent guarantee in favor of ING Bank also dated January 26, 2018 to secure all present and future
obligations of the borrower under the Term Loan Agreement. The Term Facility was used to partially fund the
acquisition of Pure.
105
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 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, 2017 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, 2017 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, 2017 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, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None
106
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Xylem Inc.
Rye Brook, New York
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Xylem Inc. and subsidiaries (the "Company") as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017,
and the related notes (collectively referred to as the “financial statements”), of the Company and our report dated
February 23, 2018, expressed an unqualified opinion on those financial statements.
Basis of Opinion
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 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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A 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 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 23, 2018
107
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 2018 Annual Meeting of Shareholders (the “2018 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 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 2018 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 2018 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 2018 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 2018 Proxy
Statement set forth under the captions “Fees of Audit and Other Services Fees” and "Pre-Approval of Audit and
Non-Audit Services."
108
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 — See exhibits listed under Part (b) below.
EXHIBIT INDEX
Exhibit
Number
Description
Location
2.1
2.2
2.3
2.4
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Distribution 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).
Share Purchase Agreement, dated as of August
15, 2016, by and among Xylem Inc., Xylem
Luxembourg S.à r.l., Sensus Worldwide Limited,
Sensus Industries Limited, and Sensus USA Inc.
Incorporated by reference to Exhibit 2.1 to Xylem
Inc.’s Current Report on Form 8-K filed on August 15,
2016 (CIK No. 1524472, File No. 1-35229).
First Amendment to Share Purchase Agreement,
dated as of October 31, 2016, by and among
Xylem Inc., Xylem Luxembourg S.à r.l., Sensus
Worldwide Limited, Sensus Industries Limited,
and Sensus USA Inc.
Incorporated by reference to Exhibit 2.2 to Xylem
Inc.’s Current Report on Form 8-K filed on October
31, 2016 (CIK No. 1524472, File No. 1-35229).
Arrangement Agreement, dated as of December
8, 2017, by and between Xylem Inc. and Pure
Technologies Ltd.
Incorporated by reference to Exhibit 2.1 to Xylem
Inc.'s Current Report on Form 8-K filed on December
11, 2017 (CIK No. 1524472, File No. 1-35229)
Fourth Amended and Restated Articles of
Incorporation of Xylem Inc.
Fourth Amended and Restated By-laws of Xylem
Inc.
Indenture, dated as of September 20, 2011,
between Xylem Inc., ITT Corporation, as initial
guarantor, and Union Bank, N.A., as trustee.
Incorporated by reference to Exhibit 3.1 of Xylem
Inc.’s Form 8-K filed on May 15, 2017 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 3.1 of Xylem
Inc.’s Form 8-K filed on May 15, 2017 (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).
Senior Indenture, dated March 11, 2016, by and
between the Company and Deutsche Bank Trust
Company Americas, as trustee.
Incorporated by reference to Exhibit 4.1 of Xylem
Inc.’s Form 8-K filed on March 11, 2016 (CIK No.
1524472, File No. 1-35229).
First Supplemental Indenture, dated March 11,
2016, by and between the Company and
Deutsche Bank Trust Company Americas, as
trustee.
Second Supplemental Indenture, dated March
11, 2016, by and between the Company and
Deutsche Bank Trust Company Americas, as
trustee.
Third Supplemental Indenture, dated October
11, 2016, by and between the Company and
Deutsche Bank Trust Company Americas, as
trustee.
Incorporated by reference to Exhibit 4.1 of Xylem
Inc.’s Form 8-K filed on March 11, 2016 (CIK No.
1524472, File No. 1-35229)
Incorporated by reference to Exhibit 4.1 of Xylem
Inc.’s Form 8-K filed on March 11, 2016 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 4.1 of Xylem
Inc.’s Form 8-K filed on October 11, 2016 (CIK No.
1524472, File No. 1-35229).
109
Exhibit
Number
4.6
4.7
4.8
4.9
Description
Location
Form of Xylem Inc. 4.875% Senior Notes due
2021.
Form of Xylem Inc. 2.250% Senior Notes due
2023.
Form of Xylem Inc. 3.250% Senior Notes due
2026.
Form of Xylem Inc. 4.375% Senior Notes due
2046.
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 4.3 of Xylem
Inc.’s Current Report on Form 8-K dated March 11,
2016 (CIK No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 4.1 of Xylem
Inc.’s Form 8-K filed on October 11, 2016 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 4.1 of Xylem
Inc.’s Form 8-K filed on October 11, 2016 (CIK No.
1524472, File No. 1-35229).
10.1
# Form of Xylem 2011 Omnibus Incentive Plan
Non-Qualified Stock Option Award Agreement
(2015).
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).
10.2
# Benefits and Compensation Matters Agreement,
dated as of October 25, 2011, among ITT
Corporation, Exelis Inc. and Xylem Inc.
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).
10.3
10.5
Tax Matters Agreement, dated as of October 25,
2011, among ITT Corporation, Exelis Inc. and
Xylem Inc.
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).
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 February 24, 2016).
Incorporated by reference to Exhibit 10.6 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
10.7
# Form of Xylem Non-Qualified Stock Option
Award Agreement (Amended as of February 24,
2016).
Incorporated by reference to Exhibit 10.7 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
10.8
# Form of Xylem Restricted Stock Unit Agreement
(Amended as of February 24, 2016).
10.9
# Form of Xylem Performance Share Unit
Agreement (Amended as of February 24, 2016).
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.
Incorporated by reference to Exhibit 10.8 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.9 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.1 of Xylem
Inc.’s Form 10-Q filed on July 30, 2013 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.11 of Xylem
Inc.’s Form 10-Q Quarterly Report filed on November
21, 2011 (CIK No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.12 of Xylem
Inc.'s Form 10-K Annual Report filed on February 23,
2017 (CIK No. 1524472, File No. 1-35229).
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).
110
Exhibit
Number
Description
Location
10.15
# Xylem Special Senior Executive Severance Pay
Plan (Amended as of February 24, 2016).
10.16
# Xylem Senior Executive Severance Pay Plan
(Amended as of May 10, 2017).
Incorporated by reference to Exhibit 10.15 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.1 of Xylem
Inc.'s Form 10-Q filed on August 1, 2017 (CIK No.
1524472, File No. 1-35229).
10.17
# Form of Xylem 2011 Omnibus Incentive Plan
2011 Non-Qualified Stock Option Award
Agreement — Founders 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).
10.18
# Form of Xylem 2011 Omnibus Incentive Plan
Non-Qualified Stock Option Award Agreement —
General Grant.
10.19
# Xylem Annual Incentive Plan for Executive
Officers (Amended as of February 24, 2016).
10.20
# Form of Director’s Indemnification Agreement.
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).
Incorporated by reference to Exhibit 10.16 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.16 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
10.21
# Form of Xylem 2011 Omnibus Incentive Plan
Non-Qualified Stock Option Award Agreement
(2013).
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).
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.
10.24
10.25
10.26
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.
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.
Agreement dated December 3, 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.
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).
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).
Incorporated by reference to Exhibit 10.16 of Xylem
Inc.'s Form 10-K filed on February 26, 2016 (CIK No.
1524472, File No. 1-35229).
111
Exhibit
Number
10.27
10.28
10.29
10.30
Description
Amendment No.1, dated as of August 30, 2016,
to the Five-Year Revolving Credit Facility, dated
as of March 27, 2015, among Xylem Inc., the
lenders named therein and Citibank N.A. as
Administrative Agent.
Finance Contract, dated October 28, 2016,
between Xylem Holdings S.a.r.l. and Xylem
International S.a.r.l., as borrowers, Xylem Inc.,
as guarantor and the European Investment
Bank.
Term Loan Agreement, dated as of October 24,
2016 among Xylem Europe GmbH, as borrower,
Xylem Inc., as parent guarantor and ING Bank,
as lender (including Form of Parent Guarantee).
Term Loan Agreement, dated as of January 26,
2018 among Xylem Europe GmbH, as borrower,
Xylem Inc., as parent guarantor and ING Bank,
as lender (including Form of Parent Guarantee).
Location
Incorporated by reference to Exhibit 10.1 of Xylem
Inc.’s Form 10-Q filed on November 1, 2016 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.2 of Xylem
Inc.’s Form 10-Q filed on November 1, 2016 (CIK
No. 1524472, File No. 1-35229).
Incorporated by reference to Exhibit 10.1 of Xylem
Inc.’s Form 8-K filed on October 28, 2016 (CIK No.
1524472, File No. 1-35229).
Filed herewith.
10.31
# Form of Xylem Restricted Stock Unit Agreement
Filed herewith.
(Amended as of February 21, 2018).
10.32
# Form of Xylem Performance Share Unit
Filed herewith.
Agreement (Amended as of February 21, 2018).
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
21.0
23.1
31.1
31.2
32.1
Statements re computation of ratios.
Subsidiaries of the Registrant.
Consent of Independent Registered Public
Accounting Firm.
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.
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.
Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
112
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
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.
Exhibit
Number
32.2
(101)
Description
Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
The following materials from Xylem Inc.’s Annual
Report on Form 10-K for the year ended
December 31, 2016, 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, (v)
Consolidated Statement of Stockholder's Equity
and (vi) 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.
The instance document does not appear in the
interactive data file because its XBRL tags are
embedded within the Inline XBRL document.
#Management contract or compensatory plan or arrangement
113
ITEM 16.
FORM 10-K SUMMARY
None
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/ Paul A. Stellato
Paul A. Stellato
Vice President, Controller and Chief Accounting Officer
February 23, 2018
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 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
/s/ Patrick K. Decker
Patrick K. Decker
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Markos I. Tambakeras
Markos I. Tambakeras, Chairman
/s/ Jeanne Beliveau-Dunn
Jeanne Beliveau-Dunn, Director
/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/ Surya N. Mohapatra
Surya N. Mohapatra, Director
February 23, 2018
/s/ Jerome A. Peribere
Jerome A. Peribere, Director
114
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, 2017;
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 23, 2018
/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, E. Mark Rajkowski, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Xylem Inc. for the period ended December 31, 2017;
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 23, 2018
/s/ E. Mark Rajkowski
E. Mark Rajkowski
Senior Vice President and Chief
Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Xylem Inc. (the “Company”) for the period ended
December 31, 2017 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 23, 2018
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, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, E.
Mark Rajkowski, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ E. Mark Rajkowski
E. Mark Rajkowski
Senior Vice President and Chief Financial Officer
February 23, 2018
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.