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.
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 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
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:
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Estimated Life
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Buildings and improvements
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5 to 40 years
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Machinery and equipment
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2 to 10 years
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Furniture and fixtures
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3 to 7 years
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Equipment held for lease or rental
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2 to 10 years
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Leasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease. Costs related to maintenance and repairs that do not prolong the assets' useful lives are expensed as incurred.
Goodwill and Intangible Assets
Goodwill represents purchase consideration paid in a business combination that exceeds the values assigned to the net assets of acquired businesses. Intangible assets include customer relationships, proprietary technology,
brands and trademarks, patents, software and other intangible assets. Intangible assets with a finite life are amortized on a straight-line basis over an estimated economic useful life which ranges from
1
to
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.
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.
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:
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Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
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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.
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Level 3 inputs are unobservable inputs for the assets or liabilities.
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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:
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(1)
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Eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges
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(2)
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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
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(3)
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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
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(4)
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Provides the ability to perform subsequent hedge effectiveness tests qualitatively
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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
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.
|
|
|
|
|
•
|
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
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)
|
Amount
|
|
Cash
|
$
|
56
|
|
|
Receivables
|
104
|
|
|
Inventories
|
79
|
|
|
Prepaid and other current assets
|
19
|
|
|
Property, plant and equipment
|
176
|
|
|
Intangible assets
|
782
|
|
|
Other long-term assets
|
5
|
|
|
Accounts payable
|
(69
|
)
|
|
Accrued and other current liabilities
|
(90
|
)
|
|
Deferred income tax liabilities
|
(198
|
)
|
|
Accrued post retirement benefits
|
(84
|
)
|
|
Other non-current accrued liabilities
|
(60
|
)
|
|
Total identifiable net assets
|
720
|
|
|
|
|
|
Goodwill
|
1,063
|
|
|
Non-controlling interest
|
(17
|
)
|
|
Total consideration
|
$
|
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.
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
|
|
Life
|
|
Amount (in millions)
|
|
Customer and Distributor Relationships
|
|
2 - 18 years
|
|
$
|
543
|
|
|
Tradenames
|
|
10 - 25 years
|
|
98
|
|
|
Internally Developed Network Software
|
|
7 years
|
|
60
|
|
|
FCC Licenses
|
|
Indefinite lived
|
|
24
|
|
|
Technology
|
|
5 - 15 years
|
|
39
|
|
|
Other
|
|
1 - 16 years
|
|
18
|
|
|
Total
|
|
|
|
$
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2016
|
2015
|
|
Revenue
|
$
|
4,528
|
|
$
|
4,507
|
|
|
Net income
|
$
|
286
|
|
$
|
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
.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
|
By component:
|
|
|
|
|
|
|
|
Severance and other charges
|
|
$
|
20
|
|
|
$
|
28
|
|
|
$
|
7
|
|
|
Lease related charges
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Other restructuring charges
|
|
2
|
|
|
1
|
|
|
—
|
|
|
Reversal of restructuring accruals
|
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
Total restructuring charges
|
|
20
|
|
|
30
|
|
|
6
|
|
|
Asset impairment charges
|
|
5
|
|
|
—
|
|
|
—
|
|
|
Total restructuring and asset impairment charges
|
|
25
|
|
|
30
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
By segment:
|
|
|
|
|
|
|
|
Water Infrastructure
|
|
$
|
7
|
|
|
$
|
12
|
|
|
$
|
4
|
|
|
Applied Water
|
|
13
|
|
|
10
|
|
|
1
|
|
|
Measurement & Control Solutions
|
|
5
|
|
|
6
|
|
|
1
|
|
|
Corporate and other
|
|
—
|
|
|
2
|
|
|
—
|
|
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)
|
|
2017
|
|
2016
|
|
Restructuring accruals - January 1
|
|
$
|
15
|
|
|
$
|
3
|
|
|
Restructuring charges
|
|
20
|
|
|
30
|
|
|
Cash payments
|
|
(28
|
)
|
|
(16
|
)
|
|
Foreign currency and other
|
|
—
|
|
|
(2
|
)
|
|
Restructuring accruals - December 31
|
|
$
|
7
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
By segment:
|
|
|
|
|
|
Water Infrastructure
|
|
$
|
1
|
|
|
$
|
2
|
|
|
Applied Water
|
|
1
|
|
|
5
|
|
|
Measurement & Control Solutions
|
|
2
|
|
|
4
|
|
|
Regional selling locations (a)
|
|
3
|
|
|
2
|
|
|
Corporate and other
|
|
—
|
|
|
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
.
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Planned reductions - January 1
|
|
188
|
|
|
82
|
|
|
Additional planned reductions
|
|
151
|
|
|
612
|
|
|
Actual reductions and reversals
|
|
(292
|
)
|
|
(506
|
)
|
|
Planned reductions - December 31
|
|
47
|
|
|
188
|
|
The following table presents expected restructuring spend:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Water Infrastructure
|
|
Applied Water
|
|
Measurement & Control Solutions
|
|
Corporate
|
|
Total
|
|
Actions Commenced in 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs
|
|
$
|
19
|
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
34
|
|
|
Costs incurred during 2017
|
|
5
|
|
|
4
|
|
|
2
|
|
|
—
|
|
|
11
|
|
|
Total expected costs remaining
|
|
$
|
14
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actions Commenced in 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs
|
|
$
|
13
|
|
|
$
|
14
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
39
|
|
|
Costs incurred during 2016
|
|
11
|
|
|
10
|
|
|
6
|
|
|
2
|
|
|
29
|
|
|
Costs incurred during 2017
|
|
2
|
|
|
4
|
|
|
3
|
|
|
—
|
|
|
9
|
|
|
Total expected costs remaining
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actions Commenced in 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
Costs incurred during 2015
|
|
3
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
5
|
|
|
Costs incurred during 2016
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Total expected costs remaining
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Interest income
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Income from joint ventures
|
3
|
|
|
3
|
|
|
3
|
|
|
Other expense – net
|
(4
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
Total other non-operating income, net
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Note 6
. Income Taxes
The source of pre-tax income and the components of income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Income components:
|
|
|
|
|
|
|
Domestic
|
$
|
162
|
|
|
$
|
80
|
|
|
$
|
116
|
|
|
Foreign
|
304
|
|
|
260
|
|
|
287
|
|
|
Total pre-tax income
|
$
|
466
|
|
|
$
|
340
|
|
|
$
|
403
|
|
|
Income tax expense components:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Domestic – federal
|
$
|
109
|
|
|
$
|
19
|
|
|
$
|
32
|
|
|
Domestic – state and local
|
9
|
|
|
5
|
|
|
6
|
|
|
Foreign
|
51
|
|
|
42
|
|
|
34
|
|
|
Total Current
|
169
|
|
|
66
|
|
|
72
|
|
|
Deferred:
|
|
|
|
|
|
|
Domestic – federal
|
$
|
(29
|
)
|
|
$
|
19
|
|
|
$
|
1
|
|
|
Domestic – state and local
|
10
|
|
|
1
|
|
|
1
|
|
|
Foreign
|
(14
|
)
|
|
(6
|
)
|
|
(11
|
)
|
|
Total Deferred
|
(33
|
)
|
|
14
|
|
|
(9
|
)
|
|
Total income tax provision
|
$
|
136
|
|
|
$
|
80
|
|
|
$
|
63
|
|
|
Effective income tax rate
|
29.2
|
%
|
|
23.5
|
%
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Tax provision at U.S. statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
State income taxes
|
1.6
|
|
|
0.8
|
|
|
1.0
|
|
|
Settlements of tax examinations
|
1.6
|
|
|
(6.4
|
)
|
|
0.5
|
|
|
Valuation allowance
|
3.3
|
|
|
18.5
|
|
|
8.6
|
|
|
Tax exempt interest
|
(10.6
|
)
|
|
(14.3
|
)
|
|
(13.1
|
)
|
|
Foreign tax rate differential
|
(6.7
|
)
|
|
(7.9
|
)
|
|
(7.2
|
)
|
|
Repatriation of foreign earnings, net of foreign tax credits
|
37.0
|
|
|
5.9
|
|
|
0.2
|
|
|
Tax incentives
|
(6.6
|
)
|
|
(8.9
|
)
|
|
(7.8
|
)
|
|
Other – net
|
(2.5
|
)
|
|
0.8
|
|
|
(1.6
|
)
|
|
Rate change
|
(22.9
|
)
|
|
—
|
|
|
—
|
|
|
Effective income tax rate
|
29.2
|
%
|
|
23.5
|
%
|
|
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.
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
Employee benefits
|
$
|
108
|
|
|
$
|
126
|
|
|
Accrued expenses
|
34
|
|
|
53
|
|
|
Loss and other tax credit carryforwards
|
419
|
|
|
387
|
|
|
Inventory
|
8
|
|
|
6
|
|
|
Other
|
24
|
|
|
—
|
|
|
|
593
|
|
|
572
|
|
|
Valuation allowance
|
(350
|
)
|
|
(311
|
)
|
|
Net deferred tax asset
|
$
|
243
|
|
|
$
|
261
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Intangibles
|
$
|
300
|
|
|
$
|
434
|
|
|
Investment in foreign subsidiaries
|
20
|
|
|
4
|
|
|
Property, plant, and equipment
|
57
|
|
|
61
|
|
|
Other
|
49
|
|
|
48
|
|
|
Total deferred tax liabilities
|
$
|
426
|
|
|
$
|
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)
|
2017
|
|
2016
|
|
2015
|
|
Valuation allowance — January 1
|
$
|
311
|
|
|
$
|
248
|
|
|
$
|
427
|
|
|
Change in assessment
(a)
|
(28
|
)
|
|
17
|
|
|
(5
|
)
|
|
Current year operations
|
48
|
|
|
38
|
|
|
39
|
|
|
Foreign currency and other
(b)
|
19
|
|
|
(32
|
)
|
|
(213
|
)
|
|
Acquisitions
|
—
|
|
|
40
|
|
|
—
|
|
|
Valuation allowance — December 31
|
$
|
350
|
|
|
$
|
311
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
Non-current assets
|
$
|
69
|
|
|
$
|
66
|
|
|
Non-current liabilities
|
(252
|
)
|
|
(352
|
)
|
|
Total net deferred tax liabilities
|
$
|
(183
|
)
|
|
$
|
(286
|
)
|
Tax attributes available to reduce future taxable income begin to expire as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2017
|
|
First Year of Expiration
|
|
U.S. net operating loss
|
$
|
8
|
|
|
December 31, 2024
|
|
State net operating loss
|
124
|
|
|
December 31, 2017
|
|
U.S. tax credits
|
12
|
|
|
December 31, 2024
|
|
State tax credits
|
2
|
|
|
Indefinitely
|
|
Foreign net operating loss
|
1,523
|
|
|
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)
|
2017
|
|
2016
|
|
2015
|
|
Unrecognized tax benefits — January 1
|
$
|
67
|
|
|
$
|
47
|
|
|
$
|
44
|
|
|
Current year tax positions
|
56
|
|
|
12
|
|
|
4
|
|
|
Prior year tax positions
|
7
|
|
|
(22
|
)
|
|
1
|
|
|
Acquisitions
|
—
|
|
|
30
|
|
|
—
|
|
|
Settlements
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
Unrecognized tax benefits — December 31
|
$
|
130
|
|
|
$
|
67
|
|
|
$
|
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
|
|
Earliest Open Year
|
|
Italy
|
|
2012
|
|
Luxembourg
|
|
2014
|
|
Sweden
|
|
2012
|
|
Germany
|
|
2010
|
|
United Kingdom
|
|
2010
|
|
United States
|
|
2014
|
|
Switzerland
|
|
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
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
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Net income attributable to Xylem (in millions)
|
$
|
331
|
|
|
$
|
260
|
|
|
$
|
340
|
|
|
Shares (in thousands):
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
179,602
|
|
|
179,069
|
|
|
180,854
|
|
|
Add: Participating securities (a)
|
27
|
|
|
37
|
|
|
39
|
|
|
Weighted average common shares outstanding — Basic
|
179,629
|
|
|
179,106
|
|
|
180,893
|
|
|
Plus incremental shares from assumed conversions: (b)
|
|
|
|
|
|
|
Dilutive effect of stock options
|
712
|
|
|
499
|
|
|
465
|
|
|
Dilutive effect of restricted stock units and performance share units
|
516
|
|
|
433
|
|
|
379
|
|
|
Weighted average common shares outstanding — Diluted
|
180,857
|
|
|
180,038
|
|
|
181,737
|
|
|
Basic earnings per share
|
$
|
1.84
|
|
|
$
|
1.45
|
|
|
$
|
1.88
|
|
|
Diluted earnings per share
|
$
|
1.83
|
|
|
$
|
1.45
|
|
|
$
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
|
Stock options
|
1,626
|
|
|
1,892
|
|
|
2,616
|
|
|
Restricted stock units
|
379
|
|
|
514
|
|
|
723
|
|
|
Performance share units
|
504
|
|
|
373
|
|
|
181
|
|
Note 8. Inventories
The components of total inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
Finished goods
|
$
|
223
|
|
|
$
|
220
|
|
|
Work in process
|
42
|
|
|
42
|
|
|
Raw materials
|
259
|
|
|
260
|
|
|
Total inventories
|
$
|
524
|
|
|
$
|
522
|
|
Note 9. Property, Plant and Equipment
The components of total property, plant and equipment, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
Land, buildings and improvements
|
$
|
329
|
|
|
$
|
299
|
|
|
Machinery and equipment
|
799
|
|
|
731
|
|
|
Equipment held for lease or rental
|
241
|
|
|
218
|
|
|
Furniture and fixtures
|
101
|
|
|
95
|
|
|
Construction work in progress
|
85
|
|
|
76
|
|
|
Other
|
21
|
|
|
19
|
|
|
Total property, plant and equipment, gross
|
1,576
|
|
|
1,438
|
|
|
Less accumulated depreciation
|
933
|
|
|
822
|
|
|
Total property, plant and equipment, net
|
$
|
643
|
|
|
$
|
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)
|
Water
Infrastructure
|
|
Applied Water
|
|
Measurement & Control Solutions
|
|
Total
|
|
Balance as of December 31, 2015
|
$
|
660
|
|
|
$
|
518
|
|
|
$
|
406
|
|
|
$
|
1,584
|
|
|
Activity in 2016
|
|
|
|
|
|
|
|
|
Acquired (a)
|
—
|
|
|
—
|
|
|
1,106
|
|
|
1,106
|
|
|
Foreign currency and other
|
(20
|
)
|
|
(13
|
)
|
|
(25
|
)
|
|
(58
|
)
|
|
Balance as of December 31, 2016
|
$
|
640
|
|
|
$
|
505
|
|
|
$
|
1,487
|
|
|
$
|
2,632
|
|
|
Activity in 2017
|
|
|
|
|
|
|
|
|
Divested/acquired
|
—
|
|
|
(3
|
)
|
|
10
|
|
|
7
|
|
|
Foreign currency and other
|
27
|
|
|
24
|
|
|
78
|
|
|
129
|
|
|
Balance as of December 31, 2017
|
$
|
667
|
|
|
$
|
526
|
|
|
$
|
1,575
|
|
|
$
|
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.
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
|
$
|
906
|
|
|
$
|
(241
|
)
|
|
$
|
665
|
|
|
$
|
891
|
|
|
$
|
(168
|
)
|
|
$
|
723
|
|
|
Proprietary technology and patents
|
163
|
|
|
(75
|
)
|
|
88
|
|
|
156
|
|
|
(61
|
)
|
|
95
|
|
|
Trademarks
|
138
|
|
|
(37
|
)
|
|
101
|
|
|
139
|
|
|
(23
|
)
|
|
116
|
|
|
Software
|
277
|
|
|
(130
|
)
|
|
147
|
|
|
218
|
|
|
(118
|
)
|
|
100
|
|
|
Other
|
26
|
|
|
(20
|
)
|
|
6
|
|
|
26
|
|
|
(13
|
)
|
|
13
|
|
|
Indefinite-lived intangibles
|
161
|
|
|
—
|
|
|
161
|
|
|
154
|
|
|
—
|
|
|
154
|
|
|
Other intangibles
|
$
|
1,671
|
|
|
$
|
(503
|
)
|
|
$
|
1,168
|
|
|
$
|
1,584
|
|
|
$
|
(383
|
)
|
|
$
|
1,201
|
|
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
|
$
|
121
|
|
|
2019
|
116
|
|
|
2020
|
107
|
|
|
2021
|
91
|
|
|
2022
|
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.
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.
The table below presents the effect of our derivative financial instruments on the Consolidated Income Statements and Consolidated Statements of Comprehensive Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
|
Derivatives in Cash Flow Hedges
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
Amount of (loss) gain recognized in OCI (a)
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
Amount of (gain) loss reclassified from OCI into revenue (a)
|
|
(6
|
)
|
|
(2
|
)
|
|
19
|
|
|
Amount of loss reclassified from OCI into cost of revenue (a)
|
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Net Investment Hedges
|
|
|
|
|
|
|
|
Cross Currency Swaps
|
|
|
|
|
|
|
|
Amount of (loss) gain recognized in OCI (a)
|
|
$
|
(53
|
)
|
|
$
|
19
|
|
|
$
|
(17
|
)
|
|
Foreign Currency Denominated Debt
|
|
|
|
|
|
|
|
Amount of (loss) gain recognized in OCI (a)
|
|
$
|
(74
|
)
|
|
$
|
28
|
|
|
$
|
—
|
|
|
Forward Contracts
|
|
|
|
|
|
|
|
Amount of gain recognized in OCI (a)
|
|
$
|
—
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
Assets
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
Other current assets
|
$
|
3
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
Other current liabilities
|
(1
|
)
|
|
—
|
|
|
Net Investment Hedges
|
|
|
|
|
Other non-current liabilities
|
(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.
Note 12. Accrued and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
Compensation and other employee-benefits
|
$
|
203
|
|
|
$
|
182
|
|
|
Customer-related liabilities
|
119
|
|
|
80
|
|
|
Accrued warranty costs
|
55
|
|
|
64
|
|
|
Accrued taxes
|
75
|
|
|
63
|
|
|
Other accrued liabilities
|
99
|
|
|
132
|
|
|
Total accrued and other current liabilities
|
$
|
551
|
|
|
$
|
521
|
|
Note 13
. Credit Facilities and Long-Term Debt
Total debt outstanding is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
4.875% Senior Notes due 2021 (a)
|
600
|
|
|
600
|
|
|
2.250% Senior Notes due 2023 (a)
|
597
|
|
|
522
|
|
|
3.250% Senior Notes due 2026 (a)
|
500
|
|
|
500
|
|
|
4.375% Senior Notes due 2046 (a)
|
400
|
|
|
400
|
|
|
Commercial paper
|
—
|
|
|
65
|
|
|
Research and development facility agreement
|
—
|
|
|
38
|
|
|
Research and development finance contract
|
125
|
|
|
110
|
|
|
Term loan
|
—
|
|
|
157
|
|
|
Debt issuance costs and unamortized discount (b)
|
(22
|
)
|
|
(24
|
)
|
|
Total debt
|
2,200
|
|
|
2,368
|
|
|
Less: short-term borrowings and current maturities of long-term debt
|
—
|
|
|
260
|
|
|
Total long-term debt
|
$
|
2,200
|
|
|
$
|
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
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
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 o
f
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)
|
Defined Contribution
|
|
2017
|
38
|
|
|
2016
|
35
|
|
|
2015
|
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.
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
|
|
|
Pension
|
|
Other
|
|
Total
|
|
Pension
|
|
Other
|
|
Total
|
|
Fair value of plan assets
|
$
|
628
|
|
|
$
|
—
|
|
|
$
|
628
|
|
|
$
|
562
|
|
|
$
|
—
|
|
|
$
|
562
|
|
|
Projected benefit obligation
|
(950
|
)
|
|
(55
|
)
|
|
(1,005
|
)
|
|
(854
|
)
|
|
(64
|
)
|
|
(918
|
)
|
|
Funded status
|
$
|
(322
|
)
|
|
$
|
(55
|
)
|
|
$
|
(377
|
)
|
|
$
|
(292
|
)
|
|
$
|
(64
|
)
|
|
$
|
(356
|
)
|
|
Amounts recognized in the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
$
|
81
|
|
|
$
|
—
|
|
|
$
|
81
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
67
|
|
|
Accrued and other current liabilities
|
(13
|
)
|
|
(3
|
)
|
|
(16
|
)
|
|
(11
|
)
|
|
(4
|
)
|
|
(15
|
)
|
|
Accrued postretirement benefits
|
(390
|
)
|
|
(52
|
)
|
|
(442
|
)
|
|
(348
|
)
|
|
(60
|
)
|
|
(408
|
)
|
|
Net amount recognized
|
$
|
(322
|
)
|
|
$
|
(55
|
)
|
|
$
|
(377
|
)
|
|
$
|
(292
|
)
|
|
$
|
(64
|
)
|
|
$
|
(356
|
)
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses
|
$
|
(251
|
)
|
|
$
|
(24
|
)
|
|
$
|
(275
|
)
|
|
$
|
(220
|
)
|
|
$
|
(32
|
)
|
|
$
|
(252
|
)
|
|
Prior service credit
|
(1
|
)
|
|
12
|
|
|
11
|
|
|
1
|
|
|
12
|
|
|
13
|
|
|
Total
|
$
|
(252
|
)
|
|
$
|
(12
|
)
|
|
$
|
(264
|
)
|
|
$
|
(219
|
)
|
|
$
|
(20
|
)
|
|
$
|
(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).
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
International Plans
|
|
|
December 31,
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
100
|
|
|
$
|
86
|
|
|
$
|
754
|
|
|
$
|
693
|
|
|
Service cost
|
3
|
|
|
3
|
|
|
12
|
|
|
10
|
|
|
Interest cost
|
4
|
|
|
4
|
|
|
21
|
|
|
21
|
|
|
Benefits paid
|
(5
|
)
|
|
(4
|
)
|
|
(30
|
)
|
|
(26
|
)
|
|
Actuarial loss (gain)
|
5
|
|
|
(2
|
)
|
|
10
|
|
|
52
|
|
|
Plan amendments, settlements and curtailments
|
1
|
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
Acquisitions
|
—
|
|
|
13
|
|
|
—
|
|
|
83
|
|
|
Foreign currency translation/Other
|
(1
|
)
|
|
1
|
|
|
78
|
|
|
(78
|
)
|
|
Benefit obligation at end of year
|
$
|
107
|
|
|
$
|
100
|
|
|
$
|
843
|
|
|
$
|
754
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
69
|
|
|
57
|
|
|
$
|
493
|
|
|
$
|
502
|
|
|
Employer contributions
|
10
|
|
|
4
|
|
|
20
|
|
|
20
|
|
|
Actual return on plan assets
|
10
|
|
|
4
|
|
|
21
|
|
|
64
|
|
|
Benefits paid
|
(5
|
)
|
|
(4
|
)
|
|
(30
|
)
|
|
(26
|
)
|
|
Plan amendments, settlements and curtailments
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
Acquisitions
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
Foreign currency translation/Other
|
—
|
|
|
(1
|
)
|
|
43
|
|
|
(67
|
)
|
|
Fair value of plan assets at end of year
|
$
|
84
|
|
|
$
|
69
|
|
|
$
|
544
|
|
|
$
|
493
|
|
|
Unfunded status of the plans
|
$
|
(23
|
)
|
|
$
|
(31
|
)
|
|
$
|
(299
|
)
|
|
$
|
(261
|
)
|
The following table provides a rollforward of the projected benefit obligation for the other postretirement employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
64
|
|
|
$
|
61
|
|
|
Service cost
|
1
|
|
|
1
|
|
|
Interest cost
|
2
|
|
|
3
|
|
|
Benefits paid
|
(3
|
)
|
|
(4
|
)
|
|
Actuarial gain/(loss)
|
(5
|
)
|
|
3
|
|
|
Plan Amendment and other
|
(4
|
)
|
|
—
|
|
|
Benefit obligation at the end of year
|
$
|
55
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
Projected benefit obligation
|
$
|
528
|
|
|
$
|
474
|
|
|
Accumulated benefit obligation
|
499
|
|
|
453
|
|
|
Fair value of plan assets
|
126
|
|
|
116
|
|
The components of net periodic benefit cost for our defined benefit pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Domestic defined benefit pension plans:
|
|
|
|
|
|
|
Service cost
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Interest cost
|
4
|
|
|
4
|
|
|
4
|
|
|
Expected return on plan assets
|
(6
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
Amortization of net actuarial loss
|
2
|
|
|
2
|
|
|
2
|
|
|
Net periodic benefit cost
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
International defined benefit pension plans:
|
|
|
|
|
|
|
Service cost
|
$
|
12
|
|
|
$
|
10
|
|
|
$
|
12
|
|
|
Interest cost
|
21
|
|
|
21
|
|
|
22
|
|
|
Expected return on plan assets
|
(34
|
)
|
|
(30
|
)
|
|
(32
|
)
|
|
Amortization of net actuarial loss
|
9
|
|
|
8
|
|
|
13
|
|
|
Settlement
|
1
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
15
|
|
|
Total net periodic benefit cost
|
$
|
12
|
|
|
$
|
13
|
|
|
$
|
19
|
|
Other changes in assets and benefit obligations recognized in other comprehensive loss, as they pertain to our defined benefit pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Domestic defined benefit pension plans:
|
|
|
|
|
|
|
Net (gain) loss
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
Prior service cost
|
1
|
|
|
—
|
|
|
—
|
|
|
Amortization of net actuarial loss
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(Gains) losses recognized in other comprehensive loss
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
International defined benefit pension plans:
|
|
|
|
|
|
|
Net (gain) loss
|
$
|
23
|
|
|
$
|
18
|
|
|
$
|
(29
|
)
|
|
Prior service credit
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
Amortization of net actuarial loss
|
(9
|
)
|
|
(8
|
)
|
|
(13
|
)
|
|
Settlement
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
Foreign Exchange
|
19
|
|
|
(20
|
)
|
|
(21
|
)
|
|
(Gains) losses recognized in other comprehensive loss
|
$
|
33
|
|
|
$
|
(11
|
)
|
|
$
|
(63
|
)
|
|
Total (gains) losses recognized in other comprehensive loss
|
$
|
33
|
|
|
$
|
(14
|
)
|
|
$
|
(63
|
)
|
|
Total (gains) losses recognized in comprehensive income
|
$
|
45
|
|
|
$
|
(1
|
)
|
|
$
|
(44
|
)
|
The components of net periodic benefit cost for other postretirement employee benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Service cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Interest cost
|
2
|
|
|
3
|
|
|
2
|
|
|
Amortization of prior service credit
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
Amortization of net actuarial loss
|
2
|
|
|
3
|
|
|
3
|
|
|
Net periodic benefit cost
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
3
|
|
Other changes in benefit obligations recognized in other comprehensive loss, as they pertain to other postretirement employee benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Net loss (gain)
|
$
|
(5
|
)
|
|
$
|
3
|
|
|
$
|
4
|
|
|
Prior service credit
|
(3
|
)
|
|
—
|
|
|
(1
|
)
|
|
Amortization of prior service credit
|
3
|
|
|
3
|
|
|
3
|
|
|
Amortization of net actuarial loss
|
(2
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
Foreign Exchange/Other
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
Losses (gains) recognized in other comprehensive loss
|
$
|
(8
|
)
|
|
$
|
4
|
|
|
$
|
3
|
|
|
Total losses (gains) recognized in comprehensive income
|
$
|
(6
|
)
|
|
$
|
8
|
|
|
$
|
6
|
|
Assumptions
The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, as they pertain to our pension plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
U.S.
|
|
Int’l
|
|
U.S.
|
|
Int’l
|
|
U.S.
|
|
Int’l
|
|
Benefit Obligation Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
2.43
|
%
|
|
4.25
|
%
|
|
2.63
|
%
|
|
4.27
|
%
|
|
3.44
|
%
|
|
Rate of future compensation increase
|
NM
|
|
|
2.93
|
%
|
|
NM
|
|
|
2.76
|
%
|
|
NM
|
|
|
3.29
|
%
|
|
Net Periodic Benefit Cost Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.25
|
%
|
|
2.63
|
%
|
|
4.27
|
%
|
|
3.44
|
%
|
|
4.01
|
%
|
|
3.14
|
%
|
|
Expected long-term return on plan assets
|
8.00
|
%
|
|
7.20
|
%
|
|
8.00
|
%
|
|
7.25
|
%
|
|
8.00
|
%
|
|
7.31
|
%
|
|
Rate of future compensation increase
|
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 utilize
d in calculating the net periodic benefit costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected long-term rate of return on plan assets
|
7.30
|
%
|
|
7.32
|
%
|
|
7.38
|
%
|
|
Actual rate of return on plan assets
|
5.70
|
%
|
|
12.20
|
%
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Target
Allocation
Ranges
|
|
Equity securities
|
35.6
|
%
|
|
24.2
|
%
|
|
20-50%
|
|
Fixed income
|
23.4
|
%
|
|
32.7
|
%
|
|
10-40%
|
|
Hedge funds
|
17.0
|
%
|
|
31.7
|
%
|
|
0-40%
|
|
Private equity
|
1.6
|
%
|
|
2.4
|
%
|
|
0-30%
|
|
Insurance contracts and other
|
22.4
|
%
|
|
9.0
|
%
|
|
0-30%
|
Fair Value of Plan Assets
In measuring plan assets at fair value, the fair value hierarchy is applied which categorizes and prioritizes the inputs used to estimate fair value into three levels. See
Note 1
"Summary of Significant Accounting Policies" for further detail on fair value hierarchy.
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the pricing service, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value ("NAV"). Additionally, in certain circumstances, the NAV reported by an asset manager may be adjusted when sufficient evidence indicates NAV is not representative of fair value.
The following is a description of the valuation methodologies and inputs used to measure fair value for major categories of investments.
|
|
|
|
•
|
Equity securities — Equities (including common and preferred shares, domestic listed and foreign listed, closed end mutual funds and exchange traded funds) are generally valued at the closing price reported on the major market on which the individual securities are traded at the measurement date. Equity securities held by the Company that are publicly traded in active markets are classified within Level 1 of the fair value hierarchy. Those equities that are held in proprietary funds pooled with other investor accounts measured at fair value using the NAV per share practical expedient are not classified in the fair value hierarchy.
|
|
|
|
|
•
|
Fixed income — United States government securities are generally valued using quoted prices of securities with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g. discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income securities listed on active markets are classified in Level 1. Fixed income held in proprietary funds pooled with other investor accounts measured at fair value using the NAV per share practical expedient are not classified in
|
the fair value hierarchy. 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.
|
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
|
$
|
101
|
|
$
|
—
|
|
$
|
—
|
|
$
|
29
|
|
$
|
130
|
|
|
$
|
87
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6
|
|
$
|
93
|
|
|
Index funds
|
—
|
|
—
|
|
—
|
|
3
|
|
3
|
|
|
4
|
|
—
|
|
—
|
|
36
|
|
40
|
|
|
Emerging market funds
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
4
|
|
—
|
|
—
|
|
—
|
|
4
|
|
|
Diversified Growth and Income Funds
|
—
|
|
—
|
|
—
|
|
92
|
|
92
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Fixed income
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
24
|
|
—
|
|
—
|
|
8
|
|
32
|
|
|
22
|
|
—
|
|
—
|
|
18
|
|
40
|
|
|
Government bonds
|
48
|
|
—
|
|
—
|
|
5
|
|
53
|
|
|
88
|
|
—
|
|
—
|
|
11
|
|
99
|
|
|
Hedging Instruments
|
5
|
|
36
|
|
—
|
|
—
|
|
41
|
|
|
—
|
|
45
|
|
—
|
|
—
|
|
45
|
|
|
Diversified Growth and Income Funds
|
—
|
|
—
|
|
—
|
|
20
|
|
20
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Hedge funds
|
—
|
|
—
|
|
—
|
|
107
|
|
107
|
|
|
—
|
|
—
|
|
—
|
|
178
|
|
178
|
|
|
Private equity
|
—
|
|
—
|
|
—
|
|
10
|
|
10
|
|
|
—
|
|
—
|
|
—
|
|
13
|
|
13
|
|
|
Insurance contracts and other
|
90
|
|
—
|
|
17
|
|
33
|
|
140
|
|
|
26
|
|
—
|
|
24
|
|
—
|
|
50
|
|
|
Total plan assets subject to leveling
|
$
|
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)
|
|
Insurance Contracts and Other
|
|
Balance, December 31, 2015
|
|
$
|
25
|
|
|
Purchases, sales, settlements
|
|
1
|
|
|
Currency impact
|
|
(2
|
)
|
|
Balance, December 31, 2016
|
|
$
|
24
|
|
|
Purchases, sales, settlements
|
|
(8
|
)
|
|
Currency impact
|
|
1
|
|
|
Balance, December 31, 2017
|
|
$
|
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.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Pension
|
|
Other Benefits
|
|
2018
|
$
|
36
|
|
|
$
|
3
|
|
|
2019
|
36
|
|
|
3
|
|
|
2020
|
38
|
|
|
4
|
|
|
2021
|
38
|
|
|
4
|
|
|
2022
|
39
|
|
|
4
|
|
|
Years 2023 - 2027
|
212
|
|
|
19
|
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share units
(in thousands)
|
|
Weighted
Average
Exercise
Price / Share
|
|
Weighted Average
Remaining
Contractual
Term (Years)
|
|
Aggregate Intrinsic Value
(in millions)
|
|
Outstanding at January 1, 2017
|
2,126
|
|
|
$
|
33.71
|
|
|
6.9
|
|
|
|
Granted
|
501
|
|
|
$
|
48.43
|
|
|
|
|
|
|
Exercised
|
(494
|
)
|
|
$
|
31.95
|
|
|
|
|
|
|
Forfeited and expired
|
(57
|
)
|
|
$
|
42.60
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
2,076
|
|
|
$
|
37.44
|
|
|
7.0
|
|
$
|
64
|
|
|
Options exercisable at December 31, 2017
|
1,147
|
|
|
$
|
33.07
|
|
|
5.8
|
|
$
|
40
|
|
|
Vested and non-vested expected to vest as of December 31, 2017
|
1,997
|
|
|
$
|
36.52
|
|
|
6.8
|
|
$
|
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.
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Dividend yield
|
1.49
|
%
|
|
1.63
|
%
|
|
1.57
|
%
|
|
Volatility
|
25.39
|
%
|
|
28.87
|
%
|
|
27.77
|
%
|
|
Risk-free interest rate
|
2.07
|
%
|
|
1.41
|
%
|
|
1.64
|
%
|
|
Expected term (in years)
|
5.10
|
|
|
5.60
|
|
|
5.58
|
|
|
Weighted-average fair value per share
|
$
|
10.66
|
|
|
$
|
9.05
|
|
|
$
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
Share Units
(in thousands)
|
|
Weighted Average
Grant Date Fair
Value / Share
|
|
Outstanding at January 1, 2017
|
899
|
|
|
$
|
37.67
|
|
|
Granted
|
344
|
|
|
49.72
|
|
|
Vested
|
(396
|
)
|
|
38.16
|
|
|
Forfeited
|
(68
|
)
|
|
41.00
|
|
|
Outstanding at December 31, 2017
|
779
|
|
|
35.39
|
|
Performance Share Units
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.
Our ROIC performance share unit activity was as follows for
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Share units
(in thousands)
|
|
Weighted Average
Grant Date Fair
Value / Share
|
|
Outstanding at January 1, 2017
|
250
|
|
|
$
|
37.11
|
|
|
Granted
|
117
|
|
|
49.15
|
|
|
Forfeited
|
(69
|
)
|
|
38.62
|
|
|
Outstanding at December 31, 2017
|
298
|
|
|
41.48
|
|
TSR Performance Share Unit Grants
The following is a summary of our TSR performance share unit grants for
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
Share units
(in thousands)
|
|
Weighted
Average
Grant Date
Fair Value /Share
|
|
Outstanding at January 1, 2017
|
108
|
|
|
$
|
46.15
|
|
|
Granted
|
117
|
|
|
47.79
|
|
|
Forfeited
|
(12
|
)
|
|
44.19
|
|
|
Outstanding at December 31, 2017
|
213
|
|
|
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
|
30.24
|
%
|
|
Risk-free interest rate
|
1.50
|
%
|
Note 16. Capital Stock
The Company has the authority to issue an aggregate of
750 million
shares of common stock having a par value of
$0.01
per share. The stockholders of Xylem common stock are entitled to receive dividends as declared by the Xylem Board of Directors. Dividends declared were
$0.7200
,
$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)
|
2017
|
|
2016
|
|
2015
|
|
Beginning Balance, January 1
|
179,367
|
|
|
178,377
|
|
|
182,300
|
|
|
Stock incentive plan net activity
|
985
|
|
|
1,085
|
|
|
1,280
|
|
|
Repurchase of common stock
|
(490
|
)
|
|
(95
|
)
|
|
(5,203
|
)
|
|
Ending Balance, December 31
|
179,862
|
|
|
179,367
|
|
|
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
.
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.
Note 17. Accumulated Other Comprehensive Loss
The following table provides the components of accumulated other comprehensive loss for
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation
|
|
Postretirement Benefit Plans
|
|
Derivative Instruments
|
|
Total
|
|
Balance at January 1, 2015
|
$
|
145
|
|
|
$
|
(231
|
)
|
|
$
|
(13
|
)
|
|
$
|
(99
|
)
|
|
Foreign currency translation adjustment
|
(180
|
)
|
|
|
|
|
|
(180
|
)
|
|
Foreign currency gain reclassified into gain on sale of business
|
(8
|
)
|
|
|
|
|
|
(8
|
)
|
|
Changes in postretirement benefit plans
|
|
|
24
|
|
|
|
|
24
|
|
|
Income tax expense on changes in postretirement benefit plans
|
|
|
(10
|
)
|
|
|
|
(10
|
)
|
|
Foreign currency translation adjustment for postretirement benefit plans
|
|
|
21
|
|
|
|
|
21
|
|
|
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
4
|
|
|
|
|
4
|
|
|
Selling, general and administrative expenses
|
|
|
9
|
|
|
|
|
9
|
|
|
Research and development expenses
|
|
|
1
|
|
|
|
|
1
|
|
|
Other non-operating income, net
|
|
|
1
|
|
|
|
|
1
|
|
|
Income tax impact on amortization of postretirement benefit plan items
|
|
|
(4
|
)
|
|
|
|
(4
|
)
|
|
Unrealized loss on derivative hedge agreements
|
|
|
|
|
(22
|
)
|
|
(22
|
)
|
|
Income tax benefit on unrealized loss on derivative hedge agreements
|
|
|
|
|
6
|
|
|
6
|
|
|
Reclassification of unrealized loss on derivative hedge agreements into revenue
|
|
|
|
|
19
|
|
|
19
|
|
|
Reclassification of unrealized loss on derivative hedge agreements into cost of revenue
|
|
|
|
|
1
|
|
|
1
|
|
|
Income tax benefit on reclassification of unrealized loss on derivative hedge agreements
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Balance at December 31, 2015
|
$
|
(43
|
)
|
|
$
|
(185
|
)
|
|
$
|
(10
|
)
|
|
$
|
(238
|
)
|
|
Foreign currency translation adjustment
|
(65
|
)
|
|
|
|
|
|
(65
|
)
|
|
Income tax impact on foreign currency translation adjustment
|
(21
|
)
|
|
|
|
|
|
(21
|
)
|
|
Changes in postretirement benefit plans
|
|
|
(19
|
)
|
|
|
|
(19
|
)
|
|
Income tax expense on changes in postretirement benefit plans
|
|
|
3
|
|
|
|
|
3
|
|
|
Foreign currency translation adjustment for postretirement benefit plans
|
|
|
19
|
|
|
|
|
19
|
|
|
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3
|
|
|
|
|
3
|
|
|
Selling, general and administrative expenses
|
|
|
6
|
|
|
|
|
6
|
|
|
Other non-operating income, net
|
|
|
1
|
|
|
|
|
1
|
|
|
Income tax impact on amortization of postretirement benefit plan items
|
|
|
(5
|
)
|
|
|
|
(5
|
)
|
|
Reclassification of unrealized gain on derivative hedge agreements into revenue
|
|
|
|
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation
|
|
Postretirement Benefit Plans
|
|
Derivative Instruments
|
|
Total
|
|
Reclassification of unrealized loss on net investment hedge, net of tax
|
(11
|
)
|
|
|
|
11
|
|
|
—
|
|
|
Balance at December 31, 2016
|
$
|
(140
|
)
|
|
$
|
(177
|
)
|
|
$
|
(1
|
)
|
|
$
|
(318
|
)
|
|
Foreign currency translation adjustment
|
79
|
|
|
|
|
|
|
79
|
|
|
Income tax impact on foreign currency translation adjustment
|
46
|
|
|
|
|
|
|
46
|
|
|
Changes in postretirement benefit plans
|
|
|
(18
|
)
|
|
|
|
(18
|
)
|
|
Foreign currency translation adjustment for postretirement benefit plans
|
|
|
(18
|
)
|
|
|
|
(18
|
)
|
|
Income tax expense on changes in postretirement benefit plans
|
|
|
7
|
|
|
|
|
7
|
|
|
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2
|
|
|
|
|
2
|
|
|
Selling, general and administrative expenses
|
|
|
7
|
|
|
|
|
7
|
|
|
Other non-operating income, net
|
|
|
1
|
|
|
|
|
1
|
|
|
Restructuring
|
|
|
1
|
|
|
|
|
1
|
|
|
Income tax impact on amortization of postretirement benefit plan items
|
|
|
(3
|
)
|
|
|
|
(3
|
)
|
|
Unrealized gain on derivative hedge agreements
|
|
|
|
|
9
|
|
|
9
|
|
|
Reclassification of unrealized (gain) loss on foreign exchange agreements into revenue
|
|
|
|
|
(6
|
)
|
|
(6
|
)
|
|
Reclassification of unrealized (gain) loss on foreign exchange agreements into cost of revenue
|
—
|
|
|
|
|
1
|
|
|
1
|
|
|
Balance at December 31, 2017
|
$
|
(15
|
)
|
|
$
|
(198
|
)
|
|
$
|
3
|
|
|
$
|
(210
|
)
|
Note 18
. Commitments and Contingencies
Legal Proceedings
From time to time we are involved in legal proceedings that are incidental to the operation of our businesses. 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
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)
|
Total
|
|
2017
|
70
|
|
|
2016
|
63
|
|
|
2015
|
59
|
|
At
December 31, 2017
, we are obligated to make minimum rental payments under operating leases which are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Minimum rental payments
|
$
|
65
|
|
|
$
|
53
|
|
|
$
|
42
|
|
|
$
|
29
|
|
|
$
|
23
|
|
|
$
|
45
|
|
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)
|
2017
|
|
2016
|
|
Warranty accrual – January 1
|
$
|
99
|
|
|
$
|
33
|
|
|
Net charges for product warranties in the period
|
28
|
|
|
32
|
|
|
Settlement of warranty claims
|
(48
|
)
|
|
(31
|
)
|
|
Warranty accrual acquired
|
—
|
|
|
66
|
|
|
Foreign currency and other
|
3
|
|
|
(1
|
)
|
|
Warranty accrual – December 31
|
$
|
82
|
|
|
$
|
99
|
|
Note 19
. Related Party Transactions
Sales to and purchases from unconsolidated joint ventures for
2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
|
Sales to unconsolidated affiliates
|
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
Purchases from unconsolidated affiliates
|
|
17
|
|
|
22
|
|
|
19
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
Water Infrastructure
|
$
|
2,004
|
|
|
$
|
1,932
|
|
|
$
|
1,940
|
|
|
Applied Water
|
1,421
|
|
|
1,393
|
|
|
1,422
|
|
|
Measurement & Control Solutions
|
1,282
|
|
|
446
|
|
|
291
|
|
|
Total
|
$
|
4,707
|
|
|
$
|
3,771
|
|
|
$
|
3,653
|
|
|
Operating income:
|
|
|
|
|
|
|
Water Infrastructure
|
$
|
308
|
|
|
$
|
291
|
|
|
$
|
261
|
|
|
Applied Water
|
197
|
|
|
188
|
|
|
190
|
|
|
Measurement & Control Solutions
|
110
|
|
|
—
|
|
|
42
|
|
|
Corporate and other
|
(59
|
)
|
|
(73
|
)
|
|
(44
|
)
|
|
Total operating income
|
556
|
|
|
406
|
|
|
449
|
|
|
Interest expense
|
82
|
|
|
70
|
|
|
55
|
|
|
Other non-operating income (expense)
|
2
|
|
|
4
|
|
|
—
|
|
|
(Loss)/gain from sale of businesses
|
(10
|
)
|
|
—
|
|
|
9
|
|
|
Income before taxes
|
$
|
466
|
|
|
$
|
340
|
|
|
$
|
403
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Water Infrastructure
|
$
|
64
|
|
|
$
|
66
|
|
|
$
|
71
|
|
|
Applied Water
|
23
|
|
|
24
|
|
|
26
|
|
|
Measurement & Control Solutions
|
122
|
|
|
41
|
|
|
17
|
|
|
Regional selling locations (a)
|
17
|
|
|
11
|
|
|
11
|
|
|
Corporate and other
|
8
|
|
|
9
|
|
|
8
|
|
|
Total
|
$
|
234
|
|
|
$
|
151
|
|
|
$
|
133
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Water Infrastructure
|
$
|
58
|
|
|
$
|
62
|
|
|
$
|
62
|
|
|
Applied Water
|
20
|
|
|
21
|
|
|
22
|
|
|
Measurement & Control Solutions
|
69
|
|
|
13
|
|
|
5
|
|
|
Regional selling locations (b)
|
18
|
|
|
24
|
|
|
23
|
|
|
Corporate and other
|
5
|
|
|
4
|
|
|
5
|
|
|
Total
|
$
|
170
|
|
|
$
|
124
|
|
|
$
|
117
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Pumps, accessories, parts and service
|
$
|
2,998
|
|
|
$
|
2,888
|
|
|
$
|
2,917
|
|
|
Other (a)
|
1,709
|
|
|
883
|
|
|
736
|
|
|
Total
|
$
|
4,707
|
|
|
$
|
3,771
|
|
|
$
|
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
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Water Infrastructure
|
$
|
1,232
|
|
|
$
|
1,179
|
|
|
$
|
1,265
|
|
|
Applied Water
|
1,002
|
|
|
990
|
|
|
1,054
|
|
|
Measurement & Control Solutions
|
3,198
|
|
|
3,102
|
|
|
759
|
|
|
Regional selling locations (a)
|
1,119
|
|
|
965
|
|
|
905
|
|
|
Corporate and other (b)
|
309
|
|
|
238
|
|
|
674
|
|
|
Total
|
$
|
6,860
|
|
|
$
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
United States
|
$
|
2,161
|
|
|
$
|
1,574
|
|
|
$
|
1,490
|
|
|
Europe
|
1,335
|
|
|
1,195
|
|
|
1,179
|
|
|
Asia Pacific
|
611
|
|
|
518
|
|
|
482
|
|
|
Other
|
600
|
|
|
484
|
|
|
502
|
|
|
Total
|
$
|
4,707
|
|
|
$
|
3,771
|
|
|
$
|
3,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant & Equipment
|
|
|
December 31,
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
United States
|
$
|
258
|
|
|
$
|
255
|
|
|
$
|
168
|
|
|
Europe
|
259
|
|
|
237
|
|
|
189
|
|
|
Asia Pacific
|
85
|
|
|
87
|
|
|
56
|
|
|
Other
|
41
|
|
|
37
|
|
|
26
|
|
|
Total
|
$
|
643
|
|
|
$
|
616
|
|
|
$
|
439
|
|
Note 21. Valuation and Qualifying Accounts
The table below provides changes in the allowance for doubtful accounts over each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
|
Balance at beginning of year
|
$
|
21
|
|
|
$
|
22
|
|
|
$
|
24
|
|
|
Additions charged to expense
|
5
|
|
|
4
|
|
|
4
|
|
|
Deductions/other
|
(1
|
)
|
|
(5
|
)
|
|
(6
|
)
|
|
Balance at end of year
|
$
|
25
|
|
|
$
|
21
|
|
|
$
|
22
|
|
Note 22. Quarterly Financial Data (Unaudited)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Quarter Ended
|
|
(in millions, except per share amounts)
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Revenue
|
|
$
|
1,277
|
|
|
$
|
1,195
|
|
|
$
|
1,164
|
|
|
$
|
1,071
|
|
|
Gross profit
|
|
509
|
|
|
471
|
|
|
459
|
|
|
412
|
|
|
Operating income
|
|
179
|
|
|
152
|
|
|
139
|
|
|
86
|
|
|
Net income attributable to Xylem
|
|
$
|
71
|
|
|
$
|
105
|
|
|
$
|
99
|
|
|
$
|
56
|
|
|
Earnings per share:
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
0.58
|
|
|
$
|
0.55
|
|
|
$
|
0.31
|
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
0.58
|
|
|
$
|
0.55
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter Ended
|
|
(in millions, except per share amounts)
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Revenue
|
|
$
|
1,095
|
|
|
$
|
897
|
|
|
$
|
932
|
|
|
$
|
847
|
|
|
Gross profit
|
|
406
|
|
|
357
|
|
|
369
|
|
|
329
|
|
|
Operating income
|
|
109
|
|
|
109
|
|
|
109
|
|
|
79
|
|
|
Net income
|
|
$
|
50
|
|
|
$
|
73
|
|
|
$
|
71
|
|
|
$
|
66
|
|
|
Earnings per share:
|
|
Basic
|
|
$
|
0.28
|
|
|
$
|
0.41
|
|
|
$
|
0.39
|
|
|
$
|
0.37
|
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.41
|
|
|
$
|
0.39
|
|
|
$
|
0.37
|
|
Note 23. Subsequent Events
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. 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.