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ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes, included elsewhere in this report on Form 10-Q (this "Report").
This Report contains “forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” "contemplate," "predict," “forecast,” “likely,” “believe,” “target,” "goal," “will,” “could,” “would,” “should,” "potential," "may" and similar expressions or their negative, may, but are not necessary to, identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements that are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals; or address possible or future results of operations or financial performance, including statements relating to orders, revenues, operating margins and earnings per share growth.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by the ongoing coronavirus (“COVID-19”) pandemic. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: overall industry and economic conditions, including industrial, governmental and private sector spending and the strength of the residential and commercial real estate markets; geopolitical, regulatory, economic and other risks associated with international operations; continued uncertainty around the COVID-19 pandemic’s magnitude, duration and impacts on our business, operations, growth, and financial condition, as well as uncertainty around approved vaccines and the pace of recovery when the pandemic subsides; actual or potential other epidemics, pandemics or global health crises; availability, shortage or delays in receiving products, parts, electronic components and raw materials from our supply chain; manufacturing and operating cost increases due to inflation, prevailing price changes, tariffs and other factors; fluctuations in foreign currency exchange rates; disruption, competition and pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; availability, regulation and interference with radio spectrum used by some of our products; our ability to retain and attract senior management and other key talent; uncertainty related to restructuring and realignment actions and related charges and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; risks relating to products, including defects, security, warranty and liability claims, and recalls; difficulty predicting our financial results, including uncertainties due to the nature of our short- and long-cycle businesses; volatility in our results due to weather conditions, including the effects of climate change; our ability to borrow or refinance our existing indebtedness and the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, competition, and the environment and climate change; changes in our effective tax rates or tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).
All forward-looking statements made herein are based on information currently available to us as of the date of this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
Xylem is a leading global water technology company. We design, manufacture and service highly engineered products and solutions ranging across a wide variety of critical applications in utility, industrial, residential and commercial building services settings. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test, treatment and analysis of wastewater to the return of water to the environment. Our product and service offerings are organized into three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control Solutions.
•Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater and storm water to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. Additionally, our offerings use monitoring and control, smart and connected technologies to allow for remote monitoring of performance and enable products to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for our customers. In the Water Infrastructure segment, we provide the majority of our sales directly to customers along with strong applications expertise, while the remaining amount is through distribution partners.
•Applied Water serves the water usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning, and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers and controls provide cooling to power plants and manufacturing facilities, circulation for food and beverage processing, as well as boosting systems for agricultural irrigation. In the Applied Water segment, we provide the majority of our sales through long-standing relationships with many of the leading independent distributors in the markets we serve, with the remainder going directly to customers.
•Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and critical infrastructure technologies that allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. We also provide analytical instrumentation used to measure and analyze water quality, flow and level in clean water, wastewater, surface water and coastal environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners, as well as direct sales depending on the regional availability of distribution channels and the type of product.
COVID-19 Pandemic Update
Depending on the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences, we anticipate that it will become more difficult to distinguish specific aspects of our operational and financial performance that are most directly related to the pandemic from those more broadly influenced by ongoing macroeconomic, market and industry dynamics that may be, to varying degrees, related to the pandemic and its consequences.
The COVID-19 pandemic, as well as broader global market supply and demand dynamics, have adversely affected, and are expected to continue to adversely affect, our supply chains. We have experienced, and expect to continue to experience, shortages in the supply of components, including electronics, parts and raw materials. We have also experienced, and continue to experience, increased freight and logistics costs, including delivery delays related to port congestion and other related logistics challenges. To help mitigate the effects of these challenges and increase the resilience of our supply chain, we continue to enhance and augment our risk management activities, including supplier pulsing and redundancy. Additionally, we have in the past, and may continue to in the future, take measures with respect to buffer stock, the use of alternative suppliers or redesign of certain products to mitigate the impacts of freight and logistics delays and bolster our access to raw materials, parts and components. If these shortages and interruptions continue, or if additional interruptions occur, they
could have a negative impact on our results of operations. Our current overall operating capacity approximates normal levels globally.
Xylem Watermark, our corporate social responsibility program, continues to support our communities in addressing the challenges posed by this global pandemic by strengthening access to Water, Sanitation and Hygiene (WASH) facilities in schools and health centers through its partnership with Americares and UNICEF, as well as the Partner Community Grants program and matching donations program for employees and partners, and other philanthropic commitments.
Xylem continues to focus on the health and safety of our employees, working with our customers to help them minimize potential disruptions and positively impact our communities. Our support pay program for employees impacted by COVID-19 will remain in place into the fourth quarter of 2021, and we will continue to evaluate it for continuation, as necessary.
Many of our offices globally remain in a substantially remote work from home status and our COVID-19 Response Team applies a set of Xylem "Return to Workplace" health and safety guidelines for remote workers to return to our facilities.
We continue to assess the evolving nature of the pandemic and its possible implications to our business, employees, supply chain, customers and communities, and to take actions in an effort to mitigate adverse consequences.
Risk related to the impact of COVID-19 as well as our supply chain are described in further detail under "Item 1A. Risk Factors" in the Company's 2020 Annual Report.
Executive Summary
Xylem reported revenue for the third quarter of 2021 of $1,265 million, an increase of 3.7% compared to $1,220 million reported in the third quarter of 2020. On a constant currency basis, revenue increased by $25 million, or 2.0%, driven by organic revenue growth in the Water Infrastructure and Applied Water segments, partially offset by Measurement & Control Solutions. These results were driven by growth in the industrial and commercial end markets, offset by declines in the utilities end market.
We generated operating income of $152 million (margin of 12.0%) during the third quarter of 2021, as compared to $73 million (margin of 6.0%) in 2020. Operating income in the third quarter of 2021 benefited from a decrease in restructuring and realignment costs of $13 million as compared to the third quarter of 2020 and a decrease in special charges of $69 million. Excluding the impact of these items, adjusted operating income was $155 million (adjusted margin of 12.3%) during the third quarter of 2021 as compared to $158 million (adjusted margin of 13.0%) in 2020. The decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments, increased logistics costs and unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives, price realization, favorable volume, and other lesser impacts.
Additional financial highlights for the quarter ended September 30, 2021 include the following:
•Orders of $1,518 million, up 21.8% from $1,246 million in the prior year, and up 20.1% on an organic basis.
•Earnings per share of $0.63, up 215.0% when compared to the prior year ($0.63, up 1.6% on an adjusted basis).
•Net income as a percent of revenue of 9.0%, up 600 basis points compared to 3.0% in the prior year. EBITDA margin of 17.0%, up 610 basis points when compared to 10.9% in the prior year (17.9%, down 30 basis points on an adjusted basis)
•Net cash flow provided by operating activities of $318 million for the nine months ended September 30, 2021, a decrease of $136 million from cash provided in the same period of the prior year. Free cash flow was $191 million, down $127 million from the prior year.
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and to provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following items to represent the non-GAAP measures we consider to be key performance indicators, as well as the related reconciling items to the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures may not be comparable to similarly-titled measures reported by other companies.
•"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales or discontinuance of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate.
•"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This approach is used for countries whose functional currency is not the U.S. Dollar.
•"adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share, respectively, adjusted to exclude restructuring and realignment costs, special charges, gain or loss from sale of businesses and tax-related special items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(In millions, except for per share data)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income & Earnings per share
|
$
|
114
|
|
|
$
|
0.63
|
|
|
$
|
37
|
|
|
$
|
0.20
|
|
|
$
|
314
|
|
|
$
|
1.73
|
|
|
$
|
106
|
|
|
$
|
0.58
|
|
Restructuring and realignment, net of tax of $1 and $4 for 2021 and $3 and $15 for 2020
|
1
|
|
|
—
|
|
|
12
|
|
|
0.06
|
|
|
12
|
|
|
0.07
|
|
|
52
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges, net of tax of $0 and $1 for 2021 and $6 and $9 for 2020
|
2
|
|
|
0.01
|
|
|
65
|
|
|
0.36
|
|
|
7
|
|
|
0.04
|
|
|
76
|
|
|
0.42
|
|
Tax-related special items
|
(1)
|
|
|
(0.01)
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
0.03
|
|
|
(5)
|
|
|
(0.03)
|
|
Gain from sale of business, net of tax of $0 for 2021
|
—
|
|
|
—
|
|
|
—
|
|
|
—
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|
|
(2)
|
|
|
(0.01)
|
|
|
—
|
|
|
—
|
|
Adjusted net income & Adjusted earnings per share
|
$
|
116
|
|
|
$
|
0.63
|
|
|
$
|
114
|
|
|
$
|
0.62
|
|
|
$
|
337
|
|
|
$
|
1.86
|
|
|
$
|
229
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•"adjusted operating expenses" defined as operating expenses adjusted to exclude restructuring and realignment costs and special charges.
•"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue.
•“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense "EBITDA margin" defined as EBITDA divided by total revenue, "adjusted EBITDA" reflects the adjustment to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, special charges and gain or loss from sale of businesses, and "adjusted EBITDA margin" defined as adjusted EBITDA divided by total revenue.
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net Income
|
$
|
114
|
|
|
$
|
37
|
|
|
$
|
314
|
|
|
$
|
106
|
|
Income tax expense
|
19
|
|
|
13
|
|
|
71
|
|
|
21
|
|
Interest expense, net
|
20
|
|
|
20
|
|
|
58
|
|
|
50
|
|
Depreciation
|
31
|
|
|
30
|
|
|
90
|
|
|
88
|
|
Amortization
|
31
|
|
|
33
|
|
|
96
|
|
|
101
|
|
EBITDA
|
$
|
215
|
|
|
$
|
133
|
|
|
$
|
629
|
|
|
$
|
366
|
|
EBITDA Margin
|
17.0
|
%
|
|
10.9
|
%
|
|
16.2
|
%
|
|
10.5
|
%
|
Share-based compensation
|
$
|
8
|
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
19
|
|
Restructuring and realignment
|
2
|
|
|
15
|
|
|
16
|
|
|
67
|
|
Special charges
|
2
|
|
|
71
|
|
|
8
|
|
|
85
|
|
Gain from sale of business
|
—
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
Adjusted EBITDA
|
$
|
227
|
|
|
$
|
222
|
|
|
$
|
676
|
|
|
$
|
537
|
|
Adjusted EBITDA Margin
|
17.9
|
%
|
|
18.2
|
%
|
|
17.5
|
%
|
|
15.3
|
%
|
•“realignment costs” defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs.
•“special charges" defined as costs incurred by the Company, such as acquisition and integration related costs, non-cash impairment charges and both operating and non-operating adjustments for pension costs.
•"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, excess tax benefits/losses and other discrete tax adjustments.
•"free cash flow" defined as net cash from operating activities, as reported in the Condensed Consolidated Statement of Cash Flows, less capital expenditures. Our definition of "free cash flow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
(In millions)
|
2021
|
|
2020
|
Net cash provided by operating activities
|
$
|
318
|
|
|
$
|
454
|
|
Capital expenditures
|
(127)
|
|
|
(136)
|
|
Free cash flow
|
$
|
191
|
|
|
$
|
318
|
|
Net cash used by investing activities
|
$
|
(113)
|
|
|
$
|
(326)
|
|
Net cash (used) provided by financing activities
|
$
|
(806)
|
|
|
$
|
550
|
|
2021 Outlook
We are updating our anticipated total revenue growth to be in the range of 5% to 7% in 2021, with organic revenue growth anticipated to be in the range of 3% to 4%, including negative impacts due to the challenging supply chain environment. The following is a summary of our organic revenue outlook by end markets:
•Utilities revenue increased by approximately 1% organically through the third quarter driven by strength in western Europe and the emerging markets, partially offset by weakness in North America. For 2021, we expect organic revenue to be essentially flat with continued resilience on the wastewater side, as utilities remain focused on mission-critical applications and anticipate modest growth on a global basis through the year. The timing of large clean water utility project deployments has been impacted by the global shortage of electronic components, which we expect to continue throughout the remainder of 2021. We anticipate that these deployments will ramp up when supply constraints ease based on our strong backlog position and orders momentum. Additionally, we expect healthy momentum in the test and treatment markets globally and increased demand for our smart water solution and digital offerings.
•Industrial revenue increased by approximately 14% organically through the third quarter driven by strong across all major geographic regions. For 2021, we expect organic revenue growth in the high-single-digit range as activity across all segments rebounds globally and our dewatering business continues to recover, especially in the emerging markets, as demand increases and site access restrictions continue to ease. We anticipate growth to continue in the remainder of the year led by the emerging markets and western Europe with North America modest lagging growth.
•In the commercial markets, organic revenue growth was approximately 9% through the third quarter driven by strength in the U.S. and the emerging markets. For 2021, we expect organic revenue growth in the mid to high-single-digit range. We expect replacement business in the U.S. to be solid during the year and anticipate continued healthy activity in Europe. We expect new construction activity in North America strengthening, through the year.
•In the residential markets, organic revenue growth was approximately 20% through the third quarter driven by strength in the emerging markets, North America and western Europe. This market is primarily driven by replacement revenue serviced through our distribution network. For 2021, we expect organic revenue growth in the low-teens, driven by healthy demand activity from increased residential users in the U.S. and western Europe. Additionally, we anticipate strong demand in China for secondary water supply product applications.
We will continue to strategically execute restructuring and realignment actions in an effort to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. During 2021, we expect to incur approximately $20 million in restructuring and realignment costs. We expect to realize approximately $35 million of net savings in 2021, consisting of approximately $33 million of incremental net savings from restructuring and realignment actions initiated in 2020, and approximately $2 million of net savings from the restructuring, realignment and other structural cost actions initiated during this year.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(In millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Revenue
|
$
|
1,265
|
|
|
$
|
1,220
|
|
|
3.7
|
|
%
|
|
$
|
3,872
|
|
|
$
|
3,503
|
|
|
10.5
|
|
%
|
Gross profit
|
472
|
|
|
461
|
|
|
2.4
|
|
%
|
|
1,482
|
|
|
1,304
|
|
|
13.7
|
|
%
|
Gross margin
|
37.3
|
%
|
|
37.8
|
%
|
|
(50)
|
|
bp
|
|
38.3
|
%
|
|
37.2
|
%
|
|
110
|
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
320
|
|
|
388
|
|
|
(17.5)
|
|
%
|
|
1,037
|
|
|
1,116
|
|
|
(7.1)
|
|
%
|
Expense to revenue ratio
|
25.3
|
%
|
|
31.8
|
%
|
|
(650)
|
|
bp
|
|
26.8
|
%
|
|
31.9
|
%
|
|
(510)
|
|
bp
|
Restructuring and realignment costs
|
2
|
|
|
15
|
|
|
(86.7)
|
|
%
|
|
16
|
|
|
67
|
|
|
(76.1)
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges
|
1
|
|
|
70
|
|
|
(98.6)
|
|
%
|
|
3
|
|
|
81
|
|
|
(96.3)
|
|
%
|
Adjusted operating expenses
|
317
|
|
|
303
|
|
|
4.6
|
|
%
|
|
1,018
|
|
|
968
|
|
|
5.2
|
|
%
|
Adjusted operating expenses to revenue ratio
|
25.1
|
%
|
|
24.8
|
%
|
|
30
|
|
bp
|
|
26.3
|
%
|
|
27.6
|
%
|
|
(130)
|
|
bp
|
Operating income
|
152
|
|
|
73
|
|
|
108.2
|
|
%
|
|
445
|
|
|
188
|
|
|
136.7
|
|
%
|
Operating margin
|
12.0
|
%
|
|
6.0
|
%
|
|
600
|
|
bp
|
|
11.5
|
%
|
|
5.4
|
%
|
|
610
|
|
bp
|
Interest and other non-operating expense, net
|
19
|
|
|
23
|
|
|
(17.4)
|
|
%
|
|
62
|
|
|
61
|
|
|
1.6
|
|
%
|
Gain from sale of business
|
—
|
|
|
—
|
|
|
NM
|
|
|
2
|
|
|
—
|
|
|
NM
|
|
Income tax expense
|
19
|
|
|
13
|
|
|
46.2
|
|
%
|
|
71
|
|
|
21
|
|
|
238.1
|
|
%
|
Tax rate
|
13.9
|
%
|
|
26.2
|
%
|
|
(1,230)
|
|
bp
|
|
18.3
|
%
|
|
16.6
|
%
|
|
170
|
|
bp
|
Net income
|
$
|
114
|
|
|
$
|
37
|
|
|
208.1
|
|
%
|
|
$
|
314
|
|
|
$
|
106
|
|
|
196.2
|
|
%
|
NM - Not meaningful change
Revenue
Revenue generated during the three and nine months ended September 30, 2021 was $1,265 million and $3,872 million, reflecting increases of $45 million, or 3.7%, and $369 million, or 10.5%, respectively, compared to the same prior year periods. On a constant currency basis, revenue grew 2.0% and 6.8% for the three and nine months ended September 30, 2021. The increases on a constant currency basis were driven by organic revenue growth of $27 million and $246 million, respectively. During the quarter, we experienced strong organic growth across the emerging markets and in western Europe, partially offset by declines in the U.S. On a year-to-date basis, we saw organic growth across all major geographies, where we recovered nicely from the significant impacts of the COVID-19 pandemic in the prior year.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to revenue during the three and nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Infrastructure
|
|
Applied Water
|
|
Measurement & Control Solutions
|
|
Total Xylem
|
|
|
(In millions)
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
|
|
|
2020 Revenue
|
$
|
524
|
|
|
|
$
|
364
|
|
|
|
$
|
332
|
|
|
|
$
|
1,220
|
|
|
|
|
|
|
Organic Growth
|
13
|
|
2.5
|
%
|
|
29
|
|
8.0
|
%
|
|
(15)
|
|
(4.5)
|
%
|
|
27
|
|
2.2
|
%
|
|
|
|
|
Divestitures
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
(2)
|
|
(0.6)
|
%
|
|
(2)
|
|
(0.2)
|
%
|
|
|
|
|
Constant Currency
|
13
|
|
2.5
|
%
|
|
29
|
|
8.0
|
%
|
|
(17)
|
|
(5.1)
|
%
|
|
25
|
|
2.0
|
%
|
|
|
|
|
Foreign currency translation (a)
|
10
|
|
1.9
|
%
|
|
7
|
|
1.9
|
%
|
|
3
|
|
0.9
|
%
|
|
20
|
|
1.7
|
%
|
|
|
|
|
Total change in revenue
|
23
|
|
4.4
|
%
|
|
36
|
|
9.9
|
%
|
|
(14)
|
|
(4.2)
|
%
|
|
45
|
|
3.7
|
%
|
|
|
|
|
2021 Revenue
|
$
|
547
|
|
|
|
$
|
400
|
|
|
|
$
|
318
|
|
|
|
$
|
1,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Chinese Yuan, the British Pound, the Canadian Dollar, the Euro and the South African Rand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Infrastructure
|
|
Applied Water
|
|
Measurement & Control Solutions
|
|
Total Xylem
|
(In millions)
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
2020 Revenue
|
$
|
1,463
|
|
|
|
$
|
1,039
|
|
|
|
$
|
1,001
|
|
|
|
$
|
3,503
|
|
|
Organic Growth
|
92
|
|
6.3
|
%
|
|
132
|
|
12.7
|
%
|
|
22
|
|
2.2
|
%
|
|
246
|
|
7.0
|
%
|
Divestitures
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
(7)
|
|
(0.7)
|
%
|
|
(7)
|
|
(0.2)
|
%
|
Constant Currency
|
92
|
|
6.3
|
%
|
|
132
|
|
12.7
|
%
|
|
15
|
|
1.5
|
%
|
|
239
|
|
6.8
|
%
|
Foreign currency translation (a)
|
70
|
|
4.8
|
%
|
|
36
|
|
3.5
|
%
|
|
24
|
|
2.4
|
%
|
|
130
|
|
3.7
|
%
|
Total change in revenue
|
162
|
|
11.1
|
%
|
|
168
|
|
16.2
|
%
|
|
39
|
|
3.9
|
%
|
|
369
|
|
10.5
|
%
|
2021 Revenue
|
$
|
1,625
|
|
|
|
$
|
1,207
|
|
|
|
$
|
1,040
|
|
|
|
$
|
3,872
|
|
|
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, the Chinese Yuan, the British Pound, the Australian Dollar and the Canadian Dollar.
Water Infrastructure
Water Infrastructure revenue increased $23 million, or 4.4%, for the third quarter of 2021 (2.5% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $10 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $13 million. Organic growth for the quarter was driven by strength in the industrial end market, particularly across the emerging markets, as well as in western Europe. Organic growth for the quarter was partially offset by weakness in the utility end market, particularly in emerging markets driven by project revenue in India and China in the prior year that did not recur, as well as in the U.S., with weakness in the dewatering construction and municipal business due to project timing.
From an application perspective, organic revenue growth for the third quarter was driven by our transport applications. The transport applications had strong revenue growth in the emerging markets, where the dewatering business in Latin America and Africa benefited from strong market conditions in mining, as well as modest oil and gas recovery, during the quarter and in western Europe, driven by strong industrial and wastewater utility demand. This growth was partially offset by softness in the transport applications in the U.S. due to supply chain constraints. The treatment applications also had organic growth in the quarter, primarily in western Europe.
For the nine months ended September 30, 2021, revenue increased $162 million, or 11.1% (6.3% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $70 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $92 million. Organic growth during the year was driven by strength in both the industrial and utility end markets. Organic growth in the industrial end market was particularly strong across the emerging markets, which included recovery from prior year COVID-19 impacts, particularly in Asia, Africa and Latin America, and in western Europe with continued strength in general industrial. Strength in the utility end market was led by western Europe, where operation spending was strong in the first half of the year, and in the emerging markets, where China benefited from healthy order intake coming into the year. This utility growth was partially offset by weakness in the U.S.
From an application perspective, organic revenue growth during the nine month period was primarily driven by our transport applications. The transport applications had strong revenue growth across the emerging markets, where we benefited from healthy order intake in China and Africa and a strong recovery in Latin America, particularly in the dewatering application, as well as growth in western Europe, where the COVID-19 pandemic had a significant impact in the first half of the prior year. Transport application growth in these regions was partially offset by weakness in the U.S. driven by our dewatering application. Organic revenue from our treatment applications also contributed to the segment's growth during the period, driven by project orders in China and Korea, as well as in western Europe and Australia, which were partially offset by the timing of project deliveries in North America.
Applied Water
Applied Water revenue increased $36 million, or 9.9%, for the third quarter of 2021 (8.0% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $7 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $29 million. Organic growth for the quarter was driven by strength in commercial building services, particularly in the U.S, as we continued to execute
on healthy backlog and order intake, and in the emerging markets, driven by recovery in China. The industrial water business also grew organically in the quarter across all of our major geographic regions, where we benefited from strong order intake and timing of price increases, as well as strength in the specialty flow control applications (marine and food & beverage). The residential building services application had continued modest growth during the quarter.
For the nine months ended September 30, 2021, revenue increased $168 million, or 16.2% (12.7% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $36 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $132 million. Organic growth during the period included growth across all three of the applications and end markets in the segment. The organic growth was led by strength in industrial, which was primarily driven by market recovery and good backlog execution in the emerging markets, particularly in China and India, as well as strong performance in western Europe, driven by market recovery from COVID-19 impacts and strength in specialty flow control applications. Commercial building services had strong organic growth in North America, as we executed on healthy backlog coming into the year. Residential building services had strong organic growth during the first half of the year, primarily driven by the emerging markets, where we experienced strong second water supply business and a favorable prior year comparison in China, as markets conditions recovered from the COVID-19 pandemic. Strength in North America also contributed to the growth in residential building services for the year-to-date, as we executed on healthy backlog coming into the year.
Measurement & Control Solutions
Measurement & Control Solutions revenue decreased $14 million, or 4.2%, for the third quarter of 2021 (5.1% decrease on a constant currency basis) as compared to the prior year. Revenue benefited from $3 million of foreign currency translation, with the change at constant currency coming from an organic decline of $15 million and reduced revenue related to divestiture impacts of $2 million. Organic weakness in the quarter was driven by declines in the utility end market, primarily in North America, which more than offset modest strength in the industrial end market.
In order to simplify and focus the application discussion, beginning with the first quarter of 2021, we are aggregating the test application into the water application and the software as a service and other application into the water and energy applications, as applicable, as both of these sub-applications provide products and services to the broader, ultimate applications of water and energy. From an application perspective, organic revenue decline during the quarter was driven by declines in the electric business within the energy application in North America, marginally offset by increased revenue in the gas business. The water application also experienced a decrease, primarily due to supply chain constraints in North America in our metrology business, which were partially offset by growth in our test and assessment service businesses.
For the nine months ended September 30, 2021, revenue increased $39 million, or 3.9% (1.5% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $24 million of foreign currency translation during the nine month period, with the change at constant currency driven by organic growth of $22 million which was partially offset by reduced revenue related to divestiture impacts of $7 million. Organic revenue growth during the period was driven by strength in the industrial end market across all of our major geographic regions. Organic growth in the industrial end market was marginally offset by weakness in the utility end market in North America.
From an application perspective, organic revenue growth during the period was driven by the water application, with growth across all major geographic regions, driven by COVID-19 recovery, coupled with strong backlog execution. Growth in the water applications was largely attributable to our test business, as well as growth in our metrology business in the first half of the year. Organic revenue growth was partially offset by a decline in the energy application during the period driven by both the electric and gas businesses, primarily in the U.S. Declines in the electric business resulted from electronic component shortages while declines in the gas business reflect large project deployments in the U.S. during the prior year that did not repeat, as well as project delays during the year driven by the COVID-19 pandemic.
Orders / Backlog
An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the third quarter of 2021 were $1,518 million, an
increase of $272 million, or 21.8%, over the prior year (19.9% increase on a constant currency basis). Orders received during the nine months ended September 30, 2021 were $4,716 million, an increase of $977 million, or 26.1%, over the prior year (22.2% increase on a constant currency basis). Order intake benefited from $24 million and $147 million of foreign currency translation for the three and nine months ended September 30, 2021, respectively. The increase on a constant currency basis was primarily driven by organic order growth of $250 million and $840 million for the three and nine months ended September 30, 2021, respectively.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three and nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Infrastructure
|
|
Applied Water
|
|
Measurement & Control Solutions
|
|
Total Xylem
|
(in millions)
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
2020 Orders
|
$
|
558
|
|
|
|
$
|
375
|
|
|
|
$
|
313
|
|
|
|
$
|
1,246
|
|
|
Organic Growth
|
53
|
|
9.5
|
%
|
|
64
|
|
17.1
|
%
|
|
133
|
|
42.5
|
%
|
|
250
|
|
20.1
|
%
|
Divestitures
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
(2)
|
|
(0.6)
|
%
|
|
(2)
|
|
(0.2)
|
%
|
Constant Currency
|
53
|
|
9.5
|
%
|
|
64
|
|
17.1
|
%
|
|
131
|
|
41.9
|
%
|
|
248
|
|
19.9
|
%
|
Foreign currency translation (a)
|
12
|
|
2.2
|
%
|
|
7
|
|
1.9
|
%
|
|
5
|
|
1.6
|
%
|
|
24
|
|
1.9
|
%
|
Total change in orders
|
65
|
|
11.6
|
%
|
|
71
|
|
18.9
|
%
|
|
136
|
|
43.5
|
%
|
|
272
|
|
21.8
|
%
|
2021 Orders
|
$
|
623
|
|
|
|
$
|
446
|
|
|
|
$
|
449
|
|
|
|
$
|
1,518
|
|
|
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Chinese Yuan, the British Pound, the Canadian Dollar, the Euro and the South African Rand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Infrastructure
|
|
Applied Water
|
|
Measurement & Control Solutions
|
|
Total Xylem
|
(in millions)
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
2020 Orders
|
$
|
1,670
|
|
|
|
$
|
1,073
|
|
|
|
$
|
996
|
|
|
|
$
|
3,739
|
|
|
Organic Growth
|
123
|
|
7.4
|
%
|
|
296
|
|
27.6
|
%
|
|
421
|
|
42.3
|
%
|
|
840
|
|
22.5
|
%
|
Divestitures
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
(10)
|
|
(1.0)
|
%
|
|
(10)
|
|
(0.3)
|
%
|
Constant Currency
|
123
|
|
7.4
|
%
|
|
296
|
|
27.6
|
%
|
|
411
|
|
41.3
|
%
|
|
830
|
|
22.2
|
%
|
Foreign currency translation (a)
|
80
|
|
4.8
|
%
|
|
40
|
|
3.7
|
%
|
|
27
|
|
2.7
|
%
|
|
147
|
|
3.9
|
%
|
Total change in orders
|
203
|
|
12.2
|
%
|
|
336
|
|
31.3
|
%
|
|
438
|
|
44.0
|
%
|
|
977
|
|
26.1
|
%
|
2021 Orders
|
$
|
1,873
|
|
|
|
$
|
1,409
|
|
|
|
$
|
1,434
|
|
|
|
$
|
4,716
|
|
|
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, the Chinese Yuan, the British Pound, the Australian Dollar and the Canadian Dollar.
Water Infrastructure
Water Infrastructure segment orders increased $65 million, or 11.6%, to $623 million (9.5% on a constant currency basis) for the third quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $12 million of foreign currency translation. Organic orders increased during the quarter as strength in the transport application benefited from strong order intake in North America and western Europe driven by healthy demand, as well as increased demand for dewatering applications in the emerging markets. Treatment orders were down slightly for the quarter.
For the nine months ended September 30, 2021, orders increased $203 million, or 12.2%, to $1,873 million (7.4% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from $80 million of foreign currency translation. The order increase on a constant currency basis consisted of organic order growth in both the transport and treatment applications. Organic growth in the transport application was driven by healthy market conditions in North America and western Europe, marginally offset by a slight net decline in the emerging markets, where we had a significant project order of greater than $100 million in India during the second quarter of 2020 which offset order strength in the rest of the emerging markets during period. Organic orders for the treatment application also increased during the period due to order growth in the
first half of the year, driven by strength in North America, emerging markets, particularly in China, and western Europe.
Applied Water
Applied Water segment orders increased $71 million, or 18.9%, to $446 million (17.1% increase on a constant currency basis) for the third quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $7 million of foreign currency translation. The order increase on a constant currency basis was driven entirely by organic order growth, primarily in the U.S. commercial building services and industrial end markets, where we benefited from strong demand recovery, amplified by longer lead times for delivering product, and to a lesser extent, in the emerging markets and western Europe.
For the nine months ended September 30, 2021, orders increased $336 million, or 31.3%, to $1,409 million (27.6% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from $40 million of foreign currency translation. The order increase on a constant currency basis was driven by organic order growth in the U.S. across all end markets and applications, where we benefited from strong demand, amplified by early ordering to mitigate longer lead times; in the emerging markets, particularly in China where order intake was weakened by COVID-19 impacts in the prior year; as well as in western Europe.
Measurement & Control Solutions
Measurement & Control Solutions segment orders increased $136 million, or 43.5%, to $449 million (41.9% increase on a constant currency basis) for the third quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $5 million of foreign currency translation. The order increase on a constant currency basis consisted almost entirely of organic order growth of $133 million, or 42.5%. Organic order growth was led by the energy application, primarily in our metrology business, where the electric and gas businesses benefited from COVID-19 recovery, coupled with increased order intake due to electronic component shortages. Order intake in the water application also grew organically during the quarter, which experienced strong order intake in the U.S. metrology business, which also benefited from COVID-19 recovery and increased order intake due to electronic component shortages.
For the nine months ended September 30, 2021, orders increased $438 million, or 44.0%, to $1,434 million (41.3% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from $27 million of foreign currency translation. The order increase on a constant currency basis included organic order growth of $421 million, or 42.3%, which was partially offset by a $10 million reduction in orders related to divestiture impacts during the period. Organic order growth was led by the water application, primarily in our metrology business, but also from our test business as well. The energy applications also had good organic growth during the period. The growth on a year-to-date basis across all the applications in this segment was impacted by similar dynamics impacting the order growth for the quarter.
Backlog
Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays occur from time to time. Total backlog was $2,964 million at September 30, 2021, an increase of $772 million or 35.2%, as compared to September 30, 2020 backlog of $2,192 million, and an increase of $840 million or 39.5%, as compared to December 31, 2020 backlog of $2,124 million driven by the significant increase in orders in the year. We anticipate that approximately 35% of the backlog at September 30, 2021 will be recognized as revenue in the remainder of 2021, subject to supply constraints. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue decreased 50 basis points to 37.3% and increased 110 basis points to 38.3% for the three and nine months ended September 30, 2021, as compared to 37.8% and 37.2% for the comparative 2020 periods. The gross margin decrease for the quarter was primarily driven by cost inflation and increased logistics costs, partially offset by cost reductions from our global procurement and productivity improvement initiatives. The gross margin increase for the nine month period was primarily driven by cost
reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, partially offset by inflation.
Operating Expenses
The following table presents operating expenses for the three and nine months ended September 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(In millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Selling, general and administrative expenses ("SG&A")
|
$
|
273
|
|
|
$
|
266
|
|
|
2.6
|
|
%
|
|
$
|
878
|
|
|
$
|
851
|
|
|
3.2
|
|
%
|
SG&A as a % of revenue
|
21.6
|
%
|
|
21.8
|
%
|
|
(20)
|
|
bp
|
|
22.7
|
%
|
|
24.3
|
%
|
|
(160)
|
|
bp
|
Research and development expenses ("R&D")
|
49
|
|
|
45
|
|
|
8.9
|
|
%
|
|
152
|
|
|
138
|
|
|
10.1
|
|
%
|
R&D as a % of revenue
|
3.9
|
%
|
|
3.7
|
%
|
|
20
|
|
bp
|
|
3.9
|
%
|
|
3.9
|
%
|
|
—
|
|
bp
|
Restructuring and asset impairment charges
|
(2)
|
|
|
19
|
|
|
(110.5)
|
|
%
|
|
7
|
|
|
69
|
|
|
(89.9)
|
|
%
|
Goodwill impairment charge
|
—
|
|
|
58
|
|
|
—
|
|
%
|
|
—
|
|
|
58
|
|
|
—
|
|
%
|
Operating expenses
|
$
|
320
|
|
|
$
|
388
|
|
|
(17.5)
|
|
%
|
|
$
|
1,037
|
|
|
$
|
1,116
|
|
|
(7.1)
|
|
%
|
Expense to revenue ratio
|
25.3
|
%
|
|
31.8
|
%
|
|
(650)
|
|
bp
|
|
26.8
|
%
|
|
31.9
|
%
|
|
(510)
|
|
bp
|
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased by $7 million to $273 million, or 21.6% of revenue, in the third quarter of 2021, as compared to $266 million, or 21.8% of revenue, in the comparable 2020 period; and increased by $27 million to $878 million, or 22.7% of revenue, in the nine months ended September 30, 2021, as compared to $851 million, or 24.3% of revenue, in the comparable 2020 period. Revenue growth driven by favorable volume was higher than SG&A increases resulting in a lower SG&A as a percentage of sales. Cost increases in both periods were driven by cost inflation and increased investments in strategic growth initiatives, partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives and decreased quality management costs.
Research and Development ("R&D") Expenses
R&D expense was $49 million, or 3.9% of revenue, in the third quarter of 2021, as compared to $45 million, or 3.7% of revenue, in the comparable 2020 period; and was $152 million, or 3.9% of revenue, in the nine months ended September 30, 2021, as compared to $138 million, or 3.9% of revenue, in the comparable 2020 period.
Restructuring and Asset Impairment Charges
Restructuring
During the three and nine months ended September 30, 2021, we recognized restructuring net charges of $(2) million and $6 million, respectively, of which $(2) million and $4 million relate to actions previously announced in 2020 and prior. These charges included reduction of headcount across all segments, asset impairments within our Measurement & Control Solutions segment, and accrual recoveries in our Measurement & Control Solutions segment.
In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, in June 2020 management committed to a restructuring plan that includes actions across our businesses and functions globally. The plan is designed to support our long-term financial resilience, simplify our operations, strengthen our competitive positioning and better serve our customers. During the three and nine months ended September 30, 2020, we recognized restructuring charges of $8 million and $48 million, respectively. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment.
The following is a roll-forward for the nine months ended September 30, 2021 and 2020 of employee position eliminations associated with restructuring activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Planned reductions - January 1
|
|
319
|
|
|
196
|
|
Additional planned reductions
|
|
73
|
|
|
670
|
|
Actual reductions and reversals
|
|
(234)
|
|
|
(604)
|
|
Planned reductions - September 30
|
|
158
|
|
|
262
|
|
The following table presents expected restructuring spend in 2021 and thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Water Infrastructure
|
|
Applied Water
|
|
Measurement & Control Solutions
|
|
Corporate
|
|
Total
|
Actions Commenced in 2021:
|
|
|
|
|
|
|
|
|
|
|
Total expected costs
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Costs incurred during Q1 2021
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Costs incurred during Q2 2021
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Costs incurred during Q3 2021
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total expected costs remaining
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Actions Commenced in 2020:
|
|
|
|
|
|
|
|
|
|
|
Total expected costs
|
|
$
|
23
|
|
|
$
|
7
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
61
|
|
Costs incurred during 2020
|
|
19
|
|
|
4
|
|
|
30
|
|
|
—
|
|
|
53
|
|
Costs incurred during Q1 2021
|
|
2
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
4
|
|
Costs incurred during Q2 2021
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Costs incurred during Q3 2021
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total expected costs remaining
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2021, we recorded an adjustment of $3 million to decrease the liability within the Measurement & Control Solutions segment, related to our 2019 actions. As a result of this adjustment, the estimated total cost of the 2019 actions decreased to $24 million for the Measurement & Control Solutions segment. The 2019 actions are complete.
The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. These actions are expected to continue through the second quarter of 2022.
The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2020 consist primarily of severance charges across segments and asset impairment charges in our Measurement & Control Solutions segment. These actions are expected to continue through the second quarter of 2022.
During the second quarter of 2020 the discontinuance of a product line resulted in $17 million of asset impairments, primarily related to customer relationships, trademarks and fixed assets within our Measurement & Control Solutions segment.
We currently expect to incur approximately $8 million in restructuring costs for the full year. These restructuring charges are primarily related to actions taken in response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic as well as other efforts to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. We expect to realize approximately $33 million of incremental net savings in 2021 from restructuring actions initiated in 2020. As a result of all of the actions taken and expected to be taken in 2021, we anticipate approximately $1 million of total net savings to be realized during 2021.
Asset Impairment
During the third quarter of 2020, we determined that certain assets including software and proprietary technology within our Measurement & Control Solutions segment were impaired. Accordingly we recognized an impairment charge of $11 million. Refer to Note 7, "Goodwill and Other Intangible Assets," for additional information.
During the second quarter of 2020 we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments. Accordingly, we recognized an impairment charge of $10 million. Refer to Note 7, "Goodwill and Other Intangible Assets," for additional information.
Operating Income
Operating income during the third quarter of 2021 was $152 million, reflecting an increase of 108.2% compared to $73 million in the third quarter of 2020. Operating margin was 12.0% for the third quarter of 2021 versus 6.0% for the comparable period in 2020, an increase of 600 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of $13 million as compared to the third quarter of 2020 and a decrease in special charges of $69 million. Excluding the impact of these items, adjusted operating income was $155 million with an adjusted operating margin of 12.3% in the third quarter of 2021 as compared to adjusted operating income of $158 million with an adjusted operating margin of 13.0% in the third quarter of 2020. The decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments, increased logistics costs and unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives, price realization, favorable volume, and other lesser impacts.
Operating income for the nine months ended September 30, 2021 was $445 million, reflecting an increase of 136.7% compared to $188 million in 2020. Operating margin was 11.5% for the nine months ended September 30, 2021 versus 5.4% for the comparable period in 2020, an increase of 610 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of $51 million and a decrease in special charges of $78 million as compared to 2020. Excluding the impact of these items, adjusted operating income was $464 million with an adjusted operating margin of 12.0% for the nine months ended September 30, 2021 as compared to adjusted operating income of $336 million with an adjusted operating margin of 9.6% in 2020. The increase in adjusted operating margin was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation and increased spending on strategic investments.
The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(In millions)
|
2021
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
|
Change
|
Water Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
101
|
|
|
$
|
89
|
|
|
13.5
|
|
%
|
|
$
|
265
|
|
|
$
|
201
|
|
|
31.8
|
|
%
|
Operating margin
|
18.5
|
%
|
|
17.0
|
%
|
|
150
|
|
bp
|
|
16.3
|
%
|
|
13.7
|
%
|
|
260
|
|
bp
|
Restructuring and realignment costs
|
1
|
|
|
8
|
|
|
(87.5)
|
|
%
|
|
10
|
|
|
21
|
|
|
(52.4)
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
$
|
102
|
|
|
$
|
97
|
|
|
5.2
|
|
%
|
|
$
|
275
|
|
|
$
|
222
|
|
|
23.9
|
|
%
|
Adjusted operating margin
|
18.6
|
%
|
|
18.5
|
%
|
|
10
|
|
bp
|
|
16.9
|
%
|
|
15.2
|
%
|
|
170
|
|
bp
|
Applied Water
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
60
|
|
|
$
|
56
|
|
|
7.1
|
|
%
|
|
$
|
190
|
|
|
$
|
144
|
|
|
31.9
|
|
%
|
Operating margin
|
15.0
|
%
|
|
15.4
|
%
|
|
(40)
|
|
bp
|
|
15.7
|
%
|
|
13.9
|
%
|
|
180
|
|
bp
|
Restructuring and realignment costs
|
2
|
|
|
2
|
|
|
—
|
|
%
|
|
5
|
|
|
8
|
|
|
(37.5)
|
|
%
|
Special charges
|
—
|
|
|
—
|
|
|
—
|
|
%
|
|
1
|
|
|
—
|
|
|
NM
|
|
Adjusted operating income
|
$
|
62
|
|
|
$
|
58
|
|
|
6.9
|
|
%
|
|
$
|
196
|
|
|
$
|
152
|
|
|
28.9
|
|
%
|
Adjusted operating margin
|
15.5
|
%
|
|
15.9
|
%
|
|
(40)
|
|
bp
|
|
16.2
|
%
|
|
14.6
|
%
|
|
160
|
|
bp
|
Measurement & Control Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
$
|
7
|
|
|
$
|
(62)
|
|
|
111.3
|
|
%
|
|
$
|
29
|
|
|
$
|
(120)
|
|
|
124.2
|
|
%
|
Operating margin
|
2.2
|
%
|
|
(18.7)
|
%
|
|
2,090
|
|
bp
|
|
2.8
|
%
|
|
(12.0)
|
%
|
|
1,480
|
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and realignment costs
|
(1)
|
|
|
5
|
|
|
120.0
|
|
%
|
|
1
|
|
|
38
|
|
|
(97.4)
|
|
%
|
Special charges
|
—
|
|
|
69
|
|
|
NM
|
|
|
—
|
|
|
79
|
|
|
NM
|
|
Adjusted operating income (loss)
|
$
|
6
|
|
|
$
|
12
|
|
|
50.0
|
|
%
|
|
$
|
30
|
|
|
$
|
(3)
|
|
|
1,100.0
|
|
%
|
Adjusted operating margin
|
1.9
|
%
|
|
3.6
|
%
|
|
(170)
|
|
bp
|
|
2.9
|
%
|
|
(0.3)
|
%
|
|
320
|
|
bp
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
(16)
|
|
|
$
|
(10)
|
|
|
60.0
|
|
%
|
|
$
|
(39)
|
|
|
$
|
(37)
|
|
|
5.4
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges
|
1
|
|
|
1
|
|
|
—
|
|
%
|
|
2
|
|
|
2
|
|
|
—
|
|
%
|
Adjusted operating loss
|
$
|
(15)
|
|
|
$
|
(9)
|
|
|
66.7
|
|
%
|
|
$
|
(37)
|
|
|
$
|
(35)
|
|
|
5.7
|
|
%
|
Total Xylem
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
152
|
|
|
$
|
73
|
|
|
108.2
|
|
%
|
|
$
|
445
|
|
|
$
|
188
|
|
|
136.7
|
|
%
|
Operating margin
|
12.0
|
%
|
|
6.0
|
%
|
|
600
|
|
bp
|
|
11.5
|
%
|
|
5.4
|
%
|
|
610
|
|
bp
|
Restructuring and realignment costs
|
2
|
|
|
15
|
|
|
(86.7)
|
|
%
|
|
16
|
|
|
67
|
|
|
(76.1)
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges
|
1
|
|
|
70
|
|
|
(98.6)
|
|
%
|
|
3
|
|
|
81
|
|
|
(96.3)
|
|
%
|
Adjusted operating income
|
$
|
155
|
|
|
$
|
158
|
|
|
(1.9)
|
|
%
|
|
$
|
464
|
|
|
$
|
336
|
|
|
38.1
|
|
%
|
Adjusted operating margin
|
12.3
|
%
|
|
13.0
|
%
|
|
(70)
|
|
bp
|
|
12.0
|
%
|
|
9.6
|
%
|
|
240
|
|
bp
|
NM - Not meaningful percentage change
Water Infrastructure
Operating income for our Water Infrastructure segment increased $12 million, or 13.5%, for the third quarter of 2021 compared to the prior year, with operating margin also increasing from 17.0% to 18.5%. Operating margin benefited from a decrease in restructuring and realignment costs of $7 million during the quarter. Excluding these restructuring and realignment costs, adjusted operating income increased $5 million, or 5.2%, with adjusted operating margin increasing from 18.5% to 18.6%. The increase in adjusted operating margin for the quarter was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives, decreased inventory management cost, and other lesser impacts. These items were partially offset by cost inflation and increased spending on strategic investments.
For the nine months ended September 30, 2021, operating income for our Water Infrastructure segment increased $64 million, or 31.8%, as compared to the prior year, with operating margin also increasing from 13.7% to 16.3%. Operating margin benefited from a decrease in restructuring and realignment costs of $11 million in 2021. Excluding these restructuring and realignment costs, adjusted operating income increased $53 million, or 23.9%, with adjusted operating margin increasing from 15.2% to 16.9%. The increase in adjusted operating margin during the period was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume. These impacts were partially offset by cost inflation, increased spending on strategic investments, unfavorable mix, and increased logistics costs.
Applied Water
Operating income for our Applied Water segment increased $4 million, or 7.1%, for the third quarter of 2021 compared to the prior year, with operating margin decreasing from 15.4% to 15.0%. Operating margin was impacted by restructuring and realignment costs of $2 million in both years. Excluding these restructuring and realignment costs, adjusted operating income increased $4 million, or 6.9%, with adjusted operating margin decreasing from 15.9% to 15.5%. The decrease in adjusted operating margin for the quarter was primarily due to cost inflation, increased spending on strategic investments, increased logistics costs, and inventory management costs. These impacts were partially offset by increased cost reduction from our productivity, restructuring and other cost saving initiatives, favorable volume, and price realization.
For the nine months ended September 30, 2021, operating income for our Applied Water segment increased $46 million, or 31.9%, as compared to the prior year, with operating margin also increasing from 13.9% to 15.7%. Operating margin benefited from a decrease in restructuring and realignment costs of $3 million during the year which was partially offset by $1 million of special charges incurred in 2021. Excluding these items, adjusted operating income increased $44 million, or 28.9%, with adjusted operating margin increasing from 14.6% to 16.2%. The increase in adjusted operating margin during the period was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation, increased logistics cost, increased spending on strategic investments, and increased inventory management costs.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment increased $69 million, or 111.3%, for the third quarter of 2021 compared to the prior year, with operating margin increasing from (18.7)% to 2.2%. Operating margin benefited from decreased restructuring and realignment costs of $6 million, and $69 million of special charges that were incurred during 2020 that did not recur during the quarter. Excluding these items, adjusted operating income decreased $6 million, or 50.0%, with adjusted operating margin decreasing from 3.6% to 1.9%. The decrease in adjusted operating margin for the quarter was primarily due to cost inflation, unfavorable volume, and unfavorable mix. These impacts were partially offset by increased cost reductions from our restructuring, productivity and other cost saving initiatives, decreased quality management costs, and price realization.
For the nine months ended September 30, 2021, operating income for our Measurement & Control Solutions segment increased $149 million, or 124.2%, as compared to the prior year, with operating margin increasing from (12.0)% to 2.8%. Operating margin benefited from a decrease in restructuring and realignment costs of $37 million during the year and $79 million of special charges incurred in 2020 that did not recur. Excluding these items, adjusted operating income increased $33 million, with adjusted operating margin increasing from (0.3)% to 2.9%. The increase in adjusted operating margin during the period was primarily due to cost reductions from our restructuring, productivity and other cost saving initiatives and decreased quality management costs, primarily due to a specific warranty charge recorded during the prior year that did not recur related to a firmware issue that was identified and addressed timely. These impacts were partially offset by cost inflation.
Corporate and other
Operating loss for corporate and other increased $6 million, or 60.0%, during the third quarter of 2021 compared to the prior year period primarily due to increased spending on strategic initiatives and timing of employee related costs across quarters. For the nine months ended September 30, 2021, operating loss for corporate and other increased $2 million, or 5.4%, compared to the same prior year period. The increase in cost is primarily driven by increased spending on strategic initiatives partially offset by reduced costs related to COVID-19 initiatives.
Interest Expense
Interest expense was $21 million for the three months ended September 30, 2021, essentially flat with the comparative prior year period. Interest expense was $63 million and $56 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in interest expense is primarily driven by the issuance of our Green Bond during the second quarter of 2020, partially offset by reduced interest expense in 2021 due to our net investment hedges and interest expense on 2020 short term borrowings. See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt and related interest.
Income Tax Expense
The income tax provision for the three months ended September 30, 2021 was $19 million resulting in an effective tax rate of 13.9%, compared to a $13 million expense resulting in an effective tax rate of 26.2% for the same period in 2020. The income tax provision for the nine months ended September 30, 2021 was $71 million resulting in an effective tax rate of 18.3%, compared to a $21 million expense resulting in an effective tax rate of 16.6% for the same period in 2020. The effective tax rate for the three month period ended September 30, 2021 differs from the same period in 2020 due to unfavorable earnings mix as compared to the prior year and favorable equity compensation deductions and goodwill impairment charge in the prior year. The effective tax rate for the nine month period ended September 30, 2021 differs from the same period in 2020 due to the impact of tax settlements in the current period.
Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
(In millions)
|
2021
|
|
2020
|
|
Change
|
Operating activities
|
$
|
318
|
|
|
$
|
454
|
|
|
$
|
(136)
|
|
Investing activities
|
(113)
|
|
|
(326)
|
|
|
213
|
|
Financing activities
|
(806)
|
|
|
550
|
|
|
(1,356)
|
|
Foreign exchange (a)
|
(19)
|
|
|
—
|
|
|
(19)
|
|
Total
|
$
|
(620)
|
|
|
$
|
678
|
|
|
$
|
(1,298)
|
|
(a)The impact is primarily due to weakening of the Euro, partially offset by the strengthening of the Canadian Dollar.
Sources and Uses of Liquidity
Operating Activities
Net cash provided by operating activities was $318 million for the nine months ended September 30, 2021 as compared to $454 million in the comparable prior year period. This decrease was primarily driven by higher working capital levels, higher interest payments, and increased cash used for income taxes and payroll and other taxes, partially from delayed timing of payments in the prior year related to COVID-19 related concessions. Partially offsetting these items was increased net cash earnings and lower prepayments.
Investing Activities
Cash used in investing activities was $113 million for the nine months ended September 30, 2021 as compared to $326 million in the comparable prior year period. This decrease in cash used of $213 million was mainly driven by spending on time deposit investments in 2020 that did not reoccur in 2021.
Financing Activities
Cash used by financing activities was $806 million for the nine months ended September 30, 2021 as compared to cash generated of $550 million in the comparable prior year period. This net decrease in cash generated by financing activities during the period was primarily driven by the issuance of our Green Bond and short term debt in 2020, and the repayment of Senior Notes due 2021. Partially offsetting these items was the repayment of short term debt in 2020.
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. As a result of uncertainties caused by the COVID-19 pandemic, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends. We will continue to evaluate aspects of our spending and anticipate our capital expenditures will gradually begin to increase to normal levels as the markets we operate in recover.
Historically, we have generated operating cash flow sufficient to fund our primary cash needs. We will continue to monitor the economic effects of the COVID-19 pandemic and its impact on the Company's future operating cash flows going forward. If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. Our securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.
We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis. As of September 30, 2021, the COVID-19 pandemic has not materially impacted our borrowing costs or other costs of capital, however the future impact of the COVID-19 pandemic is uncertain and may increase our borrowing costs and other costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity.
We have considered the impacts of the COVID-19 pandemic on our liquidity and capital resources and do not currently expect it to impact our ability to meet future liquidity needs or continue to comply with debt covenants. Based on our current global cash positions, cash flows from operations and access to the capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other obligations in both the U.S. and outside of the U.S. during the year. In addition, we believe our existing committed credit facilities and access to the public debt markets would provide further liquidity if required. Currently, we have available liquidity of approximately $2.1 billion, consisting of $1.3 billion of cash and $800 million of available credit facilities as disclosed in Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements. On October 1st, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of $600 million. Our next long-term debt maturity is March 2023.
Risks related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our 2020 Annual Report.
Credit Facilities & Long-Term Contractual Commitments
See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.
Non-U.S. Operations
We generated approximately 56% of our revenue from non-U.S. operations for both the three and nine months ended September 30, 2021 and approximately 54% and 52% for the three and nine months ended September 30, 2020, respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of the U.S., we expect to continue to generate significant revenue from non-U.S. operations and expect that a substantial portion of our cash will be predominately held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when we believe it is cost-effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. As of September 30, 2021, we have provided a deferred tax liability of $6 million for net foreign withholding taxes and state income taxes on $116 million of earnings expected to be repatriated to the U.S. parent as deemed necessary in the future.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We believe the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain, particularly at this time and moving forward given the uncertainty around the magnitude and duration of the COVID-19 pandemic. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Annual Report describes the critical accounting estimates used in preparation of the condensed consolidated financial statements. Actual results in these areas could differ from management’s estimates. Other than as discussed below, there have been no significant changes in the information concerning our critical accounting estimates as stated in our 2020 Annual Report.
In the third quarter of 2020, management updated forecasts of future cash flows for the Advanced Infrastructure Analytics ("AIA") businesses, which reflected significant negative volume impacts from the COVID-19 pandemic, primarily on our assessment services business. Our ongoing investment in the AIA businesses also continues to impact near-term profitability. Based on these factors, we determined that there were indicators that the AIA reporting unit’s goodwill may be impaired, and accordingly, we performed an interim goodwill impairment test as of July 1, 2020. The results of the impairment test showed that the fair value of the AIA reporting unit was lower than the carrying value, resulting in a $58 million goodwill impairment charge. As of September 30, 2021, the remaining goodwill balance in our AIA reporting unit after recording the goodwill impairment charge was $112 million.
The uncertainty of the future impact of the COVID-19 pandemic may also contribute to further deterioration of our future cash flows. If we do not achieve our forecasts, it is possible that the goodwill of the AIA reporting unit could be deemed to be impaired again in a future period. The risks and potential impacts of COVID-19 on the fair value of our assets are included in our risk factor disclosures referenced under “Item 1A. Risk Factors" in the Company's 2020 Annual Report.