Xylem Inc. Reports Third Quarter 2012 Results

*The 2011 normalized earnings per share reflect adjustments (including interest expense, stand-alone costs, and special tax items) to our GAAP results to better illustrate year-over-year performance. The normalized earnings are intended to give a representation of our performance had Xylem been a stand-alone company in 2011.

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED INCOME STATEMENTS (Unaudited)
(in millions, except per share data)
			Three Months						Nine Months
For the periods ended September 30,			2012			2011			2012			2011
Revenue		$	931		$	939		$	2,822		$	2,800
Cost of revenue			557			574			1,702			1,719
Gross profit			374			365			1,120			1,081
Selling, general and administrative expenses			231			215			682			643
Research and development expenses			24			23			80			73
Restructuring and asset impairment charges, net			4			2			4			2
Separation costs			4			46			15			67
Operating income			111			79			339			296
Interest expense			14			1			41			2
Other non-operating income, net			3			4			1			5
Income before taxes			100			82			299			299
Income tax expense			28			5			75			72
Net income		$	72		$	77		$	224		$	227
Earnings per share:
Basic		$	0.39		$	0.42		$	1.20		$	1.23
Diluted		$	0.38		$	0.42		$	1.20		$	1.23
Weighted average number of shares:
Basic			185.9			184.6			185.7			184.6
Diluted			186.3			184.6			186.2			184.6
Dividends declared per share		$	0.1012		$	─		$	0.3036		$	─

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
		September 30,				December 31,
		2012				2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	424			$	318
Receivables, less allowances for discounts and doubtful accounts of $33 and $37 in 2012 and 2011, respectively			801				756
Inventories, net			467				426
Prepaid and other current assets			106				97
Deferred income tax assets			36				45
Total current assets			1,834				1,642
Property, plant and equipment, net			464				463
Goodwill			1,621				1,610
Other intangible assets, net			485				505
Other non-current assets			192				173
Total assets		$	4,596			$	4,393
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	316			$	322
Accrued and other current liabilities			456				490
Short-term borrowings and current maturities of long-term debt			13				5
Total current liabilities			785				817
Long-term debt			1,199				1,201
Accrued postretirement benefits			319				316
Deferred income tax liability			170				165
Other non-current accrued liabilities			69				67
Total liabilities			2,542				2,566
Commitments and contingencies Stockholders’ equity:
Common Stock – authorized 750.0 shares, par value $0.01 per share:
Issued 186.0 shares and 184.6 shares in 2012 and 2011, respectively			2				2
Capital in excess of par value			1,699				1,663
Retained earnings			206				40
Treasury stock – at cost 0.2 shares and 0 shares in 2012 and 2011, respectively			(6	)		─
Accumulated other comprehensive income			153				122
Total stockholders’ equity			2,054				1,827
Total liabilities and stockholders’ equity		$	4,596			$	4,393

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
For the nine months ended September 30,		2012				2011
Operating Activities
Net income		$	224			$	227
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			103				104
Share-based compensation			16				7
Non-cash separation costs			—				8
Restructuring and asset impairment charges			4				2
Payments for restructuring			—				(7	)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables			(33	)			(58	)
Changes in inventories			(33	)			(40	)
Changes in accounts payable			(7	)			(31	)
Changes in accrued liabilities			(30	)			14
Changes in accrued taxes			1				4
Net changes in other assets and liabilities			(14	)			18
Other, net			(1	)			4
Net Cash - Operating activities			230				252
Investing Activities
Capital expenditures			(81	)			(79	)
Acquisitions, net of cash required			(12	)			(309	)
Proceeds from the sale of property, plant and equipment			4				9
Other, net			—				2
Net Cash - Investing activities			(89	)			(377	)
Financing Activities
Net transfer to former parent			(9	)			(1,012	)
Issuance of short-term debt			12				5
Issuance of senior notes, net of discount			—				1,189
Principal payments of debt and capital lease obligations			(6	)			—
Purchase of common stock			(4	)			—
Proceeds from exercise of employee stock options			22				—
Dividends paid			(56	)			—
Net Cash - Financing activities			(41	)			182
Effect of exchange rate changes on cash			6				(4	)
Net change in cash and cash equivalents			106				53
Cash and cash equivalents at beginning of year			318				131
Cash and cash equivalents at end of year		$	424			$	184
Supplemental disclosure of cash flow information: Cash paid during the period for:
Interest		$	38			$	—
Income taxes (net of refunds received)		$	76			$	37

Xylem Inc. Non-GAAP Measures
Management views key performance indicators including revenue, gross margins, segment operating income and margins, orders growth, free cash flow, working capital, and backlog, among others. In addition, we consider certain measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operations as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:
“Organic revenue” and “Organic orders” defined as revenue and orders, respectively, excluding the impact of foreign currency fluctuations, intercompany transactions, and contributions from acquisitions and divestitures. Divestitures include sales of portions of our business that did not meet the criteria for classification as a discontinued operation or insignificant portions of our business that we did not classify as a discontinued operation. The period-over-period change resulting from foreign currency fluctuations assumes no change in exchange rates from the prior period.
“Constant currency” defined as financial results adjusted for currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This approach is used for countries whose functional currency is not the U.S. dollar.
“EBITDA” defined as earnings before interest, taxes, depreciation, amortization expense, and share-based compensation. “Adjusted EBITDA” reflects the adjustment to EBITDA to exclude for non-recurring separation costs associated with the Xylem spin-off from ITT Corporation as well as non-recurring restructuring and realignment costs.
"Adjusted Operating Income", "Adjusted Segment Operating Income", and “Adjusted EPS” defined as operating income and earnings per share, adjusted to exclude non-recurring separation costs associated with the Xylem spin-off from ITT Corporation, non-recurring restructuring and realignment costs and tax-related special items.
“Normalized EPS” defined as adjusted earnings per share, as well as adjustments to reflect the incremental current period amount of interest expense and stand-alone costs in the prior comparable period.
“Free Cash Flow” defined as net cash from operating activities, as reported in the Statement of Cash Flow, less capital expenditures as well as adjustments for other significant items that impact current results which management believes are not related to our ongoing operations and performance. Our definition of free cash flows does not consider non-discretionary cash payments, such as debt.

Xylem Inc. Non-GAAP Reconciliation
Reported vs. Organic & Constant Currency Order Growth
($ Millions)
		(As Reported - GAAP)										(As Adjusted - Organic)														Constant Currency
				(A)		(B)						(C)			(D)		(E)			(F) = B+C+D+E			(G) = F/A			(H) = (B + D) / A
						Change			% Change											Change			% Change
		Orders		Orders		2012 v. 2011			2012 v. 2011			Acquisitions / Divestitures			FX Contribution		Eliminations			Adj. 2012 v. 2011			Adj. 2012 v. 2011
		2012		2011
Nine Months Ended September 30
Xylem Inc.		2,856		2,942		(86	)		-2.9	%		(88	)		108		-			(66	)		-2.2	%		0.7	%
Water infrastructure		1,819		1,865		(46	)		-2.5	%		(88	)		82		-			(52	)		-2.8	%		1.9	%
Applied Water		1,086		1,122		(36	)		-3.2	%		-			30		(8	)		(14	)		-1.2	%		-0.5	%
Quarter Ended September 30, 2012
Xylem Inc.		882		966		(84	)		-8.7	%		(21	)		39		-			(66	)		-6.8	%		-4.7	%
Water infrastructure		564		621		(57	)		-9.2	%		(21	)		29		-			(49	)		-7.9	%		-4.5	%
Applied Water		334		358		(24	)		-6.7	%		-			12		(5	)		(17	)		-4.7	%		-3.4	%
Quarter Ended June 30
Xylem Inc.		970		998		(28	)		-2.8	%		(30	)		51		-			(7	)		-0.7	%		2.3	%
Water infrastructure		617		632		(15	)		-2.4	%		(30	)		40		-			(5	)		-0.8	%		4.0	%
Applied Water		370		383		(13	)		-3.4	%		-			13		(2	)		(2	)		-0.5	%		0.0	%
Quarter Ended March 31
Xylem Inc.		1,004		978		26			2.7	%		(37	)		18		-			7			0.7	%		4.5	%
Water infrastructure		638		612		26			4.2	%		(37	)		13		-			2			0.3	%		6.4	%
Applied Water		382		381		1			0.3	%		-			5		(1	)		5			1.3	%		1.6	%
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.

Xylem Inc. Non-GAAP Reconciliation
Reported vs. Organic & Constant Currency Revenue
($ Millions)
		(As Reported - GAAP)										(As Adjusted - Organic)														Constant Currency
				(A)		(B)						(C)			(D)		(E)			(F) = B+C+D+E			(G) = F/A			(H) = (B + D) / A
						Change			% Change											Change			% Change
		Revenue		Revenue		2012 v. 2011			2012 v. 2011			Acquisitions / Divestitures			FX Contribution		Eliminations			Adj. 2012 v. 2011			Adj. 2012 v. 2011
		2012		2011
Nine Months Ended September 30
Xylem Inc.		2,822		2,800		22			0.8	%		(87	)		101		-			36			1.3	%		4.4	%
Water infrastructure		1,788		1,737		51			2.9	%		(87	)		75		-			39			2.2	%		7.3	%
Applied Water		1,078		1,108		(30	)		-2.7	%		-			30		(3	)		(3	)		-0.3	%		0.0	%
Quarter Ended September 30, 2012
Xylem Inc.		931		939		(8	)		-0.9	%		(21	)		38		-			9			1.0	%		3.2	%
Water infrastructure		595		584		11			1.9	%		(21	)		28		-			18			3.1	%		6.7	%
Applied Water		350		368		(18	)		-4.9	%		-			12		(2	)		(8	)		-2.2	%		-1.6	%
Quarter Ended June 30
Xylem Inc.		966		971		(5	)		-0.5	%		(32	)		49		-			12			1.2	%		4.5	%
Water infrastructure		609		602		7			1.2	%		(32	)		37		(1	)		11			1.8	%		7.3	%
Applied Water		373		385		(12	)		-3.1	%		-			13		(1	)		-			0.0	%		0.3	%
Quarter Ended March 31
Xylem Inc.		925		890		35			3.9	%		(34	)		14		-			15			1.7	%		5.5	%
Water infrastructure		584		551		33			6.0	%		(34	)		10		1			10			1.8	%		7.8	%
Applied Water		355		355		-			0.0	%		-			5		-			5			1.4	%		1.4	%
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.

Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
For The Three and Nine Months Ended September 30, 2012 & 2011
($ Millions, except per share amounts)
		Q1 2012			Q2 2012				Q3 2012				YTD 2012
Net Income			63			89				72				224
Separation Costs, Net of Tax			4			4				3				11
Restructuring & Realignment, Net of Tax			-			-				4				4
Adjusted Net Income before Special Tax Items			67			93				79				239
Special Tax Items			-			(1	)			4				3
Adjusted Net Income			67			92				83				242
Diluted Earnings per Share		$	0.34		$	0.48			$	0.38			$	1.20
Separation Costs per Share		$	0.02		$	0.02			$	0.02			$	0.06
Restructuring & Realignment Costs per Share		$	0.00		$	0.00			$	0.02			$	0.02
Adjusted Diluted EPS before Special Tax Items		$	0.36		$	0.50			$	0.42			$	1.28
Special Tax Items per Share		$	0.00			($0.01	)		$	0.02			$	0.01
Adjusted Diluted EPS		$	0.36		$	0.49			$	0.44			$	1.29
		Q1 2011			Q2 2011				Q3 2011				YTD 2011
Net Income			78			72				77				227
Separation Costs, Net of Tax			2			27				25				54
Adjusted Net Income before Special Tax Items			80			99				102				281
Special Tax Items			-			4				(1	)			3
Adjusted Net Income			80			103				101				284
Diluted Earnings per Share		$	0.42		$	0.39			$	0.42			$	1.23
Separation Costs per Share		$	0.01		$	0.15			$	0.13			$	0.29
Adjusted Diluted EPS before Special Tax Items		$	0.43		$	0.54			$	0.55			$	1.52
Special Tax Items per Share		$	0.00		$	0.02				($0.01	)		$	0.01
Adjusted Diluted EPS		$	0.43		$	0.56			$	0.54			$	1.53

Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
			Q3						YTD
			'12			'11			'12			'11
	Total Revenue
	• Total Xylem		931			939			2,822			2,800
	• Water Infrastructure		595			584			1,788			1,737
	• Applied Water		350			368			1,078			1,108
	Operating Income
	• Total Xylem		111			79			339			296
	• Water Infrastructure		85			87			253			245
	• Applied Water		43			37			135			133
	Operating Margin
	• Total Xylem		11.9	%		8.4	%		12.0	%		10.6	%
	• Water Infrastructure		14.3	%		14.9	%		14.1	%		14.1	%
	• Applied Water		12.3	%		10.0	%		12.5	%		12.0	%
	Separation Costs
	• Total Xylem		4			46			15			67
	• Water Infrastructure		-			8			3			10
	• Applied Water		1			9			2			9
	Restructuring & Realignment Costs
	• Total Xylem		5			-			5			-
	• Water Infrastructure		4			-			4			-
	• Applied Water		-			-			-			-
	Adjusted Operating Income*
	• Total Xylem		120			125			359			363
	• Water Infrastructure		89			95			260			255
	• Applied Water		44			46			137			142
	Adjusted Operating Margin*
	• Total Xylem		12.9	%		13.3	%		12.7	%		13.0	%
	• Water Infrastructure		15.0	%		16.3	%		14.5	%		14.7	%
	• Applied Water		12.6	%		12.5	%		12.7	%		12.8	%
	*Adjusted Operating Income excludes non-recurring separation, restructuring & realignment costs

Xylem Inc. Non-GAAP Reconciliation
Normalized and Adjusted Diluted EPS
($ Millions, except per share amounts)
				Q3 2011																							Q3 2012
				As Reported				Adjustments					Adjusted					Adjustments					Normalized				As Reported				Adjustments				Adjusted
		Total Revenue			939									939										939				931								931
		Operating Income			79				46		a			125					(8	)	c			117				111				9	a			120
		Operating Margin			8.4	%								13.3	%									12.5	%			11.9	%							12.9	%
		Interest Expense			(1	)								(1	)				(13	)	d			(14	)			(14	)							(14	)
		Other Non-Operating Income (Expense)			4									4										4				3								3
		Income before Taxes			82				46					128					(21	)				107				100				9				109
		Provision for Income Taxes			(5	)			(22	)	b			(27	)				4		e			(23	)			(28	)			2	b			(26	)
		Net Income			77				24					101					(17	)				84				72				11				83
		Diluted Shares			184.6																			184.6				186.3								186.3
		Diluted EPS		$	0.42			$	0.12				$	0.54				$	(0.09	)			$	0.45			$	0.38			$	0.06			$	0.44
a		One time separation, restructuring & realignment costs
b		Tax impact of one time separation costs and special tax items
c		Incremental stand-alone costs incurred in 2012
d		Incremental interest expense on long-term debt entered into in conjunction with the spin
e		Tax impact of incremental interest expense and stand-alone costs incurred in 2012

Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
For The Nine Months Ended September 30, 2012 & 2011
($ Millions)
		Nine Months Ended
		2012			2011
Net Cash - Operating Activities		230			252
Capital Expenditures		(81	)		(79	)
Free Cash Flow, including separation costs		149			173
Cash Paid for Separation Costs (incl. Capex)		22			62
Free Cash Flow, excluding separation costs		171			235
Net Income		224			227
Separation Costs, net of tax (incl. tax friction)		11			54
Adjusted Net Income		235			281
Free Cash Flow Conversion		73	%		84	%

Xylem Inc. Non-GAAP Reconciliation
Guidance
($ Millions, except per share amounts)
																									Illustration of Mid Point Guidance
		2012 Guidance
				FY '11																					FY '12
				As Reported				Adjustments					Adjusted				Adjustments					Normalized			As Projected			Adjustments				Adjusted
		Total Revenue			3,803									3,803								3,803			3,800							3,800
		Segment Operating Income			503				29		a			532				(10	)	d		522			516			25		h,i		541
		Segment Operating Margin			13.2	%								14.0	%							13.7	%		13.6	%						14.2	%
		Corporate Expense			108				(58	)	b			50				18		e		68			68			(15	)	h		53
		Operating Income			395				87					482				(28	)			454			448			40				488
		Operating Margin			10.4	%								12.7	%							11.9	%		11.8	%						12.8	%
		Interest Expense			(17	)								(17	)			(39	)	f		(56	)		(54	)						(54	)
		Other Non-Operating Income (Expense)			5									5								5			(1	)						(1	)
		Income before Taxes			383				87					470				(67	)			403			393			40				433
		Provision for Income Taxes			(104	)			(8	)	c			(112	)			16		g		(96	)		(99	)		(7	)	j		(106	)
		Net Income			279				79					358				(51	)			307			294			33				327
		Diluted Shares			185.3																	185.3			186.2							186.2
		Diluted EPS		$	1.50			$	0.43				$	1.93			$	(0.27	)			1.66			1.58			0.18				1.76
a		One time separation costs incurred at the segment level
b		One time separation costs incurred at the corporate level
c		Net tax impact of above items, plus the addition of 2011 special tax items
d		Incremental stand-alone costs to be incurred in 2012 at the segment level ($10M)
e		Incremental stand-alone costs to be incurred in 2012 at the corporate level ($18M)
f		Incremental interest expense on long-term debt to be incurred in 2012
g		Tax impact of incremental interest expense and stand-alone costs to be incurred in 2012
h		Expected one time separation costs of $5M and $15M to be incurred at the segments and headquarters, respectively.
i		Restructuring & realignment costs of $20M to be incurred at the segments.
j		Tax impact of one time separation, restructuring & realignment costs expected to be incurred in 2012 and tax special items realized through Q3 2012.

Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
														Mid Point Guidance
		2008			2009			2010			2011			2012E
Revenue		3,291			2,849			3,202			3,803			3,800
Operating Income		315			276			388			395			448
Operating Margin		9.6	%		9.7	%		12.1	%		10.4	%		11.8	%
Restructuring & Realignment		41			31			15			-			20
Separation Costs		-			-			-			87			20
Adjusted Operating Income		356			307			403			482			488
Adjusted Operating Margin		10.8	%		10.8	%		12.6	%		12.7	%		12.8	%
Stand-alone Costs		-			-			-			5			28
Adj. Operating Income, excl. Stand-alone Costs		356			307			403			487			516
Adjusted Operating Margin, excl. Stand-alone Costs		10.8	%		10.8	%		12.6	%		12.8	%		13.6	%

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