Xylem Reports First Quarter 2019 Results

  • First quarter 2019 reported net income was $79 million or $0.43 per
    share; Adjusted net income for the quarter was $94 million or $0.52
    per share, up 12% excluding foreign exchange translation
  • Delivered $1.2 billion in revenue for the first quarter, up 6%
    organically
  • Cash flow from operations up 32%
  • Reaffirms full-year 2019 organic revenue growth guidance of 4 to 6%
    and updates full-year guidance for adjusted earnings per share to
    $3.12 to $3.32

RYE BROOK, N.Y.–(BUSINESS WIRE)–Xylem Inc. (NYSE: XYL), a leading global water technology company
dedicated to solving the world’s most challenging water issues, today
reported first quarter 2019 net income of $79 million, or $0.43 per
share. Excluding the impact of restructuring, realignment and special
charges, the Company delivered adjusted net income of $94 million or
$0.52 per share in the quarter. Excluding the impact of foreign exchange
translation, adjusted earnings per share was up 12 percent. First
quarter revenue was $1.2 billion, up 6 percent organically driven by
strength across all end markets and double-digit growth in the U.S. and
Emerging Markets. Reported operating margin in the quarter was 8.8
percent and adjusted operating margin was 10.8 percent, down 30 basis
points compared to the prior year due primarily to the impact of
unfavorable sales mix and lower absorption of overhead costs.

“We continue to see robust momentum in the demand for our solutions as
we help our customers solve their water challenges and drive the digital
transformation of the sector,” said Patrick Decker, President and Chief
Executive Officer of Xylem. “While we’re disappointed with our margin
performance in the quarter, we’re confident in our long-term growth
outlook and in continuing to achieve attractive margin expansion.”

Full-year 2019 Outlook

Xylem continues to forecast full-year 2019 revenue in the range of $5.3
to $5.4 billion, up 2 to 4 percent. On an organic basis, Xylem’s revenue
growth also remains unchanged in the range of 4 to 6 percent.

Xylem is revising its full-year 2019 adjusted operating margin outlook
from 14.7 to 15.2 percent to 14.5 to 14.9 percent due to the impact of
foreign exchange translation and the results from the first quarter. The
full-year adjusted earnings per share is now expected to be $3.12 to
$3.32 down from $3.20 to $3.40. The Company’s adjusted earnings outlook
excludes projected restructuring and realignment costs, which are now
expected to be approximately $60 to $70 million for the year as a result
of actions to simplify the organization. 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.

First Quarter Segment Results

Water Infrastructure

Xylem’s Water Infrastructure segment consists of its portfolio of
businesses primarily serving wastewater operations for utility and
industrial customers through transport, dewatering and treatment
applications.

  • First quarter 2019 revenue was $482 million, up seven percent
    organically compared with first quarter 2018. Double digit organic
    growth in Emerging Markets and the U.S. from strength in the Utilities
    and Industrial end markets led top-line performance at the high end of
    guidance.
  • First quarter reported operating income for the segment was $51
    million. Adjusted operating income for the segment, which excludes $9
    million of restructuring and realignment costs, was $60 million, an
    11-percent increase over the same period a year ago. Reported
    operating margin for the Water Infrastructure segment was 10.6
    percent, up 40 basis points versus the prior year. Adjusted operating
    margins of 12.4 percent were up 110 basis points versus prior year as
    cost reductions, volume leverage and price realization more than
    offset inflation, lower absorption of overhead costs and growth
    investments.

Applied Water

Xylem’s Applied Water segment consists of its portfolio of businesses
primarily serving the end users of water through industrial water
management, commercial building services and residential applications.

  • First quarter 2019 Applied Water revenue was $379 million, a seven
    percent increase organically year-over-year, driven by growth in the
    U.S. and Emerging Markets. There was strength in all end markets led
    by 12 percent organic revenue growth in the Commercial end market.
  • First quarter reported operating income for the segment was $56
    million and adjusted operating income, which excludes $3 million of
    restructuring and realignment costs, was $59 million, an 11-percent
    increase over the comparable period last year. The segment’s reported
    operating margin was 14.8 percent and adjusted operating margin was
    15.6 percent, both up 110 basis points over the prior year period.
    Cost reductions and price realization more than offset inflationary
    pressures, lower absorption of overhead costs and foreign exchange
    headwinds.

Measurement & Control Solutions

Xylem’s Measurement & Control Solutions segment consists of its
portfolio of businesses primarily serving the clean water and energy
operations for utility and industrial customers through smart metering,
network technologies, advanced infrastructure analytics and analytic
instrumentation applications.

  • First quarter 2019 Measurement & Control Solutions revenue was $376
    million, up five percent organically versus the prior year. Revenue
    growth was driven by strength in the North American water business and
    partially offset by the lapping of a large electric project deployment
    and software sale in the first quarter of 2018.
  • First quarter reported operating income for the segment was $16
    million, and adjusted operating income, which excludes $12 million of
    restructuring and realignment costs and special charges, was $28
    million. The Measurement & Control Solutions segment reported
    operating margin was 4.3 percent. Adjusted operating margin contracted
    420 basis points over the prior year period to 7.4 percent as higher
    volume and cost reductions were more than offset by inflation, higher
    investments for growth and unfavorable mix.

Supplemental information on Xylem’s first quarter 2019 earnings and
reconciliations for certain non-GAAP items is posted at www.xylem.com/investors.

About Xylem

Xylem (XYL) is a leading global water technology company committed to
developing innovative technology solutions to the world’s water
challenges. The Company’s products and services move, treat, analyze,
monitor and return water to the environment in public utility,
industrial, residential and commercial building services settings. Xylem
also provides a leading portfolio of smart metering, network
technologies and advanced infrastructure analytics solutions for water,
electric and gas utilities. The Company’s approximately 17,000 employees
bring broad applications expertise with a strong focus on identifying
comprehensive, sustainable solutions. Headquartered in Rye Brook, New
York, with 2018 revenue of $5.2 billion, Xylem does business in more
than 150 countries through a number of market-leading product brands.

The name Xylem is derived from classical Greek and is the tissue that
transports water in plants, highlighting the engineering efficiency of
our water-centric business by linking it with the best water
transportation of all – that which occurs in nature. For more
information, please visit us at www.xylem.com.

Forward-Looking Statements

This press release contains information that may constitute
“forward-looking statements” within the meaning of the Private
Securities Litigation Act of 1995. Forward-looking statements by their
nature address matters that are, to different degrees, uncertain.
Generally, the words “anticipate,” “estimate,” “expect,” “project,”
“intend,” “plan,” “forecast,” “believe,” “target,” “will,” “could,”
“would,” “should” and similar expressions identify forward-looking
statements. However, the absence of these words or similar expressions
does not mean that a statement is not forward-looking. These
forward-looking statements include any statements that are not
historical in nature, including any statements about the capitalization
of Xylem Inc. (the “Company”), the Company’s restructuring and
realignment, future strategic plans and other statements that describe
the Company’s business strategy, outlook, objectives, plans, intentions
or goals. All statements that address operating or financial
performance, events or developments that we expect or anticipate will
occur in the future — including statements relating to orders, revenues,
operating margins and earnings per share growth, and statements
expressing general views about future operating results — are
forward-looking statements. Forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could
cause actual results to differ materially from those expressed or
implied in, or reasonably inferred from, such forward-looking statements.

Factors that could cause results to differ materially from those
anticipated include: overall economic and business conditions, political
and other risks associated with our international operations, including
military actions, economic sanctions or trade barriers including tariffs
and embargoes that could affect customer markets and our business, and
non-compliance with laws, including foreign corrupt practice laws,
export and import laws and competition laws; potential for unexpected
cancellations or delays of customer orders in our reported backlog; our
exposure to fluctuations in foreign currency exchange rates; competition
and pricing pressures in the markets we serve; the strength of housing
and related markets; weather conditions; ability to retain and attract
talent and key members of management; our relationship with and the
performance of our channel partners; our ability to successfully
identify, complete and integrate acquisitions; our ability to borrow or
to refinance our existing indebtedness and availability of liquidity
sufficient to meet our needs; changes in the value of goodwill or
intangible assets; risks relating to product defects, product liability
and recalls; claims or investigations by governmental or regulatory
bodies; security breaches or other disruptions of our information
technology systems; litigation and contingent liabilities; and other
factors set forth under “Item 1A. Risk Factors” of our Annual Report on
Form 10-K for the year ended December 31, 2018 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 the Company. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise, except as
required by law.

 

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
INCOME STATEMENTS (Unaudited)
(in millions, except per share
data)

     
For the three months ended March 31,     2019 2018
Revenue $ 1,237 $ 1,217
Cost of revenue 763   757
Gross profit 474 460
Selling, general and administrative expenses 303 296
Research and development expenses 51 41
Restructuring and asset impairment charges 11   10
Operating income 109 113
Interest expense 18 21
Other non-operating income, net 2 3
Gain from sale of business 1  
Income before taxes 94 95
Income tax expense 15     16
Net income $ 79   $ 79
Earnings per share:
Basic $ 0.44 $ 0.44
Diluted $ 0.43 $ 0.43
Weighted average number of shares:
Basic 179.7 179.9
Diluted 181.1 181.4
 
 

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS (Unaudited)
(in millions, except per share
amounts)

 
      March 31,
2019
  December 31,
2018
ASSETS    
Current assets:
Cash and cash equivalents $ 275 $ 296
Receivables, less allowances for discounts and doubtful accounts of
$28 and $35 in 2019 and 2018, respectively
1,020 1,031
Inventories 617 595
Prepaid and other current assets 169   172  
Total current assets 2,081 2,094
Property, plant and equipment, net 653 656
Goodwill 2,988 2,976
Other intangible assets, net 1,219 1,232
Other non-current assets 527   264  
Total assets $ 7,468   $ 7,222  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 548 $ 586
Accrued and other current liabilities 589 546
Short-term borrowings and current maturities of long-term debt 304   257  
Total current liabilities 1,441 1,389
Long-term debt 2,044 2,051
Accrued postretirement benefits 394 400
Deferred income tax liabilities 312 303
Other non-current accrued liabilities 469   297  
Total liabilities 4,660   4,440  
 
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 193.6 shares and 192.9 shares in
2019 and 2018, respectively
2 2
Capital in excess of par value 1,962 1,950
Retained earnings 1,674 1,639
Treasury stock – at cost 13.7 shares and 13.2 shares in 2019 and
2018, respectively
(526 ) (487 )
Accumulated other comprehensive loss (316 ) (336 )
Total stockholders’ equity 2,796   2,768  
Non-controlling interests 12 14
Total equity 2,808   2,782  
Total liabilities and stockholders’ equity $ 7,468   $ 7,222  
 
 

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)

 
For the three months ended March 31,     2019   2018
Operating Activities    
Net income $ 79 $ 79
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 29 29
Amortization 35 38
Share-based compensation 9 9
Restructuring and asset impairment charges 11 10
Gain from sale of business (1 )
Other, net 1 (4 )
Payments for restructuring (4 ) (5 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables 7 (9 )
Changes in inventories (25 ) (40 )
Changes in accounts payable (17 ) 6
Other, net (41 ) (50 )
Net Cash – Operating activities 83   63  
Investing Activities
Capital expenditures (69 ) (61 )
Acquisitions of businesses, net of cash acquired (5 ) (430 )
Other, net (3 )  
Net Cash – Investing activities (77 ) (491 )
Financing Activities
Short-term debt issued, net 50 371
Repurchase of common stock (39 ) (33 )
Proceeds from exercise of employee stock options 4 3
Dividends paid (44 ) (38 )
Other, net   (1 )
Net Cash – Financing activities (29 ) 302  
Effect of exchange rate changes on cash 2   9  
Net change in cash and cash equivalents (21 ) (117 )
Cash and cash equivalents at beginning of year 296   414  
Cash and cash equivalents at end of period $ 275   $ 297  
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 13 $ 14
Income taxes (net of refunds received) $ 18 $ 17
 

Xylem Inc. Non-GAAP Measures

Management reviews key performance indicators including revenue, gross
margins, segment operating income and margins, orders growth, working
capital and backlog, among others. In addition, we consider certain
non-GAAP (or “adjusted”) measures to be useful to management and
investors evaluating our operating performance for the periods
presented, and 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 non-GAAP measures, which may not be comparable to
similarly titled measures reported by other companies, to be key
performance indicators:

“Organic revenue” and “Organic orders” defined as
revenue and orders, respectively, excluding the impact of fluctuations
in foreign currency translation and contributions from acquisitions and
divestitures. Divestitures include sales of insignificant portions of
our business that did not meet the criteria for classification as a
discontinued operation. The period-over-period change resulting from
foreign currency translation impacts is determined by translating
current period and prior period activity using the same currency
conversion rate.

“Constant currency” defined as financial results adjusted for
foreign currency translation impacts by translating current period and
prior period activity using the same currency conversion rate. This
approach is used for countries whose functional currency is not the U.S.
dollar.

“EBITDA” defined as earnings before interest, taxes, depreciation
and amortization expense. “Adjusted EBITDA” reflects the
adjustment to EBITDA to exclude share-based compensation charges,
restructuring and realignment costs, Sensus acquisition related costs,
gain or loss from sale of businesses and special charges.

“Adjusted Operating Income”, “Adjusted Segment Operating Income”,
“Adjusted Net Income” and “Adjusted EPS”
defined as
operating income, segment operating income, adjusted net income and
earnings per share, adjusted to exclude restructuring and realignment
costs, Sensus acquisition related costs, gain or loss from sale of
businesses, special charges and tax-related special items, as applicable.

“Free Cash Flow” defined as net cash from operating activities,
as reported in the Statement of Cash Flow, less capital expenditures as
well as adjustments for other significant items that impact current
results which management believes are not related to our ongoing
operations and performance. Our definition of free cash flow does not
consider certain non-discretionary cash payments, such as debt.

“Realignment costs” defined as costs not included in
restructuring costs that are incurred as part of actions taken to
reposition our business, including items such as professional fees,
severance, relocation, travel, facility set-up and other costs.

“Sensus Acquisition Related Costs” defined as costs incurred
by the Company associated with the acquisition of Sensus that are being
reported within operating income. These costs include integration costs,
acquisition costs, costs related to the recognition of the backlog
intangible asset amortization recorded in purchase accounting.

“Special charges” defined as costs incurred by the Company,
such as acquisition and integration related costs not included in
“Sensus Acquisition Related Costs”, non-cash impairment charges and
other special non-operating items.

“Tax-related special items” defined as tax items, such as
tax return versus tax provision adjustments, tax exam impacts, tax law
change impacts, significant reserves for cash repatriation, excess tax
benefits/losses and other discrete tax adjustments.

 

Xylem Inc. Non-GAAP Reconciliation

Reported vs. Organic & Constant Currency Orders
($ Millions)
                                     
(As Reported – GAAP) (As Adjusted – Organic) Constant Currency
  (A)   (B)   (C)   (D)   (E) = B+C+D   (F) = E/A (G) = (E – C) / A
 
Change % Change

Acquisitions /

Change % Change
Orders Orders 2019 v. 2018 2019 v. 2018

Divestitures

FX Impact Adj. 2019 v. 2018 Adj. 2019 v. 2018
2019 2018  

Quarter Ended March 31

 
Xylem Inc. 1,315 1,320 (5) 0% 2 56 53 4% 4%
 
Water Infrastructure 532 554 (22) -4% 35 13 2% 2%
Applied Water 394 384 10 3% 12 22 6% 6%
Measurement & Control Solutions 389 382 7 2% 2 9 18 5% 4%
 
 

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) = B+C+D   (F) = E/A (G) = (E – C) / A
 
Change % Change

Acquisitions /

Change % Change
Revenue Revenue 2019 v. 2018 2019 v. 2018

Divestitures

FX Impact Adj. 2019 v. 2018 Adj. 2019 v. 2018
2019 2018  

Quarter Ended March 31

 
Xylem Inc. 1,237 1,217 20 2% 5 51 76 6% 6%
 
Water Infrastructure 482 480 2 0% 30 32 7% 7%
Applied Water 379 366 13 4% 12 25 7% 7%
Measurement & Control Solutions 376 371 5 1% 5 9 19 5% 4%
 
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
           
Q1

2019

 

2018

Total Revenue
• Total Xylem 1,237 1,217
• Water Infrastructure 482 480
• Applied Water 379 366
• Measurement & Control Solutions 376 371
           
Operating Income
• Total Xylem 109 113
• Water Infrastructure 51 49
• Applied Water 56 50
• Measurement & Control Solutions 16 33
• Total Segments 123 132
 
Operating Margin
• Total Xylem 8.8% 9.3%
• Water Infrastructure 10.6% 10.2%
• Applied Water 14.8% 13.7%
• Measurement & Control Solutions 4.3% 8.9%
• Total Segments     9.9%   10.8%
 
Special Charges
• Total Xylem 4 6
• Water Infrastructure
• Applied Water
• Measurement & Control Solutions 4 2
• Total Segments 4 2
 
Restructuring & Realignment Costs
• Total Xylem 20 16
• Water Infrastructure 9 5
• Applied Water 3 3
• Measurement & Control Solutions 8 8
• Total Segments 20 16
           
Adjusted Operating Income
• Total Xylem 133 135
• Water Infrastructure 60 54
• Applied Water 59 53
• Measurement & Control Solutions 28 43
• Total Segments 147 150
 
Adjusted Operating Margin
• Total Xylem 10.8% 11.1%
• Water Infrastructure 12.4% 11.3%
• Applied Water 15.6% 14.5%
• Measurement & Control Solutions 7.4% 11.6%
• Total Segments     11.9%   12.3%
 
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
($ Millions, except per share amounts)
                 
 
 
 
   
Q1 2019 Q1 2018

As Reported

Adjustments

Adjusted

As Reported

Adjustments

Adjusted

Total Revenue 1,237 1,237 1,217 1,217
Operating Income 109 24 a 133 113 22 a 135
Operating Margin 8.8 % 10.8 % 9.3 % 11.1 %
Interest Expense (18 ) (18 ) (21 ) (21 )
Other Non-Operating Income (Expense) 2 2 3 3
Gain/(Loss) From Sale of Businesses   1     (1 )                
Income before Taxes 94 23 117 95 22 117
Provision for Income Taxes   (15 )   (8 ) b   (23 )   (16 )   (8 ) b   (24 )
Net Income Attributable to Xylem   79     15     94     79     14     93  
Diluted Shares       181.1               181.1       181.4               181.4  
Diluted EPS     $ 0.43     $ 0.09         $ 0.52     $ 0.43     $ 0.08         $ 0.51  
 
Year-over-year currency translation impact on current year diluted
EPS
    $ (0.05 )   $         $ (0.05 )
Diluted EPS at Constant Currency     $ 0.48     $ 0.09         $ 0.57  
 
 
a   Restructuring & realignment costs of $20 million and $16 million in
2019 and 2018, respectively; special charges of $4 million in 2019
($1 million of acquisition related costs and $3 million of
intangible asset impairment) and $6 million of acquisition related
costs in 2018.
b Net tax impact on restructuring & realignment costs of $4 million in
both 2019 and 2018; net tax impact on special charges of $0 million
and $1 million in 2019 and 2018, respectively; and tax-related
special items of $3 million of expense in both 2019 and 2018.
 
 
Xylem Inc. Non-GAAP Reconciliation
Net Cash – Operating Activities vs. Free Cash Flow
($ Millions)
       
 
Q1
2019 2018
 
Net Cash – Operating Activities $ 83 $ 63
 
Capital Expenditures (69 ) (61 )
   
Free Cash Flow $ 14   $ 2  
 
Cash paid for Sensus acquisition related costs (1 )
   
Free Cash Flow, excluding Sensus Acquisition Related Costs $ 14   $ 3  
 
Net Income 79 79
 
Gain/(Loss) from sale of businesses 1
 
Special Charges – non-cash impairment (3 )
 
Net Income, excluding gain on sale of businesses and non-cash
impairment charges
$ 81   $ 79  
 
Free Cash Flow Conversion   17 %   4 %
 

Contacts

Media
Jenny Rider +1 (914) 323-5745
Jenny.Rider@xyleminc.com

Investors
Matt
Latino +1 (914) 323-5821
Matthew.Latino@xyleminc.com

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