Xylem Inc. reports improved third quarter earnings

Posted on Oct 28, 2014


RYE BROOK, N.Y.–(BUSINESS WIRE)–

Xylem Inc. (XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today announced third quarter 2014 net income of $ 106 million, or $ 0.58 per share. Excluding the gain on the sale of a business, impact of restructuring and realignment costs and other special charges, adjusted net income was $ 97 million or $ 0.53 per share, an increase of 4 cents or 8 percent from the comparable period in 2013. Third quarter revenue was $ 963 million, up 1 percent organically, reflecting strength in the U.S. and emerging markets, which was partially offset by weaker market conditions in Europe. Third quarter adjusted operating margin improved 40 basis points, driven by increased operating efficiencies and ongoing cost-reduction initiatives.

“We are continuing on a strong path and are on track to deliver on our full-year commitments. We generated strong order growth this quarter and further expanded our operating margin to a third quarter record performance,” said Patrick Decker, president and chief executive officer of Xylem. “We continued to see strength in emerging markets that, among other big wins, included a nearly $ 20 million order for customized column pumps as part of a hydropower dam in the Mekong River in Laos and a $ 7 million win in India that is part of a large project to divert excess flood water from the Narmada River.”

Decker continued, “As we look ahead to 2015, we intend to further focus on the growing strength we see in key developing markets, while improving operational execution across the Company. We are continuing to evolve our organization to ensure we have the right capabilities to solve our customers’ most challenging water issues in order to drive further growth and deliver greater shareholder value.”

Full-year 2014 Outlook

Xylem narrowed its EPS guidance, and now expects to deliver adjusted EPS of $ 1.92 to $ 1.98, reflecting 15 to 19-percent growth over its 2013 results. Full-year 2014 adjusted net income now is expected to be in the range of $ 355 to $ 365 million. Revenue is expected to be approximately $ 4 billion for 2014, up 2 percent versus the prior year. The Company anticipates that restructuring and realignment costs will range from $ 40 to $ 50 million for the year.

Third Quarter Segment Results

Water Infrastructure

Xylem’s Water Infrastructure segment consists of its businesses serving clean water delivery, wastewater transport and treatment, dewatering and analytical instrumentation.

  • The Company delivered third quarter 2014 revenue of $ 619 million, up 1 percent organically compared with the prior year period, with growth driven by strength in U.S. water, wastewater and dewatering transport applications, and continued strength in Xylem’s test platform. This growth was partially offset by weaker European market conditions and year-over-year timing in public utility treatment projects.
  • Third quarter adjusted segment operating income increased 1 percent year-over-year to $ 97 million. Adjusted operating margin for the quarter increased 20 basis points to 15.7 percent, primarily driven by the impact of significant cost reductions and higher volume, which was partially offset by unfavorable mix and price.

Applied Water

Xylem’s Applied Water segment consists of its portfolio of businesses in residential and commercial building services, and industrial and agricultural applications.

  • Third quarter 2014 revenue was $ 362 million, up 1 percent organically compared with the third quarter 2013. This result reflects growth across all U.S. end markets and applications, as well as continued strength in China. Partially offsetting these gains was weakness in the Company’s Southern and Eastern European markets, and Latin America.
  • Third quarter adjusted segment operating income grew 20 percent to $ 53 million versus the comparable period last year. Adjusted operating margin grew 240 basis points to 14.6 percent, primarily driven by the impact of cost reduction actions and modest price realization.

Supplemental information on Xylem’s third quarter earnings and reconciliations for certain non-GAAP items are posted at http://investors.xyleminc.com.

About Xylem

Xylem (XYL) is a leading global water technology provider, enabling customers to transport, treat, test and efficiently use water in public utility, residential and commercial building services, industrial and agricultural settings. The Company does business in more than 150 countries through a number of market-leading product brands, and its people bring broad applications expertise with a strong focus on finding local solutions to the world’s most challenging water and wastewater problems. Xylem is headquartered in Rye Brook, New York, with 2013 revenues of $ 3.8 billion and more than 12,500 employees worldwide. Xylem was named to the Dow Jones Sustainability Index for the last three years for advancing sustainable business practices and solutions worldwide.

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 document contains information that may constitute “forward-looking statements.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target” and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.

These forward-looking statements include, but are not limited to, 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, and any discussion of future operating or financial performance. All statements that address operating 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.

Caution should be taken not to place undue reliance on any such forward-looking statements because they involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from such statements. 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. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, and those described from time to time in subsequent reports filed with the Securities and Exchange Commission.

 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)

   
Three Months Nine Months
For the periods ended September 30,   2014   2013 2014   2013
Revenue $ 963 $ 965 $ 2,874 $ 2,804
Cost of revenue 587   581   1,768   1,715  
Gross profit 376 384 1,106 1,089
Selling, general and administrative expenses 222 257 688 747
Research and development expenses 24 24 78 78
Restructuring charges   5   18   30  
Operating income 130 98 322 234
Interest expense 14 14 41 41
Other non-operating income (expense), net 1 (1 ) 1 (2 )
Gain from sale of business 11     11    
Income before taxes 128 83 293 191
Income tax expense 22   10   52   31  
Net income $ 106   $ 73   $ 241   $ 160  
Earnings per share:
Basic $ 0.58 $ 0.39 $ 1.31 $ 0.86
Diluted $ 0.58 $ 0.39 $ 1.31 $ 0.86
Weighted average number of shares:
Basic 182.2 185.2 183.4 185.5
Diluted 183.4 186.0 184.6 186.2
Dividends declared per share $ 0.1280 $ 0.1164 $ 0.3840 $ 0.3492
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

   
    September 30,
2014
December 31,
2013
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 529 $ 533
Receivables, less allowances for discounts and doubtful accounts of $ 30 and $ 31 in 2014 and 2013, respectively 804 817
Inventories, net 516 475
Prepaid and other current assets 141 143
Deferred income tax assets 35   41  
Total current assets 2,025 2,009
Property, plant and equipment, net 454 488
Goodwill 1,667 1,718
Other intangible assets, net 448 488
Other non-current assets 220   193  
Total assets $ 4,814   $ 4,896  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 314 $ 332
Accrued and other current liabilities 495 479
Short-term borrowings and current maturities of long-term debt 41   42  
Total current liabilities 850 853
Long-term debt 1,199 1,199
Accrued postretirement benefits 319 348
Deferred income tax liabilities 183 191
Other non-current accrued liabilities 70   64  
Total liabilities 2,621   2,655  
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common Stock – par value $ 0.01 per share:
Authorized 750.0 shares, issued 188.4 shares and 187.6 shares in 2014 and 2013, respectively 2 2
Capital in excess of par value 1,785 1,753
Retained earnings 575 405
Treasury stock – at cost 6.5 shares and 3.0 shares in 2014 and 2013, respectively (218 ) (86 )
Accumulated other comprehensive income 49   167  
Total stockholders’ equity 2,193   2,241  
Total liabilities and stockholders’ equity $ 4,814   $ 4,896  
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

   
For the nine months ended September 30,  

 2014

 2013

Operating Activities
Net income $ 241 $ 160
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 70 72
Amortization 37 38
Share-based compensation 14 21
Restructuring charges 18 30
Gain from sale of businesses (11 )
Other, net (2 ) 11
Payments for restructuring (20 ) (24 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (40 ) (71 )
Changes in inventories (62 ) (59 )
Changes in accounts payable (2 ) 4
Other, net 10   (19 )
Net Cash – Operating activities 253   163  
Investing Activities
Capital expenditures (77 ) (91 )
Acquisitions of businesses and assets, net of cash acquired (81 )
Proceeds from sale of business 30
Proceeds from the sale of property, plant and equipment 2   7  
Net Cash – Investing activities (45 ) (165 )
Financing Activities
Issuance of short-term debt 2
Principal payments of debt and capital lease obligations (2 )
Repurchase of common stock (132 ) (44 )
Proceeds from exercise of employee stock options 17 2
Dividends paid (71 ) (65 )
Excess tax benefit from share based compensation 1
Other, net 1    
Net Cash – Financing activities (182 ) (109 )
Effect of exchange rate changes on cash (30 ) 1  
Net change in cash and cash equivalents (4 ) (110 )
Cash and cash equivalents at beginning of year 533   504  
Cash and cash equivalents at end of period $ 529   $ 394  
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 36 $ 37
Income taxes (net of refunds received) $ 69 $ 61
 
 

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 non-recurring restructuring and realignment costs, gain on sale of business and special charges.

“Adjusted Operating Income,” “Adjusted Segment Operating Income,” and “Adjusted EPS” defined as operating income, segment operating income and earnings per share, adjusted to exclude non-recurring restructuring and realignment costs, gain on sale of business, 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 flows does not consider non-discretionary cash payments, such as debt.

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

“Special charges” defined as costs incurred by the Company associated with the settlement of legal proceedings with Xylem Group LLC and certain costs incurred for the change in chief executive officer made during the third quarter of 2013, as well as costs incurred in the fourth quarter of 2013 for the contractual indemnification of federal tax obligations to ITT and costs associated with a legal judgment arising from a historical acquisition matter.

 
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) = (F – C) / A
 
Change % Change

Acquisitions /

Change % Change
Orders Orders 2014 v. 2013 2014 v. 2013

Divestitures

FX Contribution Eliminations Adj. 2014 v. 2013 Adj. 2014 v. 2013
2014 2013

Nine Months Ended September 30

 
Xylem Inc. 3,051 2,926 125 4 % (3 ) (3 ) 119 4 % 4 %
 
Water Infrastructure 1,973 1,865 108 6 % (8 ) 7 3 110 6 % 6 %
Applied Water 1,135 1,111 24 2 % 5 (11 ) (9 ) 9 1 % 0 %
 

Quarter Ended September 30

 
Xylem Inc. 1,027 955 72 8 % 5 2 79 8 % 8 %
 
Water Infrastructure 680 617 63 10 % 4 1 68 11 % 11 %
Applied Water 363 355 8 2 % 5 (2 ) 11 3 % 2 %
 

Quarter Ended June 30

 
Xylem Inc. 1,031 1,009 22 2 % (1 ) (8 ) 13 1 % 1 %
 
Water Infrastructure 674 647 27 4 % (1 ) (3 ) 23 4 % 4 %
Applied Water 378 378 0 % (5 ) (6 ) (11 ) -3 % -3 %
 

Quarter Ended March 31

 
Xylem Inc. 993 962 31 3 % (7 ) 3 27 3 % 4 %
 
Water Infrastructure 619 601 18 3 % (7 ) 6 2 19 3 % 4 %
Applied Water 394 378 16 4 % (4 ) (3 ) 9 2 % 2 %
 
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) = (F – C) / A
 
Change % Change

Acquisitions /

Change % Change
Revenue Revenue 2014 v. 2013 2014 v. 2013

Divestitures

FX Contribution Eliminations Adj. 2014 v. 2013 Adj. 2014 v. 2013
2014 2013

Nine Months Ended September 30

 
Xylem Inc. 2,874 2,804 70 2 % 1 (1 ) 70 2 % 2 %
 
Water Infrastructure 1,823 1,766 57 3 % (6 ) 9 3 63 4 % 4 %
Applied Water 1,105 1,086 19 2 % 7 (11 ) (7 ) 8 1 % 0 %
 

Quarter Ended September 30

 
Xylem Inc. 963 965 (2 ) 0 % 7 2 7 1 % 0 %
 
Water Infrastructure 619 619 0 % 4 4 1 % 1 %
Applied Water 362 360 2 1 % 7 (2 ) (3 ) 4 1 % -1 %
 

Quarter Ended June 30

 
Xylem Inc. 1,005 960 45 5 % (1 ) (7 ) 37 4 % 4 %
 
Water Infrastructure 636 596 40 7 % (1 ) (2 ) 2 39 7 % 7 %
Applied Water 388 381 7 2 % (6 ) (3 ) (2 ) -1 % -1 %
 

Quarter Ended March 31

 
Xylem Inc. 906 879 27 3 % (5 ) 4 26 3 % 4 %
 
Water Infrastructure 568 551 17 3 % (5 ) 7 1 20 4 % 5 %
Applied Water 355 345 10 3 % (3 ) (1 ) 6 2 % 2 %
 
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.
 
 

Xylem Inc. Non-GAAP Reconciliation

Adjusted Operating Income

($ Millions)

               
Q3 YTD

2014

 

2013

2014

 

2013

Total Revenue
• Total Xylem 963 965 2,874 2,804
• Water Infrastructure

 

619 619

 

1,823 1,766
• Applied Water

 

362 360

 

1,105 1,086
                 
Operating Income
• Total Xylem 130 98 322 234
• Water Infrastructure

 

94 88

 

217 171
• Applied Water

 

52 40

 

145 125
• Total Segments 146 128 362 296
 
Operating Margin
• Total Xylem 13.5% 10.2% 11.2% 8.3%
• Water Infrastructure 15.2% 14.2% 11.9% 9.7%
• Applied Water 14.4% 11.1% 13.1% 11.5%
• Total Segments   15.2%   13.3%   12.6%   10.6%
 
Special Charges
• Total Xylem 20 20
 
Restructuring & Realignment Costs
• Total Xylem 4 12 31 52
• Water Infrastructure 3 8 20 40
• Applied Water 1 4 11 12
• Total Segments 4 12 31 52
                 
Adjusted Operating Income*
• Total Xylem 134 130 353 306
• Water Infrastructure

 

97 96

 

237 211
• Applied Water

 

53 44

 

156 137
• Total Segments 150 140 393 348
 
Adjusted Operating Margin*
• Total Xylem 13.9% 13.5% 12.3% 10.9%
• Water Infrastructure 15.7% 15.5% 13.0% 11.9%
• Applied Water 14.6% 12.2% 14.1% 12.6%
• Total Segments   15.6%   14.5%   13.7%   12.4%
 
*Adjusted Operating Income excludes restructuring & realignment costs and special charges.
 
 

Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
($ Millions, except per share amounts)

                       
Q3 2013 Q3 2014

As Reported

 

Adjustments

Adjusted

As Reported

 

Adjustments

Adjusted

Total Revenue 965 965 963 963
Operating Income 98 32

 a 

130 130 4

 c 

134
Operating Margin 10.2 % 13.5 % 13.5 % 13.9 %
Interest Expense (14 ) (14 ) (14 ) (14 )
Other Non-Operating Income (Expense) (1 ) (1 ) 1 1
Gain on sale of business       11   (11 )  
Income before Taxes 83 32 115 128 (7 ) 121
Provision for Income Taxes (10 ) (13 )

 b 

(23 ) (22 ) (2 )

 b 

(24 )
Net Income 73   19   92   106   (9 ) 97  
Diluted Shares 186.0         186.0       183.4         183.4  
Diluted EPS $ 0.39     $ 0.10     $ 0.49       $ 0.58     $ (0.05 )   $ 0.53  
 
 
                     
Q3 YTD 2013 Q3 YTD 2014

As Reported

Adjustments

Adjusted

As Reported

Adjustments

Adjusted

Total Revenue 2,804 2,804 2,874 2,874
Operating Income 234 72

 a 

306 322 31

 c 

353
Operating Margin 8.3 % 10.9 % 11.2 % 12.3 %
Interest Expense (41 ) (41 ) (41 ) (41 )
Other Non-Operating Income (Expense) (2 ) (2 ) 1 1
Gain on sale of business       11   (11 )  
Income before Taxes 191 72 263 293 20 313
Provision for Income Taxes (31 ) (24 )

 b 

(55 ) (52 ) (13 )

 b 

(65 )
Net Income 160   48   208   241   7   248  
Diluted Shares 186.2         186.2       184.6         184.6  
Diluted EPS $ 0.86     $ 0.26     $ 1.12       $ 1.31     $ 0.04     $ 1.35  
 
a Restructuring & realignment costs and special charges
b Net tax impact of restructuring & realignment costs, special charges and special tax items
c Restructuring & realignment costs
 
 
Xylem Inc. Non-GAAP Reconciliation
Net Cash – Operating Activities vs. Free Cash Flow
($ Millions)
   
Nine Months Ended
  2014     2013  
 
Net Cash – Operating Activities $ 253 $ 163
 
Capital Expenditures (77 ) (91 )
   
Free Cash Flow $ 176   $ 72  
 
Net Income 241 160
 
Gain on Sale of Business   11      
 
Net Income, excluding gain on sale of business $ 230   $ 160  
 
Free Cash Flow Conversion   77 %   45 %

Contact:
Xylem Inc.
Media:
Kelly McAndrew. +1-914-323-5969
Kelly.McAndrew@xyleminc.com
or
Investors:
Phil DeSousa, +1-914-323-5930
Phil.DeSousa@xyleminc.com


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