Xylem Inc. reports first quarter 2013 results, affirms full-year guidance

• First quarter 2013 adjusted net income was $50 million or $0.27 per share, down $0.09 from first quarter 2012; GAAP net income was $41 million or $0.22 per share, down $0.12
• First quarter 2013 revenue was $879 million, down $46 million from first quarter 2012
• Xylem maintains FY 2013 EPS of $1.79-$1.89 on revenue midpoint of $3.9 billion

WHITE PLAINS, N.Y.--(BUSINESS WIRE)--Apr. 30, 2013-- Xylem Inc. (NYSE: XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported first quarter 2013 net income of $41 million, or $0.22 per share. Adjusted net income was $50 million, or $0.27 per share, excluding the impact of special items that include restructuring and realignment charges, and special tax items. First quarter revenue was $879 million, down $46 million from the first quarter 2012, reflective of on-going European economic challenges, U.S. industrial weakness and lower shipments for treatment projects. First quarter 2013 adjusted operating margins were down 230 basis points, down 320 basis points as reported, resulting from lower volume, acquisition costs and continued investments in growth initiatives.

"We were pleased to deliver earnings in line with our expectations despite weaker revenue for the quarter than we had anticipated,” said Gretchen McClain, president and chief executive officer of Xylem Inc. “We’re addressing continued market challenges in several key regions of the world, especially Europe, and are taking assertive cost actions to reposition ourselves as a more competitive and efficient organization, and to create more value for our customers. We continue to pursue attractive acquisitions that will help to strengthen our portfolio. During the first quarter, we completed two acquisitions – PIMS, which bolsters our attractive service business; and MultiTrode, which enhances our global water and wastewater monitoring and control offering.”

“Exciting new product launches are winning in the market place, leading to share gains in key market segments,” McClain said. “We were proud to launch several innovative products this quarter, including new dewatering solutions from our Godwin and Flygt brands, as well as new analytical lab instruments from our YSI and OI Analytical brands. As we look ahead to the remainder of 2013, we are focused on introducing additional new products, and continuing to expand geographically. Through these and other customer-focused solutions, we will continue to position Xylem as a global leader in the water industry.”

Xylem affirms full-year guidance, forecasting full-year 2013 revenue growth of 3 to 4 percent to approximately $3.9 billion. Full-year 2013 adjusted net income is forecast to grow 1 to 7 percent to $333 to $352 million, for adjusted earnings per share of $1.79 to $1.89 per share. The company anticipates that restructuring and realignment costs will range from $60 to $70 million for the year.

First 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.

• First quarter 2013 revenue was $551 million, down 6 percent compared with the first quarter 2012, reflecting U.S. industrial weakness, European economic challenges and decreased treatment shipments.
• First quarter adjusted segment operating income was $52 million. Adjusted operating margin was 9.4 percent, reflecting lower volumes, acquisition impacts and continued investments.

Applied Water

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

• First quarter 2013 revenue was $345 million, down 3 percent compared with the first quarter 2012, reflecting weak industrial demand and European economic challenges, offset by strength in U.S. residential and agricultural end markets.
• First quarter adjusted segment operating income was $42 million, up 2 percent versus the same period in 2012. Adjusted operating margin was 12.2 percent, reflecting strong operational performance.

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

About Xylem

Xylem (NYSE: 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 White Plains, N.Y., with 2012 annual revenues of $3.8 billion and approximately 12,700 employees worldwide. In 2012, Xylem was named to the Dow Jones Sustainability World Index 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.xyleminc.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 separation of Xylem Inc. (the “Company”) from ITT Corporation in 2011, capitalization of the Company, 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, sales, 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 in our Annual Report on Form 10-K, 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)
For the three months ended March 31,			2013					2012
Revenue			$	879				$	925
Cost of revenue			545					562
Gross profit			334					363
Selling, general and administrative expenses			236					231
Research and development expenses			26					28
Restructuring charges			5					—
Separation costs			1					5
Operating income			66					99
Interest expense			13					14
Other non-operating (expense), net			(2		)			(1		)
Income before taxes			51					84
Income tax expense			10					21
Net income			$	41				$	63
Earnings per share:
Basic			$	0.22				$	0.34
Diluted			$	0.22				$	0.34
Weighted average number of shares:
Basic			185.8					185.4
Diluted			186.4					185.9
Dividends declared per share			$	0.1164				$	0.1012

XYLEM INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except per share amounts)
			March 31, 2013					December 31, 2012
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	375				$	504
Receivables, less allowances for discounts and doubtful accounts of $27 and $34 in 2013 and 2012, respectively			767					776
Inventories, net			461					443
Prepaid and other current assets			111					110
Deferred income tax assets			43					41
Total current assets			1,757					1,874
Property, plant and equipment, net			474					487
Goodwill			1,669					1,647
Other intangible assets, net			504					484
Other non-current assets			185					187
Total assets			$	4,589				$	4,679
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	309				$	332
Accrued and other current liabilities			406					443
Short-term borrowings and current maturities of long-term debt			6					6
Total current liabilities			721					781
Long-term debt			1,199					1,199
Accrued postretirement benefits			397					400
Deferred income tax liabilities			179					173
Other non-current accrued liabilities			53					52
Total liabilities			2,549					2,605
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common Stock – authorized 750.0 shares, par value $0.01 per share:
Issued 186.3 shares and 186.2 shares in 2013 and 2012, respectively			2					2
Capital in excess of par value			1,711					1,706
Retained earnings			283					264
Treasury stock – at cost 1.0 shares and 0.5 shares in 2013 and 2012, respectively			(28		)			(13		)
Accumulated other comprehensive income			72					115
Total stockholders’ equity			2,040					2,074
Total liabilities and stockholders’ equity			$	4,589				$	4,679

XYLEM INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
For the three months ended March 31,			2013					2012
Operating Activities
Net income			$	41				$	63
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			25					23
Amortization			12					11
Share-based compensation			6					5
Restructuring charges			5					—
Payments for restructuring			(4		)			—
Changes in assets and liabilities (net of acquisitions):
Changes in receivables			1					7
Changes in inventories			(29		)			(31		)
Changes in accounts payable			(8		)			14
Other, net			(29		)			(31		)
Net Cash – Operating activities			20					61
Investing Activities
Capital expenditures			(30		)			(31		)
Acquisitions, net of cash acquired			(78		)			—
Proceeds from the sale of property, plant and equipment			3					2
Net Cash – Investing activities			(105		)			(29		)
Financing Activities
Repurchase of common stock			(15		)			(1		)
Proceeds from exercise of employee stock options			—					16
Dividends paid			(22		)			(19		)
Other, net			1					(6		)
Net Cash – Financing activities			(36		)			(10		)
Effect of exchange rate changes on cash			(8		)			7
Net change in cash and cash equivalents			(129		)			29
Cash and cash equivalents at beginning of year			504					318
Cash and cash equivalents at end of period			$	375				$	347
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest			$	11				$	11
Income taxes (net of refunds received)			$	27				$	18

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 (not excluded for 2013) 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 (not excluded for 2013), non-recurring restructuring and realignment costs and tax-related special items.

“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															Adj.				Adj.
								2013 v.				2013 v.				Acquisitions /											2013 v.				2013 v.
		Orders			Orders			2012				2012				Divestitures				FX Contribution			Eliminations				2012				2012
		2013			2012
Quarter Ended March 31, 2013
Xylem Inc.		962			1,004			(42	)			-4.2	%			(26	)			2			-				(66	)			-6.6	%			-4.0	%
Water Infrastructure		601			638			(37	)			-5.8	%			(26	)			2			-				(61	)			-9.6	%			-5.5	%
Applied Water		378			382			(4	)			-1.0	%			-				-			(1	)			(5	)			-1.3	%			-1.0	%
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															Adj.				Adj.
								2013 v.				2013 v.				Acquisitions /											2013 v.				2013 v.
		Revenue			Revenue			2012				2012				Divestitures				FX Contribution			Eliminations				2012				2012
		2013			2012
Quarter Ended March 31, 2013
Xylem Inc.		879			925			(46	)			-5.0	%			(23	)			2			-				(67	)			-7.2	%			-4.8	%
Water Infrastructure		551			584			(33	)			-5.7	%			(23	)			1			-				(55	)			-9.4	%			-5.5	%
Applied Water		345			355			(10	)			-2.8	%			-				-			(2	)			(12	)			-3.4	%			-2.8	%
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.

Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
			Q1
			'13			'12
Total Revenue
• Total Xylem			879			925
• Water Infrastructure			551			584
• Applied Water			345			355
Operating Income
• Total Xylem			66			99
• Water Infrastructure			42			75
• Applied Water			40			40
Operating Margin
• Total Xylem			7.5%			10.7%
• Water Infrastructure			7.6%			12.8%
• Applied Water			11.6%			11.3%
Separation Costs
• Total Xylem			-			5
• Water Infrastructure			-			2
• Applied Water			-			1
Restructuring & Realignment Costs
• Total Xylem			12			-
• Water Infrastructure			10			-
• Applied Water			2			-
Adjusted Operating Income*
• Total Xylem			78			104
• Water Infrastructure			52			77
• Applied Water			42			41
Adjusted Operating Margin*
• Total Xylem			8.9%			11.2%
• Water Infrastructure			9.4%			13.2%
• Applied Water			12.2%			11.5%

*Adjusted Operating Income excludes restructuring & realignment costs in 2013 and excludes non-recurring separation costs in 2012.

Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
($ Millions, except per share amounts)
					Q1 2012																	Q1 2013
					As Reported					Adjustments							Adjusted					As Reported					Adjustments							Adjusted
		Total Revenue				925												925					879												879
		Operating Income				99					5			a				104					66					12			c				78
		Operating Margin				10.7	%											11.2	%				7.5	%											8.9	%
		Interest Expense				(14	)											(14	)				(13	)											(13	)
		Other Non-Operating Income (Expense)				(1	)											(1	)				(2	)											(2	)
		Income before Taxes				84					5							89					51					12							63
		Provision for Income Taxes				(21	)				(1	)		b				(22	)				(10	)				(3	)		d				(13	)
		Net Income				63					4							67					41					9							50
		Diluted Shares				185.9												185.9					186.4												186.4
		Diluted EPS			$	0.34				$	0.02						$	0.36				$	0.22				$	0.05						$	0.27
a		One time separation costs
b		Net tax impact of separation costs
c		Restructuring & realignment costs
d		Tax impact of restructuring & realignment costs

Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
Three Months Ended March 31, 2013 and 2012
($ Millions)
			Three Months Ended
			2013				2012
Net Cash - Operating Activities			20				61
Capital Expenditures			(30	)			(31	)
Free Cash Flow, including separation costs			(10	)			30
Cash Paid for Separation Costs (incl. Capex)			-				11
Free Cash Flow, excluding separation costs*			(10	)			41
Net Income			41				63
Separation Costs, net of tax (incl. tax friction)			-				4
Net Income, excluding separation costs*			41				67
Free Cash Flow Conversion			-24	%			61	%

* Separation costs are not excluded in 2013

Xylem Inc. Non-GAAP Reconciliation
Guidance
($ Millions, except per share amounts)
																						Illustration of Mid Point Guidance
		2013 Guidance
					FY '12																	FY '13
					As Reported					Adjustments							Adjusted					As Projected					Adjustments							Adjusted
		Total Revenue				3,791												3,791					3,925												3,925
		Segment Operating Income				512					30			a				542					484					65			d				549
		Segment Operating Margin				13.5	%											14.3	%				12.3	%											14.0	%
		Corporate Expense				69					(16	)		b				53					59					-							59
		Operating Income				443					46							489					425					65							490
		Operating Margin				11.7	%											12.9	%				10.8	%											12.5	%
		Interest Expense				(55	)											(55	)				(55	)											(55	)
		Other Non-Operating Income (Expense)				-												-					(2	)											(2	)
		Income before Taxes				388					46							434					368					65							433
		Provision for Income Taxes				(91	)				(13	)		c				(104	)				(72	)				(19	)		c				(91	)
		Net Income				297					33							330					296					46							342
		Diluted Shares				186.2												186.2					186.4												186.4
		Diluted EPS			$	1.59				$	0.18						$	1.77				$	1.59				$	0.25						$	1.84
a		One time separation, restructuring and realignment costs incurred at the segment level
b		One time separation, restructuring and realignment costs incurred at the corporate level
c		Net tax impact of above items, plus the addition of special tax items
d		Restructuring and realignment costs incurred at the segment level

Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
																							Mid Point Guidance
			2008				2009				2010				2011				2012				2013E
Revenue			3,291				2,849				3,202				3,803				3,791				3,925
Operating Income			315				276				388				395				443				425
Operating Margin			9.6	%			9.7	%			12.1	%			10.4	%			11.7	%			10.8	%
Restructuring & Realignment			41				31				15				-				24				65
Separation Costs			-				-				-				87				22				-
Adjusted Operating Income			356				307				403				482				489				490
Adjusted Operating Margin			10.8	%			10.8	%			12.6	%			12.7	%			12.9	%			12.5	%
Standalone Costs			-				-				-				5				28				-
Adj. Operating Income, excl. Standalone Costs			356				307				403				487				517				490
Adjusted Operating Margin, excl. Standalone Costs			10.8	%			10.8	%			12.6	%			12.8	%			13.6	%			12.5	%

Source: Xylem Inc.

Xylem
Media:
Tom Glover, +1-914-323-5891
tom.glover@xyleminc.com
or
Investors:
Phil DeSousa, +1-914-323-5930
phil.desousa@xyleminc.com