Xylem Inc. reports improved second quarter earnings

• Second quarter 2014 adjusted net income was $88 million or $0.48 per share, up $0.12 or 33 percent over second quarter 2013; GAAP net income was $86 million or $0.47 per share, up $0.22 or 88 percent
• Second quarter 2014 revenue was $1 billion, up 4 percent organically from second quarter 2013; orders were up 1 percent organically
• Second quarter 2014 adjusted operating margin was up 220 basis points to 12.4 percent; up 420 basis points to 11.5 percent on a GAAP basis
• Increases lower end of 2014 EPS range, now expects adjusted EPS of $1.90 to $2.00

RYE BROOK, N.Y.--(BUSINESS WIRE)--Jul. 29, 2014-- Xylem Inc. (NYSE: XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today announced second quarter 2014 net income of $86 million, or $0.47 per share. Excluding the impact of restructuring and realignment costs and special tax items, adjusted net income was $88 million or $0.48 per share, up 12 cents or 33 percent from the comparable period in 2013. Second quarter revenue was $1 billion, up 4 percent organically, reflecting continued strength in emerging markets and modest growth in the U.S. and Europe. Second quarter adjusted operating margin improved 220 basis points, driven by increased volume, realization of operating efficiencies and execution of ongoing initiatives to reduce costs.

“I am proud of our teams and what we achieved this quarter. Our organic revenue performance was strong and orders reached a record high. We are on track to deliver our full-year commitments for 2014, as well as building our backlog and solid momentum for 2015 and beyond,” said Patrick Decker, president and chief executive officer of Xylem. “Public utilities are improving and I’m encouraged by the signs of emerging market growth. One example of the opportunities available to us is demonstrated by our recent win of a $9 million order in Brazil for a drinking water ultrafiltration membrane system in the São Paulo region.”

Decker continued, “In addition, we are building a culture focused on continuous improvement, which will enable us to support targeted investments to accelerate our progress and improve shareholder return.”

Full-year 2014 Outlook

Xylem increased the lower end of its EPS guidance, and now expects adjusted EPS of $1.90 to $2.00, reflecting 14 to 20 percent growth over 2013. Full-year 2014 revenue is still expected to be approximately $4 billion, up 2 to 4 percent versus the prior year. Full-year 2014 adjusted net income is now expected to be in the range of approximately $350 to $370 million. The company anticipates that restructuring and realignment costs will range from $40 to $50 million for the year.

Second 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.

• Second quarter 2014 revenue was $636 million, up 7 percent organically compared with the second quarter 2013, with growth driven by water and wastewater infrastructure investments in emerging markets and to a lesser extent in Europe. Additionally, we saw growth in our U.S. dewatering and analytics businesses.
• Second quarter adjusted segment operating income, which excludes $5 million of restructuring and realignment costs, was $82 million, up 30 percent over the same period in 2013. Adjusted operating margin for the quarter increased 230 basis points, primarily driven by higher volume and significant benefits from cost reduction actions, but 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, industrial and agricultural applications.

• Second quarter 2014 revenue was $388 million, down 1 percent organically compared with the second quarter 2013, reflecting weakness in the U.S. institutional building construction and southern European residential markets, partially offset by modest growth in emerging markets and U.S. residential building services.
• Second quarter adjusted segment operating income, which excludes $4 million of restructuring and realignment costs, was $56 million, 10 percent higher than the comparable period last year. Adjusted operating margin grew 100 basis points, primarily driven by the positive impact of cost reduction actions.

Supplemental information on Xylem’s second quarter earnings and reconciliations for certain non-GAAP items are posted at 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 World Index for the last two 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										Six Months
For the period ended June 30,		2014					2013					2014					2013
Revenue		$	1,005				$	960				$	1,911				$	1,839
Cost of revenue		617					589					1,181					1,134
Gross profit		388					371					730					705
Selling, general and administrative expenses		242					253					466					490
Research and development expenses		27					28					54					54
Restructuring charges		3					20					18					25
Operating income		116					70					192					136
Interest expense		13					14					27					27
Other non-operating income (expense), net		1					1					—					(1		)
Income before taxes		104					57					165					108
Income tax expense		18					11					30					21
Net income		$	86				$	46				$	135				$	87
Earnings per share:
Basic		$	0.47				$	0.25				$	0.74				$	0.47
Diluted		$	0.47				$	0.25				$	0.73				$	0.47
Weighted average number of shares:
Basic		183.4					185.4					184.0					185.6
Diluted		184.5					186.1					185.1					186.3
Dividends declared per share		$	0.1280				$	0.1164				$	0.2560				$	0.2328

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
	June 30,					December 31,
	2014					2013
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	450				$	533
Receivables, less allowances for discounts and doubtful accounts of $28 and $31 in 2014 and 2013, respectively	830					817
Inventories, net	527					475
Prepaid and other current assets	172					143
Deferred income tax assets	37					41
Total current assets	2,016					2,009
Property, plant and equipment, net	469					488
Goodwill	1,719					1,718
Other intangible assets, net	471					488
Other non-current assets	225					193
Total assets	$	4,900				$	4,896
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	328				$	332
Accrued and other current liabilities	475					479
Short-term borrowings and current maturities of long-term debt	43					42
Total current liabilities	846					853
Long-term debt	1,199					1,199
Accrued postretirement benefits	342					348
Deferred income tax liabilities	195					191
Other non-current accrued liabilities	73					64
Total liabilities	2,655					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	1,779					1,753
Retained earnings	493					405
Treasury stock – at cost 5.7 shares and 3.0 shares in 2014 and 2013, respectively	(187		)			(86		)
Accumulated other comprehensive income	158					167
Total stockholders’ equity	2,245					2,241
Total liabilities and stockholders’ equity	$	4,900				$	4,896

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
For the six months ended June 30,	2014					2013
Operating Activities
Net income	$	135				$	87
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	47					49
Amortization	25					25
Share-based compensation	9					12
Restructuring charges	18					25
Other, net	(1		)			7
Payments for restructuring	(17		)			(11		)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	(32		)			(31		)
Changes in inventories	(53		)			(44		)
Changes in accounts payable	2					(4		)
Other, net	(35		)			(53		)
Net cash – operating activities	98					62
Investing Activities
Capital expenditures	(48		)			(60		)
Acquisitions of businesses and assets, net of cash acquired	—					(81		)
Proceeds from the sale of property, plant and equipment	1					3
Net cash – investing activities	(47		)			(138		)
Financing Activities
Issuance of short-term debt	1					—
Repurchase of common stock	(102		)			(18		)
Proceeds from exercise of employee stock options	17					1
Dividends paid	(47		)			(43		)
Excess tax benefit from share-based compensation	1					—
Net cash – financing activities	(130		)			(60		)
Effect of exchange rate changes on cash	(4		)			(8		)
Net change in cash and cash equivalents	(83		)			(144		)
Cash and cash equivalents at beginning of year	533					504
Cash and cash equivalents at end of period	$	450				$	360
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	26				$	26
Income taxes (net of refunds received)	$	50				$	52

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.

"Adjusted Operating Income," "Adjusted Segment Operating Income," and “Adjusted EPS” defined as operating income and earnings per share, adjusted to exclude 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.

“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.

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												Change			% Change
					2014 v.		2014 v.			Acquisitions/			FX						Adj. 2014			Adj. 2014
	Orders		Orders		2013		2013			Divestitures			Contribution			Eliminations			v. 2013			v. 2013
	2014		2013
Six Months Ended June 30
Xylem Inc.	2,024		1,971		53		3	%		(8	)		(5	)		-			40			2	%		2	%
Water Infrastructure	1,293		1,248		45		4	%		(8	)		3			2			42			3	%		4	%
Applied Water	772		756		16		2	%		-			(9	)		(9	)		(2	)		0	%		0	%
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								Change		% Change
					2014 v.		2014 v.		Acquisitions/		FX				Adj. 2014		Adj. 2014
	Revenue		Revenue		2013		2013		Divestitures		Contribution		Eliminations		v. 2013		v. 2013
	2014		2013
Six Months Ended June 30
Xylem Inc.	1,911		1,839		72		4%		(6)		(3)		-		63		3%		4%
Water Infrastructure	1,204		1,147		57		5%		(6)		5		3		59		5%		6%
Applied Water	743		726		17		2%		-		(9)		(4)		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)
			Q1						Q2						YTD
			2014			2013			2014			2013			2014			2013
Total Revenue
• Total Xylem			906			879			1,005			960			1,911			1,839
• Water Infrastructure			568			551			636			596			1,204			1,147
• Applied Water			355			345			388			381			743			726
Operating Income
• Total Xylem			76			66			116			70			192			136
• Water Infrastructure			46			42			77			41			123			83
• Applied Water			41			40			52			45			93			85
Operating Margin
• Total Xylem			8.4%			7.5%			11.5%			7.3%			10.0%			7.4%
• Water Infrastructure			8.1%			7.6%			12.1%			6.9%			10.2%			7.2%
• Applied Water			11.5%			11.6%			13.4%			11.8%			12.5%			11.7%
Restructuring & Realignment Costs
• Total Xylem			18			12			9			28			27			40
• Water Infrastructure			12			10			5			22			17			32
• Applied Water			6			2			4			6			10			8
Adjusted Operating Income*
• Total Xylem			94			78			125			98			219			176
• Water Infrastructure			58			52			82			63			140			115
• Applied Water			47			42			56			51			103			93
Adjusted Operating Margin*
• Total Xylem			10.4%			8.9%			12.4%			10.2%			11.5%			9.6%
• Water Infrastructure			10.2%			9.4%			12.9%			10.6%			11.6%			10.0%
• Applied Water			13.2%			12.2%			14.4%			13.4%			13.9%			12.8%
*Adjusted Operating Income excludes restructuring & realignment costs.

Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
($ Millions, except per share amounts)
	Q2 2013															Q2 2014
	As Reported					Adjustments					Adjusted					As Reported					Adjustments					Adjusted
Total Revenue		960										960					1,005										1,005
Operating Income		70					28		a			98					116					9		a			125
Operating Margin		7.3	%									10.2	%				11.5	%									12.4	%
Interest Expense		(14	)									(14	)				(13	)									(13	)
Other Non-Operating Income (Expense)		1										1					1										1
Income before Taxes		57					28					85					104					9					113
Provision for Income Taxes		(11	)				(8	)	b			(19	)				(18	)				(7	)	b			(25	)
Net Income		46					20					66					86					2					88
Diluted Shares		186.1										186.1					184.5										184.5
Diluted EPS	$	0.25				$	0.11				$	0.36				$	0.47				$	0.01				$	0.48
	Q2 YTD 2013															Q2 YTD 2014
	As Reported					Adjustments					Adjusted					As Reported					Adjustments					Adjusted
Total Revenue		1,839										1,839					1,911										1,911
Operating Income		136					40		a			176					192					27		a			219
Operating Margin		7.4	%									9.6	%				10.0	%									11.5	%
Interest Expense		(27	)									(27	)				(27	)									(27	)
Other Non-Operating Income (Expense)		(1	)									(1	)				-										-
Income before Taxes		108					40					148					165					27					192
Provision for Income Taxes		(21	)				(11	)	b			(32	)				(30	)				(11	)	b			(41	)
Net Income		87					29					116					135					16					151
Diluted Shares		186.3										186.3					185.1										185.1
Diluted EPS	$	0.47				$	0.15				$	0.62				$	0.73				$	0.09				$	0.82
a Restructuring & realignment costs
b Net tax impact of restructuring & realignment costs and special tax items

Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
($ Millions)
				Six Months Ended
				2014					2013
Net Cash - Operating Activities				$	98				$	62
Capital Expenditures					(48	)				(60	)
Free Cash Flow				$	50				$	2
Net Income				$	135				$	87
Free Cash Flow Conversion					37	%				2	%

Source: Xylem Inc.

Xylem Inc.
Media
Jennifer Jacob, +1 914-323-5745
jennifer.jacob@xyleminc.com
or
Investors
Phil DeSousa, +1 914-323-5930
phil.desousa@xyleminc.com