Xylem Inc. Reports Second Quarter 2012 Results

Second quarter adjusted net income is $92 million or $0.49 per share, up 4 percent on a normalized* basis; $89 million or $0.48 per share as reported, up 23 percent or $0.09 per share from Q2 2011

Second quarter revenue up 4 percent in constant currencies to $966 million; down 1 percent as reported, due to foreign currency translation impact

Gross and operating margins climb 60 and 100 basis points, respectively, on a normalized basis, continuing a three-year upward trend; sales program and cost reduction initiatives driving profitability

Company continues to execute growth strategy with MJK Automation acquisition; emerging markets post revenue growth of 22 percent in constant currencies

WHITE PLAINS, N.Y.--(BUSINESS WIRE)--Aug. 2, 2012-- Xylem Inc. (NYSE: XYL), a leading global water technology company focused on solving the world’s most challenging water issues, today reported second quarter revenue of $966 million, up 4 percent on a constant currency basis, down 1 percent as reported from the second quarter 2011. Second quarter net income was $89 million or $0.48 per share, up $0.09 per share or 23 percent from the same period last year. Adjusting for one-time separation costs resulting from the Xylem spinoff from ITT Corporation on October 31, 2011, and special tax items, net income was $92 million or $0.49 per share, up 4 percent or $0.02 per share over the second quarter 2011 on a normalized basis.* Recognizing soft economic conditions and the anticipated negative currency impact from the recent strengthening of the U.S. dollar, the company announced that it is revising its full-year revenue and earnings outlook downward.

"Our business operations continue to improve, even with lower than anticipated revenue, showing strong gross and operating margin improvement in this tough economy, extending a three-year positive trend: we’re seeing the benefit of disciplined cost control measures we’ve put in place,” said Gretchen McClain, president and chief executive officer of Xylem. “Our leadership team is committed to maximizing the benefit of our Customer Excellence sales initiatives to grow the top line, and we are driving operational excellence to grow the bottom line, as well as controlling costs.”

“We continue to enhance our portfolio, having just closed the acquisition of MJK Automation, a leading manufacturer of flow and level sensors, and measurement and control technology for water and wastewater applications, a business that complements our offerings in the attractive analytical instrumentation space,” McClain said. “Further, we’ve seen our business grow by 22 percent in constant currencies in the emerging markets, or 17 percent on an organic basis, enhancing our footprint, most recently with new sales and service centers in Panama and Vietnam.”

Full-year revenues are now expected to be approximately $3.8 billion, and adjusted net income is expected to be in the range of $321 to $338 million, or $1.72 to $1.82 per share, down from the earlier projection of adjusted net income of $1.80 to $1.95 per share. Full-year GAAP net income is now anticipated to be in the range of $292 to $317 million, or $1.57 to $1.70 per share, which includes $15 to $20 million of restructuring and realignment costs and $15 to $20 million of one-time separation costs. This is down from the earlier projection of GAAP net income of $1.72 to $1.89 per share.

Second Quarter Segment Results

Water Infrastructure

Xylem’s Water Infrastructure businesses provide equipment and services focused on the transport, treatment and testing of water and wastewater in the public utility and industrial markets.

• Second quarter 2012 segment revenue was $609 million, up 1 percent as reported, and up 7 percent in constant currencies from the second quarter of 2011. A 58 percent increase in the test business, driven by the newly acquired YSI business, and 38 percent growth in the emerging markets on a constant currency basis, more than offset weakness in treatment.
• Second quarter adjusted segment operating margin was down 50 basis points from the second quarter 2011 to 15.4 percent, driven by the impact of incremental stand-alone costs and inflation, which was partially offset by price and cost actions. Stand-alone costs negatively impacted operating margin by 70 basis points for the second quarter 2012.

Applied Water

Xylem’s Applied Water businesses provide equipment and services in the residential and commercial building services, general industrial and agricultural markets.

• Second quarter 2012 segment revenue was $373 million, flat on a constant currency basis and down 3 percent over the second quarter of 2011, attributable to slowing commercial and residential demand, which was partially offset by strength in the U.S. industrial business.
• Second quarter adjusted segment operating margin was 13.9 percent, up 90 basis points from the second quarter 2011, thanks to significant productivity and price initiatives which more than offset incremental stand-alone costs. Stand-alone costs negatively impacted operating margin 50 basis points for the second quarter of 2012.

More detail available

Supplemental information on Xylem’s second quarter earnings, including reconciliations for certain non-GAAP items, is 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. Launched in 2011 from the spinoff of the water-related businesses of ITT Corporation, Xylem is headquartered in White Plains, N.Y., with 2011 annual revenues of $3.8 billion and 12,500 employees 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, the terms and the effect of the separation, the nature and impact of the separation, 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.

*The 2011 normalized earnings per share reflect adjustments (including one-time separation costs, 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								Six Months
For the periods ended June 30,			2012				2011				2012				2011
Revenue		$	966			$	971			$	1,891			$	1,861
Cost of revenue			583				592				1,145				1,145
Gross profit			383				379				746				716
Selling, general and administrative expenses			220				219				451				429
Research and development expenses			28				26				56				50
Separation costs			6				18				11				21
Operating income			129				116				228				216
Interest expense			13				1				27				1
Other non-operating (expense) income, net			(1	)			─				(2	)			1
Income before taxes			115				115				199				216
Income tax expense			26				43				47				66
Net income		$	89			$	72			$	152			$	150
Earnings per share:
Basic		$	0.48			$	0.39			$	0.82			$	0.82
Diluted		$	0.48			$	0.39			$	0.82			$	0.82
Weighted average number of shares:
Basic			185.8				184.6				185.6				184.6
Diluted			186.2				184.6				186.1				184.6
Dividends declared per share		$	0.1012			$	─			$	0.2024			$	─

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
		June 30,				December 31,
		2012				2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	358			$	318
Receivables, less allowances for discounts and doubtful accounts of $32 and $37 in 2012 and 2011, respectively			770				756
Inventories, net			467				426
Prepaid and other current assets			107				97
Deferred income tax assets			47				45
Total current assets			1,749				1,642
Property, plant and equipment, net			459				463
Goodwill			1,601				1,610
Other intangible assets, net			485				505
Other non-current assets			188				173
Total assets		$	4,482			$	4,393
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	327			$	322
Accrued and other current liabilities			445				490
Short-term borrowings and current maturities of long-term debt			7				5
Total current liabilities			779				817
Long-term debt			1,199				1,201
Accrued postretirement benefits			313				316
Deferred income tax liability			176				165
Other non-current accrued liabilities			67				67
Total liabilities			2,534				2,566
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common Stock – authorized 750.0 shares, par value $0.01 per share:
Issued 185.7 shares and 184.6 shares in 2012 and 2011, respectively			2				2
Capital in excess of par value			1,690				1,663
Retained earnings			153				40
Treasury stock – at cost 0.1 shares and 0 shares in 2012 and 2011, respectively			(3	)		─
Accumulated other comprehensive income			106				122
Total stockholders’ equity			1,948				1,827
Total liabilities and stockholders’ equity		$	4,482			$	4,393

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
For the six months ended June 30,		2012				2011
Operating Activities
Net income		$	152			$	150
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			67				68
Share-based compensation			10				5
Payments for restructuring			—				(6	)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables			(16	)			(54	)
Changes in inventories			(44	)			(31	)
Changes in accounts payable			12				(14	)
Changes in accrued liabilities			(24	)			3
Changes in accrued taxes			(5	)			26
Net changes in other assets and liabilities			(20	)			11
Other, net			(7	)			3
Net Cash - Operating activities			125				161
Investing Activities
Capital expenditures			(57	)			(53	)
Proceeds from the sale of property, plant and equipment			3				5
Other, net			1				—
Net Cash - Investing activities			(53	)			(48	)
Financing Activities
Net transfer to former parent			(6	)			(112	)
Issuance of short-term debt			3				—
Principal payments of debt and capital lease obligations			(3	)			—
Purchase of common stock			(3	)			—
Proceeds from exercise of employee stock options			16				—
Dividends paid			(39	)			—
Other, net			1				—
Net Cash - Financing activities			(31	)			(112	)
Effect of exchange rate changes on cash			(1	)			6
Net change in cash and cash equivalents			40				7
Cash and cash equivalents at beginning of year			318				131
Cash and cash equivalents at end of year		$	358			$	138
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	26			$	—
Income taxes (net of refunds received)		$	54			$	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 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 one-time separation costs associated with the Xylem spin-off from ITT Corporation.

“Operating Income * ”, "Adjusted Operating Income" and “Adjusted EPS” defined as operating income and earnings per share, adjusted to exclude restructuring and realignment and one-time separation costs associated with the Xylem spin-off from ITT Corporation 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			Acquisitions /			FX						Adj. 2012			Adj. 2012
		Orders			Orders			2012 v. 2011			2012 v. 2011			Divestitures			Contribution			Eliminations			v. 2011			v. 2011
		2012			2011
Six Months Ended June 30
Xylem Inc.		1,974			1,976			(2	)		-0.1	%		(67	)		69			-			-			0.0	%		3.4	%
Water infrastructure		1,255			1,244			11			0.9	%		(67	)		53			-			(3	)		-0.2	%		5.1	%
Applied Water		752			764			(12	)		-1.6	%		-			18			(3	)		3			0.4	%		0.8	%
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			Acquisitions /			FX						Adj. 2012			Adj. 2012
		Revenue			Revenue			2012 v. 2011			2012 v. 2011			Divestitures			Contribution			Eliminations			v. 2011			v. 2011
		2012			2011
Six Months Ended June 30
Xylem Inc.		1,891			1,861			30			1.6	%		(66	)		63			-			27			1.5	%		5.0	%
Water infrastructure		1,193			1,153			40			3.5	%		(66	)		47			-			21			1.8	%		7.5	%
Applied Water		728			740			(12	)		-1.6	%		-			18			(1	)		5			0.7	%		0.8	%
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 Six Months Ended June 30, 2012 & 2011
($ Millions, except per share amounts)
		Q1 2012				Q2 2012				YTD 2012
Net Income			63				89				152
Separation costs, net of tax			4				4				8
Adjusted Net Income before Special Tax Items			67				93				160
Special Tax Items			-				(1	)			(1	)
Adjusted Net Income			67				92				159
Diluted Earnings per Share		$	0.34			$	0.48			$	0.82
Separation costs per Share		$	0.02			$	0.02			$	0.04
Adjusted diluted EPS before Special Tax Items		$	0.36			$	0.50			$	0.86
Special Tax Items per Share		$	0.00				($0.01	)			($0.01	)
Adjusted diluted EPS		$	0.36			$	0.49			$	0.85
		Q1 2011				Q2 2011				YTD 2011
Net Income			78				72				150
Separation costs, net of tax			2				27				29
Adjusted Net Income before Special Tax Items			80				99				179
Special Tax Items			-				4				4
Adjusted Net Income			80				103				183
Diluted Earnings per Share		$	0.42			$	0.39			$	0.82
Separation costs per Share		$	0.01			$	0.15			$	0.16
Adjusted diluted EPS before Special Tax Items		$	0.43			$	0.54			$	0.97
Special Tax Items per Share		$	0.00			$	0.02			$	0.02
Adjusted diluted EPS		$	0.43			$	0.56			$	0.99

Xylem Inc. Non-GAAP Reconciliation
Normalized and Adjusted Diluted EPS
($ Millions, except per share amounts)
				Q2 2011																							Q2 2012
				As Reported				Adjustments					Adjusted				Adjustments					Normalized					As Reported				Adjustments					Adjusted
		Total Revenue			971									971									971					966									966
		Operating Income			116				18		a			134				(8	)	c			126					129				6		a			135
		Operating Margin			11.9	%								13.8	%								13.0	%				13.4	%								14.0	%
		Interest Expense			(1	)								(1	)			(13	)	d			(14	)				(13	)								(13	)
		Other Non-Operating Income (Expense)			-									-									-					(1	)								(1	)
		Income before Taxes			115				18					133				(21	)				112					115				6					121
		Provision for Income Taxes			(43	)			13		b			(30	)			5		e			(25	)				(26	)			(3	)	b			(29	)
		Net Income			72				31					103				(16	)				87					89				3					92
		Diluted Shares			184.6																		184.6					186.2									186.2
		Diluted EPS		$	0.39			$	0.17				$	0.56			$	(0.09	)			$	0.47				$	0.48			$	0.01				$	0.49
a		One time separation 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
Segment Operating Income
($ Millions)
Adjusted Segment Operating Income
		Q1					Q2					YTD
		'12		'11			'12		'11			'12		'11
Total Revenue
• Water Infrastructure		584		551			609		602			1,193		1,153
• Applied Water		355		355			373		385			728		740
Operating Income
• Water Infrastructure		75		64			93		94			167		158
• Applied Water		40		46			52		50			92		96
Separation Costs
• Water Infrastructure		2		-			1		2			3		2
• Applied Water		1		-			-		-			1		-
Adjusted Operating Income*
• Water Infrastructure		77		64			94		96			170		160
• Applied Water		41		46			52		50			93		96
Operating Margin
• Water Infrastructure		12.8%		11.6%			15.2%		15.6%			14.0%		13.7%
• Applied Water		11.3%		13.0%			13.9%		13.0%			12.6%		13.0%
Adjusted Operating Margin*
• Water Infrastructure		13.2%		11.6%			15.4%		15.9%			14.2%		13.9%
• Applied Water		11.5%		13.0%			13.9%		13.0%			12.8%		13.0%
*Adjusted Operating Income excludes non-recurring separation costs

Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
For The Six Months Ended June 30, 2012 & 2011
($ Millions)
		Six Months Ended
		2012			2011
Net Cash - Operating Activities		125			161
Capital Expenditures		(57	)		(53	)
Free Cash Flow, including separation costs		68			108
Separation Costs (Cash Paid incl. Capex)		18			26
Free Cash Flow, excluding separation costs		86			134
Net Income		152			150
Separation Costs, net of tax (incl. tax friction)		8			29
Adjusted Net Income		160			179
Free Cash Flow Conversion		54	%		75	%

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			524			25		h,i		549
		Segment Operating Margin			13.2	%								14.0	%							13.7	%		13.8	%						14.4	%
		Corporate Expense			108				(58	)	b			50				18		e		68			66			(11	)	h		55
		Operating Income			395				87					482				(28	)			454			458			36				494
		Operating Margin			10.4	%								12.7	%							11.9	%		12.1	%						13.0	%
		Interest Expense			(17	)								(17	)			(39	)	f		(56	)		(54	)						(54	)
		Other Non-Operating Income (Expense)			5									5								5			(2	)						(2	)
		Income before Taxes			383				87					470				(67	)			403			402			36				438
		Provision for Income Taxes			(104	)			(8	)	c			(112	)			16		g		(96	)		(99	)		(10	)	j		(109	)
		Net Income			279				79					358				(51	)			307			303			26				329
		Diluted Shares			185.3																	185.3			186.3							186.3
		Diluted EPS		$	1.50			$	0.43				$	1.93			$	(0.27	)			1.66			1.63			0.14				1.77
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 $7M and $11M to be incurred at the segments and headquarters, respectively.
i		Restructuring & realignment costs of $18M 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 Q2 2012.

Source: Xylem Inc.

Xylem Inc.
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Tom Glover, +1-914-323-5891
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Phil.DeSousa@xyleminc.com