Press Release

Xylem Inc. reports second quarter 2015 earnings

July 30, 2015
  • Second quarter 2015 adjusted earnings per share (EPS) of $0.43 were down 10 percent from the second quarter 2014, but up two percent excluding foreign exchange headwinds; GAAP EPS were $0.41, down 13 percent year-over-year
  • Second quarter 2015 revenue was $920 million, an increase of one percent on an organic basis
  • Free cash flow increased 21 percent to $64 million compared with the second quarter 2014

RYE BROOK, N.Y.--(BUSINESS WIRE)--Jul. 30, 2015-- Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported second quarter 2015 net income of $74 million, or $0.41 per share. Excluding restructuring and realignment charges and other special items, adjusted net income was $78 million or $0.43 per share, down 10 percent from the comparable period in 2014, but up two percent excluding the impact of foreign exchange translation. Second quarter revenue was $920 million, an increase of one percent organically, reflecting strength in the commercial and public utility end-markets. Second quarter operating margin was 11.3 percent, down 20 basis points from the prior year. Adjusted operating margin was 12.0 percent, flat year-over-year excluding the 40-basis-point impact of foreign exchange translation. This result reflects volume leverage and lower expenses offset by inflation, the divestiture of a business and unfavorable mix.

“Xylem again delivered solid results that met our earnings expectations, despite challenging market conditions,” said Patrick Decker, Xylem President and Chief Executive Officer. “I’m pleased with our team’s performance in this environment, particularly their strong execution. This is an area on which we will continue to focus, as well as driving our initiatives to accelerate growth and maintaining strong cost discipline.”

Decker continued, “While we continue to manage near-term headwinds, particularly in the industrial sector, there are signs of improving conditions in other key end-markets. In the second quarter, we delivered impressive growth in backlog that is shippable in 2016 and beyond – an encouraging indicator of growing demand. These factors contribute to an increasingly optimistic long-term outlook for our business.”

Full-year 2015 Outlook

Xylem is narrowing the range of its full-year outlook, which continues to reflect ongoing foreign exchange fluctuations. Xylem continues to expect full-year 2015 revenue of approximately $3.7 billion, a decrease of six to seven percent from the full-year 2014 results. On an organic basis, Xylem now expects to generate revenue growth of approximately one to two percent.

Full-year 2015 adjusted operating income is now expected to be in the range of $470 million to $483 million, resulting in adjusted earnings per share of $1.82 to $1.87. Excluding the projected unfavorable impact of foreign exchange translation, Xylem’s adjusted earnings per share growth expectations are in the range of six to seven percent over the comparable full-year 2014 results. The Company’s outlook for projected restructuring and realignment costs of $20 million for the year is unchanged.

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 2015 Water Infrastructure revenue was $551 million, flat relative to the prior year period on an organic basis. Growth in the public utility and industrial sectors in Europe and Australia was offset primarily by declines in dewatering, particularly in the oil and gas market.
  • Second quarter adjusted segment operating income was $69 million, down $12 million from the prior year result, reflecting the unfavorable impact of foreign exchange translation. Operating income for the quarter was $65 million, down $11 million from last year. Adjusted operating margin for the quarter decreased 30 basis points to 12.8 percent, excluding the 30-basis-point impact of foreign exchange translation. Strengthening execution and solid cost reductions were more than offset by inflation and unfavorable mix, as well as increased investment in growth initiatives.

Applied Water

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

  • Second quarter 2015 revenue was $369 million, an increase of three percent organically compared with the second quarter 2014. This increase was driven by strong organic growth in the commercial and industrial sectors, which resulted in double-digit growth in emerging markets. Growth in the U.S. commercial end-market was offset by declines in industrial water applications in the region.
  • Adjusted segment operating income was $53 million in the second quarter, down $4 million from the comparable period last year. Operating income was $51 million, which was $2 million lower than last year. The impact of productivity actions, cost reductions and volume growth helped to drive a 10-basis-point increase in the adjusted operating margin for the segment to 14.8 percent, excluding the 40-basis-point impact of foreign exchange translation.

Supplemental information on Xylem’s second quarter earnings and reconciliations for 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 2014 revenues of $3.9 billion and approximately 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 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, 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 statements about the capitalization of 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, revenue, 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: economic, political and other risks associated with our international operations, including military actions, economic sanctions or trade embargoes that could affect customer markets, 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 key members of management; our relationship with and the performance of our channel partners; 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; governmental investigations; security breaches or other disruptions of our information technology systems; litigation and contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and with subsequent filings we make with the Securities and Exchange Commission.

All forward-looking statements made herein are based on information available to the Company as of the date of this press release. 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)

     
Three Months Six Months
For the period ended June 30,   2015     2014 2015     2014
Revenue $ 920 $ 1,005 $ 1,757 $ 1,911
Cost of revenue 572   617   1,094   1,181
Gross profit 348 388 663 730
Selling, general and administrative expenses 218 242 424 466
Research and development expenses 25 27 48 54
Restructuring charges 1   3   4   18
Operating income 104 116 187 192
Interest expense 14 13 28 27
Other non-operating income, net 1 1 — —
Gain from sale of businesses —   —   9   —
Income before taxes 91 104 168 165
Income tax expense 17   18   30   30
Net income $ 74   $ 86   $ 138   $ 135
Earnings per share:
Basic $ 0.41 $ 0.47 $ 0.76 $ 0.74
Diluted $ 0.41 $ 0.47 $ 0.76 $ 0.73
Weighted average number of shares:
Basic 181.5 183.4 181.8 184.0
Diluted 182.3 184.5 182.7 185.1
Dividends declared per share $ 0.1408 $ 0.1280 $ 0.2816 $ 0.2560
 
 
XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

     
   

June 30,
2015

December 31,
2014
 
ASSETS
Current assets:
Cash and cash equivalents $ 600 $ 663

Receivables, less allowances for discounts and doubtful accounts
of $31 and $34 in 2015 and 2014, respectively

772 771
Inventories 498 486
Prepaid and other current assets 149 144
Deferred income tax assets 37   38  
Total current assets 2,056 2,102
Property, plant and equipment, net 431 461
Goodwill 1,592 1,635
Other intangible assets, net 442 470
Other non-current assets 198   192  
Total assets $ 4,719   $ 4,860  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 315 $ 338
Accrued and other current liabilities 441 481
Short-term borrowings and current maturities of long-term debt 81   89  
Total current liabilities 837 908
Long-term debt 1,196 1,195
Accrued postretirement benefits 377 388
Deferred income tax liabilities 152 158
Other non-current accrued liabilities 77   84  
Total liabilities 2,639   2,733  
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common Stock – par value $0.01 per share:

Authorized 750.0 shares, issued 189.6 shares and 188.9 shares
in 2015 and 2014, respectively

2 2
Capital in excess of par value 1,815 1,796
Retained earnings 734 648

Treasury stock – at cost 8.1 shares and 6.6 shares in 2015 and
2014, respectively

(273 ) (220 )
Accumulated other comprehensive loss (198 ) (99 )
Total stockholders’ equity 2,080   2,127  
Total liabilities and stockholders’ equity $ 4,719   $ 4,860  
 
 
XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

       
For the six months ended June 30,     2015 2014
Operating Activities
Net income $ 138 $ 135

Adjustments to reconcile net income to net cash provided by operating
activities:

Depreciation 47 47
Amortization 22 25
Share-based compensation 8 9
Restructuring charges 4 18
Gain from sale of businesses (9 ) —
Other, net 3 (1 )
Payments for restructuring (9 ) (17 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (28 ) (32 )
Changes in inventories (27 ) (53 )
Changes in accounts payable 3 2
Other, net (29 ) (35 )

Net Cash – Operating activities

123   98  
Investing Activities
Capital expenditures (57 ) (48 )
Proceeds from sale of businesses 1 —
Proceeds from the sale of property, plant and equipment — 1
Other, net 3   —  

Net Cash – Investing activities

(53 ) (47 )
Financing Activities
(Repayment) issuance of short-term debt (2 ) 1
Repurchase of common stock (53 ) (102 )
Proceeds from exercise of employee stock options 9 17
Dividends paid (51 ) (47 )
Other, net 1   1  
Net Cash – Financing activities (96 ) (130 )
Effect of exchange rate changes on cash (37 ) (4 )
Net change in cash and cash equivalents (63 ) (83 )
Cash and cash equivalents at beginning of year 663   533  
Cash and cash equivalents at end of period $ 600   $ 450  
Supplemental disclosure of cash flow information:
Cash paid during the period for:

Interest

$ 26 $ 26
Income taxes (net of refunds received) $ 42 $ 50
 
 
 

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 fluctuations in foreign currency translation 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 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 restructuring and realignment costs, gain on 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 flows does not consider 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.
 
“Special charges" defined as costs incurred by the Company, such as legal and professional fees, associated with the Korea matters, as well as costs incurred for the contractual indemnification of tax obligations to ITT.
 
 

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) = B+C+D   (F) = E/A (G) = (E - C) / A

 

 

 

 

 

Orders Orders

Change
2015 v. 2014

% Change
2015 v. 2014

Acquisitions /
Divestitures

FX Contribution

Change
Adj. 2015 v. 2014

% Change
Adj. 2015 v. 2014

2015 2014
 
Six Months Ended June 30
 
Xylem Inc. 1,859 2,024 (165) -8% 10 169 14 1% 0%
 
Water Infrastructure 1,147 1,251 (104) -8% - 124 20 2% 2%
Applied Water 712 773 (61) -8% 10 45 (6) -1% -2%
 
Quarter Ended June 30
 
Xylem Inc. 944 1,031 (87) -8% 5 92 10 1% 0%
 
Water Infrastructure 585 654 (69) -11% - 69 - 0% 0%
Applied Water 359 377 (18) -5% 5 24 11 3% 2%
 
Quarter Ended March 31
 
Xylem Inc. 915 993 (78) -8% 5 77 4 0% 0%
 

Water Infrastructure

562 597 (35) -6% - 56 21 4% 4%
Applied Water 353 396 (43) -11% 5 21 (17) -4% -6%
 
 

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
 
Revenue Revenue

Change
2015 v. 2014

% Change
2015 v. 2014

Acquisitions /
Divestitures

FX Contribution

Change
Adj. 2015 v. 2014

% Change
Adj. 2015 v. 2014

2015 2014
 
Six Months Ended June 30
 
Xylem Inc. 1,757 1,911 (154) -8% 11 162 19 1% 0%
 
Water Infrastructure 1,051 1,168 (117) -10% - 119 2 0% 0%
Applied Water 706 743 (37) -5% 11 43 17 2% 1%
 

Quarter Ended June 30

 
Xylem Inc. 920 1,005 (85) -8% 6 89 10 1% 0%
 
Water Infrastructure 551 616 (65) -11% - 65 - 0% 0%
Applied Water 369 389 (20) -5% 6 24 10 3% 1%
 
Quarter Ended March 31
 
Xylem Inc. 837 906 (69) -8% 5 73 9 1% 0%
 

Water Infrastructure

500 552 (52) -9% - 54 2 0% 0%
Applied Water 337 354 (17) -5% 5 19 7 2% 1%
 
 

Xylem Inc. Non-GAAP Reconciliation

Adjusted Operating Income

($ Millions)
                 
Q1 Q2 YTD
2015 2014 2015 2014 2015 2014
Total Revenue
• Total Xylem 837 906 920 1,005 1,757 1,911
• Water Infrastructure 500 552 551 616

 

1,051 1,168
• Applied Water 337 354 369 389

 

706 743
                 
Operating Income
• Total Xylem 83 76 104 116 187 192
• Water Infrastructure 47 46 65 76

 

112 122
• Applied Water 46 41 51 53

 

97 94
• Total Segments 93 87 116 129 209 216
 
Operating Margin
• Total Xylem 9.9% 8.4% 11.3% 11.5% 10.6% 10.0%
• Water Infrastructure 9.4% 8.3% 11.8% 12.3% 10.7% 10.4%
• Applied Water 13.6% 11.6% 13.8% 13.6% 13.7% 12.7%
• Total Segments 11.1% 9.6%   12.6% 12.8%   11.9% 11.3%
 
Special Charges
• Total Xylem 1 - - - 1 -
• Water Infrastructure 1 - - - 1 -
• Applied Water - - - - - -
• Total Segments 1 - - - 1 -
 
Restructuring & Realignment Costs
• Total Xylem 6 18 6 9 12 27
• Water Infrastructure 5 12 4 5 9 17
• Applied Water 1 6 2 4 3 10
• Total Segments 6 18 6 9 12 27
                 
Adjusted Operating Income*
• Total Xylem 90 94 110 125 200 219
• Water Infrastructure 53 58 69 81

 

122 139
• Applied Water 47 47 53 57

 

100 104
• Total Segments 100 105 122 138 222 243
 
Adjusted Operating Margin*
• Total Xylem 10.8% 10.4% 12.0% 12.4% 11.4% 11.5%
• Water Infrastructure 10.6% 10.5% 12.5% 13.1% 11.6% 11.9%
• Applied Water 13.9% 13.3% 14.4% 14.7% 14.2% 14.0%
• Total Segments 11.9% 11.6%   13.3% 13.7%   12.6% 12.7%
 
 
*Adjusted Operating Income excludes restructuring & realignment costs and special charges.
 
 

Xylem Inc. Non-GAAP Reconciliation

Adjusted Diluted EPS
($ Millions, except per share amounts)
     
 
 
 
                     
Q2 2014 Q2 2015
As Reported   Adjustments   Adjusted As Reported   Adjustments   Adjusted
Total Revenue 1,005 1,005 920 920
Operating Income 116 9 a 125 104 6 a 110
Operating Margin 11.5 % 12.4 % 11.3 % 12.0 %
Interest Expense (13 ) (13 ) (14 ) (14 )
Other Non-Operating Income (Expense)   1       1     1     1   b   2  
Income before Taxes 104 9 113 91 7 98
Provision for Income Taxes   (18 )   (7 ) c   (25 )   (17 )   (3 ) c   (20 )
Net Income   86     2     88     74     4     78  
Diluted Shares   184.5           184.5         182.3           182.3  
Diluted EPS $ 0.47     $ 0.01     $ 0.48       $ 0.41     $ 0.02     $ 0.43  
 
Currency translation impact on current year diluted EPS             $ (0.06 )       $ (0.06 )
Diluted EPS at Constant Currency               $ 0.47         $ 0.49  
 
 
 
 
                     
Q2 YTD 2014 Q2 YTD 2015
As Reported   Adjustments   Adjusted As Reported   Adjustments   Adjusted
Total Revenue 1,911 1,911 1,757 1,757
Operating Income 192 27 a 219 187 13 a 200
Operating Margin 10.0 % 11.5 % 10.6 % 11.4 %
Interest Expense (27 ) (27 ) (28 ) (28 )
Other Non-Operating Income (Expense) - - - 2 b 2
Gain from sale of businesses   -       -     9     (9 )   0  
Income before Taxes 165 27 192 168 6 174
Provision for Income Taxes   (30 )   (11 ) c   (41 )   (30 )   (6 ) c   (36 )
Net Income   135     16     151     138     0     138  
Diluted Shares   185.1           185.1         182.7           182.7  
Diluted EPS $ 0.73     $ 0.09     $ 0.82       $ 0.76     $ -     $ 0.76  
 
Currency translation impact on current year diluted EPS             $ (0.11 )       $ (0.11 )
Diluted EPS at Constant Currency               $ 0.87         $ 0.87  
 
a Restructuring & realignment costs in 2014 and 2015 and special charges in 2015
b Special charges
c Net tax impact of restructuring & realignment costs and special charges, and special tax items
 
 

Xylem Inc. Non-GAAP Reconciliation

Net Cash - Operating Activities vs. Free Cash Flow
($ Millions)
                       
 
Q1 Q2 Six Months Ended
2015   2014   2015   2014   2015   2014  
 
Net Cash - Operating Activities $ 39 $ 22 $ 84 $ 76 $ 123 $ 98
 
Capital Expenditures (37 ) (25 ) (20 ) (23 ) (57 ) (48 )
           
Free Cash Flow $ 2   $ (3 ) $ 64   $ 53   $ 66   $ 50  
 
Net Income 64 49 74 86 138 135
 
Gain from sale of businesses   9     -     -     -     9     -  
 
Net Income, excluding gain on sale of businesses $ 55   $ 49   $ 74   $ 86   $ 129   $ 135  
 
Free Cash Flow Conversion   4 %   -6 %   86 %   62 %   51 %   37 %
 

Source: Xylem Inc.

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