Xylem Inc. reports strong revenue, orders and earnings growth in third quarter 2017

• Xylem generated $1.2 billion in third quarter 2017 revenue, up 33 percent year-over-year including the impact of acquisitions; Pro forma organic revenue increased five percent
• Third quarter reported net income was $105 million or $0.58 per share; Adjusted net income for the quarter was $119 million or $0.65 per share, up 20 percent versus the prior year period
• Global orders grew six percent organically
• Reported operating margin increased 50 basis points to 12.7 percent; Adjusted operating margin increased 20 basis points excluding purchase accounting impact
• Xylem raised the mid-point of its full-year 2017 forecast for adjusted earnings per share by five cents; the updated range is $2.39 to $2.41

RYE BROOK, N.Y.--(BUSINESS WIRE)--Oct. 31, 2017-- Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported third quarter 2017 net income of $105 million, or $0.58 per share. The Company delivered adjusted net income of $119 million, or $0.65 per share, in the quarter, a 20-percent increase over the prior year period, excluding the impact of restructuring, realignment and acquisition-related charges, and other items. Revenue in the third quarter, including the contribution from Xylem’s Sensus business, was $1.2 billion, a 33-percent increase year-over-year. Xylem’s pro forma organic revenue grew five percent in the quarter with growth achieved across all three business segments. Xylem’s base business and Sensus each grew five percent in the quarter. Reported operating margin in the quarter increased 50 basis points to 12.7 percent, and adjusted operating margin was 14.1 percent. Excluding the negative impact of purchase accounting amortization related to the Sensus acquisition, the adjusted operating margin expanded by 20 basis points year-over-year.

“Our teams continued to execute well, delivering strong results across all business segments in the third quarter,” said Patrick Decker, President and Chief Executive Officer of Xylem. “As conditions in our varied end markets continued to improve, we generated solid growth and, in some cases, captured share, expanding the reach of Xylem solutions. We delivered positive organic growth in each of our geographic regions, while continuing to deliver on our productivity initiatives. We’ve been building momentum in our business over the past several quarters, which is reflected in our robust six-percent orders growth in the third quarter. That, combined with continued solid market execution, positions us well for strong revenue growth and margin expansion in the fourth quarter and into 2018.”

Full-year 2017 Outlook

Xylem now forecasts full-year 2017 revenue to be approximately $4.70 billion, up 24 to 25 percent, including growth from previously announced acquisitions and projected impacts of foreign exchange translation. On a pro forma organic basis, Xylem projects revenue growth of three to four percent.

Full-year 2017 adjusted operating margin is expected to be approximately 13.5 percent. The Company increased the mid-point of its full-year 2017 forecast for adjusted earnings per share by five cents. The Company now expects to deliver adjusted earnings per share of $2.39 to $2.41. This represents an increase of 18 to 19 percent from Xylem’s 2016 adjusted results. The Company’s adjusted earnings outlook excludes projected integration, restructuring and realignment costs, which now are forecast to be approximately $50 million for the year. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts, without unreasonable effort, that would be included in GAAP earnings.

Third Quarter Segment Results

As previously announced, Xylem combined its Analytics, Sensus and Visenti businesses effective second quarter 2017. As a result of this change, the Company now reports the financial and operational results from these businesses as one segment, which has now been named Measurement & Control Solutions.

Water Infrastructure

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

• Third quarter 2017 segment revenue was $520 million, a seven-percent organic increase over third quarter 2016. This growth reflects improved public utility demand across geographies globally as well as several significant treatment project deliveries. The industrial sector continued to strengthen as conditions improved in mining and oil and gas. Segment revenues in Emerging Markets grew 16 percent in the quarter, the second consecutive quarter of double-digit growth.
• Third quarter reported operating income for the segment was $91 million, a 21-percent increase year-over-year. Adjusted operating income for the segment, which excludes $3 million of restructuring and realignment costs, was $94 million, an 18-percent increase over the same period in 2016. Reported operating margin for the Water Infrastructure segment was 17.5 percent, reflecting a 180-basis-point increase year-over-year. Adjusted operating margin increased 140 basis points to 18.1 percent driven by benefits from operating leverage from volume growth, global procurement and lean initiatives. These improvements more than offset cost inflation and investments for strategic growth initiatives.

Applied Water

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

• Third quarter 2017 segment revenue was $354 million, reflecting two-percent growth year-over-year on an organic basis. The commercial end market remained strong across the U.S., Europe and China, while the residential business was particularly strong in China as demand for secondary water supply increased, as well as in the U.S. driven by promotional activity. This growth was partially offset by ongoing softness in agriculture, primarily in the U.S. Third quarter orders in the segment increased nine percent year-over-year, including key project wins that will deliver solid revenue into 2018.
• Third quarter reported operating income for the segment was $51 million, a two-percent increase versus the prior year. Adjusted operating income, which excludes $5 million of restructuring and realignment charges, increased six percent year-over-year to $56 million. Applied Water segment reported operating margin was 14.4 percent, down 20 basis points over the prior year period. Adjusted operating margin increased 30 basis points to 15.8 percent as cost reductions and productivity initiatives more than offset inflation and strategic growth initiative investments.

Measurement & Control Solutions

Xylem’s Measurement & Control Solutions segment consists of its portfolio of businesses in smart metering, network technologies, advanced data analytics and analytic instrumentation.

• Third quarter 2017 segment revenue was $321 million, up five percent on a pro forma organic basis over the prior year period. The Sensus business delivered double-digit growth in the energy and software services sectors. The water sector revenues were down due to a strong year-ago quarter that included channel stocking of a new product and timing of current project deliveries. Revenue from Xylem’s legacy analytics business increased five percent in the quarter.
• The segment delivered operating income of $26 million in the third quarter. Adjusted operating income for the segment was $31 million, which excludes $5 million of restructuring and acquisition-related costs, with an adjusted operating margin of 9.7 percent. Excluding the impact of Sensus purchase accounting, adjusted operating margin increased 150 basis points.

Supplemental information on Xylem’s third quarter 2017 earnings and reconciliations for certain non-GAAP items is posted at investors.xyleminc.com. In addition, Sensus historical financial results for 2016 are also posted at investors.xyleminc.com.

About Xylem

Xylem (XYL) is a leading global water technology company committed to developing innovative technology solutions to the world’s water challenges. The Company’s products and services move, treat, analyze, monitor and return water to the environment in public utility, industrial, residential and commercial building services settings. With its October 2016 acquisition of Sensus, Xylem added smart metering, network technologies and advanced data analytics for water, gas and electric utilities to its portfolio of solutions. The combined Company’s nearly 16,000 employees bring broad applications expertise with a strong focus on identifying comprehensive, sustainable solutions. Headquartered in Rye Brook, New York with 2016 revenue of $3.8 billion, Xylem does business in more than 150 countries through a number of market-leading product brands.

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.” 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 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. 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, revenues, 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; ability to retain and attract key members of management; our relationship with and the performance of our channel partners; our ability to successfully identify, complete and integrate acquisitions, including the integration of Sensus; 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 in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, and those described from time to time in subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements made herein are based on information currently available to the Company. 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. Non-GAAP Measures

Management reviews key performance indicators including revenue, gross margins, segment operating income and margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and to 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, including but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. 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 operating activities 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 insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate.

“Constant currency” defined as financial results adjusted for foreign 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, Sensus acquisition related costs, gain from sale of business and special charges. For Sensus historical adjustments, see Sensus Historical - Adjusted EBITDA table.

"Adjusted Operating Income", "Adjusted Segment Operating Income", "Adjusted Net Income" and “Adjusted EPS” defined as operating income, segment operating income, adjusted net income and earnings per share, adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs, gain from sale of business, special charges and tax-related special items, as applicable. For Sensus historical adjustments, see Sensus Historical - Adjusted Operating Income table.

“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 flow does not consider certain 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.

“Sensus Acquisition Related Costs” defined as costs incurred by the Company associated with the acquisition of Sensus that are being reported within operating income. These costs include integration costs, acquisition costs and costs related to the recognition of the backlog intangible asset recorded in purchase accounting.

“Special charges" defined as costs incurred by the Company, such as non-cash impairment charges, due diligence costs, initial acquisition costs not related to Sensus and other special non-operating items, as well as interest expense related to the early extinguishment of debt and financing costs on the bridge loan entered into for the Sensus acquisition during 2016.

“Tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, significant reserves for cash repatriation, excess tax benefits/losses and other discrete tax adjustments.

"Pro forma" defined as including the results of Sensus for the calendar period prior to the acquisition of Sensus by Xylem Inc. on October 31, 2016.

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Source: Xylem Inc.

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