Xylem : reports improved third quarter earnings

Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today announced third quarter 2014 net income of $106 million, or $0.58 per share. Excluding the gain on the sale of a business, impact of restructuring and realignment costs and other special charges, adjusted net income was $97 million or $0.53 per share, an increase of 4 cents or 8 percent from the comparable period in 2013. Third quarter revenue was $963 million, up 1 percent organically, reflecting strength in the U.S. and emerging markets, which was partially offset by weaker market conditions in Europe. Third quarter adjusted operating margin improved 40 basis points, driven by increased operating efficiencies and ongoing cost-reduction initiatives.

“We are continuing on a strong path and are on track to deliver on our full-year commitments. We generated strong order growth this quarter and further expanded our operating margin to a third quarter record performance,” said Patrick Decker, president and chief executive officer of Xylem. “We continued to see strength in emerging markets that, among other big wins, included a nearly $20 million order for customized column pumps as part of a hydropower dam in the Mekong River in Laos and a $7 million win in India that is part of a large project to divert excess flood water from the Narmada River.”

Decker continued, “As we look ahead to 2015, we intend to further focus on the growing strength we see in key developing markets, while improving operational execution across the Company. We are continuing to evolve our organization to ensure we have the right capabilities to solve our customers’ most challenging water issues in order to drive further growth and deliver greater shareholder value.”

Full-year 2014 Outlook

Xylem narrowed its EPS guidance, and now expects to deliver adjusted EPS of $1.92 to $1.98, reflecting 15 to 19-percent growth over its 2013 results. Full-year 2014 adjusted net income now is expected to be in the range of $355 to $365 million. Revenue is expected to be approximately $4 billion for 2014, up 2 percent versus the prior year. The Company anticipates that restructuring and realignment costs will range from $40 to $50 million for the year.

Third 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.

• The Company delivered third quarter 2014 revenue of $619 million, up 1 percent organically compared with the prior year period, with growth driven by strength in U.S. water, wastewater and dewatering transport applications, and continued strength in Xylem’s test platform. This growth was partially offset by weaker European market conditions and year-over-year timing in public utility treatment projects.
• Third quarter adjusted segment operating income increased 1 percent year-over-year to $97 million. Adjusted operating margin for the quarter increased 20 basis points to 15.7 percent, primarily driven by the impact of significant cost reductions and higher volume, which was 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, and industrial and agricultural applications.

• Third quarter 2014 revenue was $362 million, up 1 percent organically compared with the third quarter 2013. This result reflects growth across all U.S. end markets and applications, as well as continued strength in China. Partially offsetting these gains was weakness in the Company’s Southern and Eastern European markets, and Latin America.
• Third quarter adjusted segment operating income grew 20 percent to $53 million versus the comparable period last year. Adjusted operating margin grew 240 basis points to 14.6 percent, primarily driven by the impact of cost reduction actions and modest price realization.

Supplemental information on Xylem’s third quarter earnings and reconciliations for certain 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 2013 revenues of $3.8 billion and more than 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 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. 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, 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 non-recurring restructuring and realignment costs, gain on sale of business, 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 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.

“Special charges” defined as costs incurred by the Company associated with the settlement of legal proceedings with Xylem Group LLC and certain costs incurred for the change in chief executive officer made during the third quarter of 2013, as well as costs incurred in the fourth quarter of 2013 for the contractual indemnification of federal tax obligations to ITT and costs associated with a legal judgment arising from a historical acquisition matter.