Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported third quarter 2015 net income of $88 million, or $0.48 per share. Excluding restructuring and realignment charges and other special items, adjusted net income was $90 million or $0.49 per share, down eight percent from the comparable period in 2014, but up four percent excluding foreign exchange translation impact. Third quarter revenue was $902 million, an increase of two percent organically, reflecting strength in the public utility end market. Third quarter operating margin, adjusted to exclude restructuring and realignment charges, was 13.7 percent, down 20 basis points from the prior year, however, this result was flat year-over-year excluding foreign exchange translation.

“Our team delivered solid results this quarter, with project deliveries driving better than expected performance,” said Patrick Decker, Xylem President and Chief Executive Officer. “We are continuing to see signs of increasing strength in the public utility end market and mixed conditions in industrials. We continue to grow and expand our business in emerging markets, where we generated a nine-percent increase in organic revenue in the quarter. While we did see some growth deceleration in the commercial building and industrial sectors, these regions, such as China and India, are continuing to increase investments in water and wastewater infrastructure. In India, for example, we recently secured a $39 million order for a custom pumping system that will provide drinking water and irrigation to arid areas that currently do not have stable water sources.”

Decker continued, “We are executing a balanced capital deployment strategy. During the quarter, we opportunistically repurchased $75 million in shares and, last week, we added a new business to our analytics portfolio that strengthens our offering. We will continue to maintain a sharp focus on execution across all aspects of our business as we close out the year.”

During the third quarter 2015, Xylem repurchased 2.3 million shares of common stock under its stock repurchase programs. As of September 30, 2015, Xylem had approximately $475 million remaining under its current stock repurchase authorizations.

Full-year 2015 Outlook

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 also continues to expect to generate revenue growth of approximately one to two percent.

Expectations for full-year 2015 adjusted earnings per share continue to be in the range 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 four 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.

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.

  • Third quarter 2015 Water Infrastructure revenue was $551 million, up two percent relative to the prior year period on an organic basis. This increase was driven by five-percent growth in the public utility end market, reflecting strong growth in the United States and Europe, as well as continued infrastructure investment activity in emerging markets.
  • Third quarter adjusted segment operating income was $85 million, down $13 million from the prior year result, reflecting the unfavorable impact of foreign exchange translation. Operating income for the quarter was $83 million, down $12 million from last year. Adjusted operating margin for the quarter decreased 90 basis points to 15.4 percent as the impact of strong procurement and lean cost savings was more than offset by investment in strategic growth initiatives, unfavorable mix and inflation.

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 2015 revenue was $351 million, an increase of three percent organically compared with the third quarter 2014. Growth in residential and commercial building applications, as well as industrial project deliveries helped to drive this improvement. Xylem’s business in emerging markets showed continued strength, despite the expected slow-down in China, and North America and Europe each delivered modest growth.
  • Adjusted segment operating income was $48 million in the third quarter, down $4 million from the comparable period last year, reflecting the unfavorable impact of foreign exchange translation. Operating income was $46 million, which was $5 million lower than last year. Adjusted operating margin for the quarter decreased 70 basis points to 13.7 percent as strong procurement and lean cost savings were more than offset by the impacts of foreign exchange translation, unfavorable mix and inflation.

Supplemental information on Xylem’s third 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 four years for advancing sustainable business practices and solutions worldwide and the Company has satisfied the requirements to be a constituent of the FTSE4Good Index Series each year since 2013.

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       Nine Months
For the periods ended September 30,         2015       2014 2015       2014
Revenue $ 902 $ 963 $ 2,659 $ 2,874
Cost of revenue 551   587   1,645   1,768
Gross profit 351 376 1,014 1,106
Selling, general and administrative expenses 207 222 631 688
Research and development expenses 23 24 71 78
Restructuring charges 1     5   18
Operating income 120 130 307 322
Interest expense 13 14 41 41
Other non-operating income, net 1 1
Gain from sale of businesses   11   9   11
Income before taxes 107 128 275 293
Income tax expense 19   22   49   52
Net income $ 88   $ 106   $ 226   $ 241
Earnings per share:
Basic $ 0.48 $ 0.58 $ 1.25 $ 1.31
Diluted $ 0.48 $ 0.58 $ 1.24 $ 1.31
Weighted average number of shares:
Basic 180.8 182.2 181.5 183.4
Diluted 181.6 183.4 182.3 184.6
Dividends declared per share $ 0.1408 $ 0.1280 $ 0.4224 $ 0.3840
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

 
         

September 30,

2015

     

December 31,

2014

       
ASSETS
Current assets:
Cash and cash equivalents $ 611 $ 663

Receivables, less allowances for discounts and doubtful accounts

of $29 and $34 in 2015 and 2014, respectively

762 771
Inventories 477 486
Prepaid and other current assets 132 144
Deferred income tax assets 35   38  
Total current assets 2,017 2,102
Property, plant and equipment, net 418 461
Goodwill 1,584 1,635
Other intangible assets, net 434 470
Other non-current assets 192   192  
Total assets $ 4,645   $ 4,860  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 314 $ 338
Accrued and other current liabilities 422 481
Short-term borrowings and current maturities of long-term debt 79   89  
Total current liabilities 815 908
Long-term debt 1,196 1,195
Accrued postretirement benefits 374 388
Deferred income tax liabilities 141 158
Other non-current accrued liabilities 76   84  
Total liabilities 2,602   2,733  
 
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 189.8 shares and 188.9 shares in 2015 and 2014, respectively 2 2
Capital in excess of par value 1,822 1,796
Retained earnings 796 648
Treasury stock – at cost 10.4 shares and 6.6 shares in 2015 and 2014, respectively (348 ) (220 )
Accumulated other comprehensive loss (229 ) (99 )
Total stockholders’ equity 2,043   2,127  
Total liabilities and stockholders’ equity $ 4,645   $ 4,860  
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

 
For the nine months ended September 30,         2015       2014
Operating Activities        
Net income $ 226 $ 241

Adjustments to reconcile net income to net cash provided by operating

activities:

Depreciation 69 70
Amortization 33 37
Share-based compensation 11 14
Restructuring charges 5 18
Gain from sale of businesses (9 ) (11 )
Other, net 10 (2 )
Payments for restructuring (11 ) (20 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (32 ) (40 )
Changes in inventories (15 ) (62 )
Changes in accounts payable 6 (2 )
Other, net (33 ) 10  
Net Cash – Operating activities 260   253  
Investing Activities
Capital expenditures (78 ) (77 )
Proceeds from sale of businesses 1 30
Proceeds from the sale of property, plant and equipment 1 2
Other, net 2    
Net Cash – Investing activities (74 ) (45 )
Financing Activities
(Repayment) issuance of short-term debt (3 ) 2
Repurchase of common stock (128 ) (132 )
Proceeds from exercise of employee stock options 14 17
Dividends paid (77 ) (71 )
Other, net   2  
Net Cash – Financing activities (194 ) (182 )
Effect of exchange rate changes on cash (44 ) (30 )
Net change in cash and cash equivalents (52 ) (4 )
Cash and cash equivalents at beginning of year 663   533  
Cash and cash equivalents at end of period $ 611   $ 529  
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 37 $ 36
Income taxes (net of refunds received) $ 57 $ 69
 
 
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.
 
“Tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts and other discrete tax adjustments.
 
 
Xylem Inc. Non-GAAP Reconciliation
Reported vs. Organic & Constant Currency Orders
($ 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
 

Nine Months Ended September 30

 
Xylem Inc. 2,798 3,051 (253 ) -8 % 10 257 14 0 % 0 %
 
Water Infrastructure 1,737 1,915 (178 ) -9 % - 192 14 1 % 1 %
Applied Water 1,061 1,136 (75 ) -7 % 10 65 - 0 % -1 %
 

Quarter Ended September 30

 
Xylem Inc. 939 1,027 (88 ) -9 % - 88 - 0 % 0 %
 
Water Infrastructure 590 664 (74 ) -11 % - 68 (6 ) -1 % -1 %
Applied Water 349 363 (14 ) -4 % - 20 6 2 % 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 % - 55 20 3 % 3 %
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
 

Nine Months Ended September 30

 
Xylem Inc. 2,659 2,874 (215 ) -7 % 11 243 39 1 % 1 %
 
Water Infrastructure 1,602 1,770 (168 ) -9 % - 180 12 1 % 1 %
Applied Water 1,057 1,104 (47 ) -4 % 11 63 27 2 % 1 %
 

Quarter Ended September 30

 
Xylem Inc. 902 963 (61 ) -6 % - 81 20 2 % 2 %
 
Water Infrastructure 551 602 (51 ) -8 % - 61 10 2 % 2 %
Applied Water 351 361 (10 ) -3 % - 20 10 3 % 3 %
 

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 Q3 YTD
`

2015

   

2014

2015

   

2014

2015

   

2014

2015

   

2014

Total Revenue
• Total Xylem 837 906 920 1,005 902 963 2,659 2,874
• Water Infrastructure 500 552 551 616

 

551 602

 

1,602 1,770
• Applied Water 337 354 369 389

 

351 361

 

1,057 1,104
                                                         
Operating Income
• Total Xylem 83 76 104 116 120 130 307 322
• Water Infrastructure 47 46 65 76

 

83 95

 

195 217
• Applied Water 46 41 51 53

 

46 51

 

143 145
• Total Segments 93 87 116 129 129 146 338 362
 
Operating Margin
• Total Xylem 9.9 % 8.4 % 11.3 % 11.5 % 13.3 % 13.5 % 11.5 % 11.2 %
• Water Infrastructure 9.4 % 8.3 % 11.8 % 12.3 % 15.1 % 15.8 % 12.2 % 12.3 %
• Applied Water 13.6 % 11.6 % 13.8 % 13.6 % 13.1 % 14.1 % 13.5 % 13.1 %
• Total Segments         11.1 %     9.6 %     12.6 %     12.8 %       14.3 %     15.2 %       12.7 %     12.6 %
 
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 4 4 16 31
• Water Infrastructure 5 12 4 5 2 3 11 20
• Applied Water 1 6 2 4 2 1 5 11
• Total Segments 6 18 6 9 4 4 16 31
                                                         
Adjusted Operating Income*
• Total Xylem 90 94 110 125 124 134 324 353
• Water Infrastructure 53 58 69 81

 

85 98

 

207 237
• Applied Water 47 47 53 57

 

48 52

 

148 156
• Total Segments 100 105 122 138 133 150 355 393
 
Adjusted Operating Margin*
• Total Xylem 10.8 % 10.4 % 12.0 % 12.4 % 13.7 % 13.9 % 12.2 % 12.3 %
• Water Infrastructure 10.6 % 10.5 % 12.5 % 13.1 % 15.4 % 16.3 % 12.9 % 13.4 %
• Applied Water 13.9 % 13.3 % 14.4 % 14.7 % 13.7 % 14.4 % 14.0 % 14.1 %
• Total Segments         11.9 %     11.6 %     13.3 %     13.7 %       14.7 %     15.6 %       13.4 %     13.7 %
 

*Adjusted Operating Income excludes restructuring & realignment costs and special charges.

 
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
($ Millions, except per share amounts)
 
                 
Q3 2014 Q3 2015
As Reported       Adjustments     Adjusted As Reported       Adjustments     Adjusted
Total Revenue 963 963 902 902
Operating Income 130 4 a 134 120 4 a 124
Operating Margin 13.5 % 13.9 % 13.3 % 13.7 %
Interest Expense (14 ) (14 ) (13 ) (13 )
Other Non-Operating Income (Expense) 1 1 - 2 b 2
Gain from sale of business   11     (11 )   -     -     -     -  
Income before Taxes 128 (7 ) 121 107 6 113
Provision for Income Taxes   (22 )   (2 ) c   (24 )   (19 )   (4 ) c   (23 )
Net Income   106     (9 )   97     88     2     90  
Diluted Shares           183.4                   183.4             181.6                   181.6  
Diluted EPS         $ 0.58         $ (0.05 )       $ 0.53           $ 0.48         $ 0.01         $ 0.49  
 
Currency translation impact on current year diluted EPS                             $ (0.06 )               $ (0.06 )
Diluted EPS at Constant Currency                                   $ 0.54                 $ 0.55  
 
 
 
 
   
Q3 YTD 2014 Q3 YTD 2015
As Reported Adjustments Adjusted As Reported Adjustments Adjusted
Total Revenue 2,874 2,874 2,659 2,659
Operating Income 322 31 a 353 307 17 a 324
Operating Margin 11.2 % 12.3 % 11.5 % 12.2 %
Interest Expense (41 ) (41 ) (41 ) (41 )
Other Non-Operating Income (Expense) 1 1 - 4 b 4
Gain from sale of businesses   11     (11 )   -     9     (9 )   0  
Income before Taxes 293 20 313 275 12 287
Provision for Income Taxes   (52 )   (13 ) c   (65 )   (49 )   (10 ) c   (59 )
Net Income   241     7     248     226     2     228  
Diluted Shares           184.6                   184.6             182.3                   182.3  
Diluted EPS         $ 1.31         $ 0.04         $ 1.35           $ 1.24         $ 0.01         $ 1.25  
 
Currency translation impact on current year diluted EPS                             $ (0.17 )               $ (0.17 )
Diluted EPS at Constant Currency                                   $ 1.41                 $ 1.42  
 
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 tax-related special items
 
 
Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
($ Millions)
 
 
          Q1       Q2       Q3       Nine Months Ended
2015       2014 2015       2014 2015       2014 2015       2014
 
Net Cash - Operating Activities $ 39 $ 22 $ 84 $ 76 $ 137 $ 155 $ 260 $ 253
 
Capital Expenditures (37 ) (25 ) (20 ) (23 ) (21 ) (29 ) (78 ) (77 )
               
Free Cash Flow $ 2   $ (3 ) $ 64   $ 53   $ 116   $ 126   $ 182   $ 176  
 
Net Income 64 49 74 86 88 106 226 241
 
Gain from sale of businesses   9     -     -     -     -     11     9     11  
 
Net Income, excluding gain on sale of businesses $ 55   $ 49   $ 74   $ 86   $ 88   $ 95   $ 217   $ 230  
 
Free Cash Flow Conversion   4 %   -6 %   86 %   62 %   132 %   133 %   84 %   77 %