Xylem : reports strong fourth quarter and full year 2014 results, including double-digit growth in earnings per share

Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported fourth quarter 2014 net income of $96 million, or $0.52 per share. Excluding the impact of restructuring, realignment and other special charges, the Company delivered adjusted net income of $114 million or $0.62 per share in the quarter, an 11-percent increase over the comparable period in 2013. Fourth quarter organic revenue grew 6 percent to $1.04 billion, reflecting stronger results from emerging markets and the U.S., as well as across all end markets. Fourth quarter adjusted operating margins improved 70 basis points, driven by higher volume and the impact of efficiency measures undertaken throughout the year.

For the full year 2014, Xylem generated $3.92 billion in revenue, an organic increase of 3 percent over 2013. Full-year reported net income was $337 million, or $1.83 per share, with an operating margin of 11.8 percent. Adjusted net income, which excludes the impact of restructuring, realignment and other special items, was $362 million or $1.97 per share. Xylem delivered a full-year 2014 adjusted operating margin of 12.9 percent. Free cash flow was $297 million, up 50 percent versus last year.

“Xylem delivered strong results in the fourth quarter, closing out 2014 with a clear strategic focus, stronger execution and a renewed drive in research and innovation,” said Patrick Decker, president and chief executive officer of Xylem. “We generated growth in each of our key regions in the fourth quarter, with notably strong results in China and the emerging markets in general. Solid growth in the U.S. and more effective execution across the company helped us to mitigate slower growth in Europe.”

Decker continued, “During 2015, we will continue to strengthen critical organization capabilities in the areas of commercial excellence, innovation and technology, and emerging markets in order to accelerate Xylem’s growth. Our commitment to building a continuous improvement culture across the organization will drive efficiencies and enable us to continue to expand margins and reinvest for growth in our business. Our core fundamentals are strong and our 2015 plan tracks well with our long-term commitments to grow the company and our shareholders’ return.”

Xylem today also announced that its Board of Directors declared a dividend in the amount of $0.1408 per share for the first quarter of 2015, an increase of 10 percent. The dividend is payable on March 18, 2015 to shareholders of record as of February 18, 2015.

Full-year 2015 Outlook

Xylem forecasts full-year 2015 revenue of approximately $3.7 billion, a decrease of 5 to 7 percent over the 2014 results, including the projected unfavorable impact of foreign exchange translation. On an organic basis, Xylem’s revenue growth is anticipated to be in the range of 1 to 3 percent.

Full-year 2015 adjusted operating income is expected to be in the range of $480 to $505 million, resulting in adjusted earnings per share of $1.85 to $1.95. This represents a decline of 1 to 6 percent from Xylem’s 2014 adjusted results. Excluding the projected unfavorable impact of foreign exchange translation, Xylem’s adjusted earnings per share growth is anticipated to be in the range of 5 to 10 percent. The company’s adjusted earnings outlook reflects projected restructuring and realignment costs of $20 million for the year.

Fourth 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.

• Fourth quarter 2014 revenue was $672 million, up 6 percent organically compared with the fourth quarter 2013, reflecting growth across all business lines and all geographic regions.
• Fourth quarter adjusted operating income for the segment, which excludes $9 million of restructuring, realignment and other special items, was $113 million, a 2-percent improvement over the same period in 2013. Adjusted operating margin for the quarter expanded 30 basis points reflecting the benefits of cost reduction actions taken throughout the year.

Applied Water

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

• Fourth quarter 2014 revenue increased 7 percent organically year-over-year to $370 million with growth coming from all applications, and exceptionally strong performances in the U.S. and emerging markets.
• Fourth quarter adjusted operating income for the segment, which excludes $2 million of restructuring and realignment costs, was $50 million, 6 percent higher than the comparable period last year. Adjusted operating margin grew 40 basis points, reflecting the benefits of cost reduction actions taken throughout the year, partially offset by unfavorable foreign exchange translation impacts.

Supplemental information on Xylem’s fourth quarter and full year 2014 earnings and reconciliations for certain non-GAAP items is posted at 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.xyleminc.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 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, 2013, and those described from time to time in subsequent reports filed with the Securities and Exchange Commission.

All 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 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 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.

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