Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported second quarter 2016 net income of $71 million, or $0.39 per share, a decrease of five percent year-over-year reflecting debt refinancing costs and higher restructuring and realignment charges. Excluding those and other special charges, adjusted net income in the quarter was $87 million or $0.48 per share, a 12-percent increase over the prior year period. Second quarter revenue was $932 million, an increase of one percent, or three percent in constant currency, which includes one point of growth attributable to acquisitions. Revenue growth reflects primarily a robust public utility end market globally, with particular strength in the U.S. Reported operating margin in the quarter expanded 40 basis points to 11.7 percent. On an adjusted basis, operating margin grew 100 basis points to 13 percent as strong execution on productivity initiatives more than offset inflation and funded targeted investments in strategic growth initiatives.

“With our second quarter results, we are continuing to build a compelling track record of growth that reflects a strong focus on elevating our execution and driving productivity to expand margins,” said Patrick Decker, Xylem President and Chief Executive Officer. “We continued to capitalize on robust growth in the global public utility sector, which helped to offset softness in the industrial end market. Our teams also delivered strong performance in executing against our productivity initiatives. These results enabled us to continue to invest in key growth initiatives, which will drive our long-term performance.”

Full-year 2016 Outlook

Xylem reaffirmed its forecast of full-year 2016 revenue of approximately $3.7 billion, including approximately one-percent growth from completed acquisitions and the unfavorable impacts of foreign exchange. On an organic basis, Xylem’s revenue growth now is anticipated to be in the range of two to three percent.

Xylem is narrowing the range of its full-year earnings outlook, while maintaining the same adjusted EPS mid-point. Xylem now expects to generate full-year 2016 adjusted operating income of $495 million to $510 million, or adjusted EPS of $2.00 to $2.06. The Company’s adjusted earnings outlook continues to exclude projected restructuring and realignment costs of approximately $25 million for the year. 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 integration and acquisition-related costs, special charges and discrete tax impacts.

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 2016 Water Infrastructure revenue was $566 million, up three percent over the prior year period on a reported basis and up five percent in constant currency, which includes two points of growth attributable to acquisitions. This growth reflects continued strength in the public utility end market, which was up 15 percent on a global basis in the quarter and 22 percent in the U.S. In addition, major projects in the Emerging Markets, particularly in India, contributed to the gains. This progress was partially offset by weakness in the industrial end market, notably the ongoing declines in oil and gas in North America and the global mining sector.
  • Reported segment operating income was $70 million in the second quarter, up from $65 million in the prior year. Excluding restructuring, realignment and special charges, adjusted segment operating income was $79 million, a 15-percent increase over the $69 million generated in the comparable period a year ago. Operating margin for the quarter increased 60 basis points to 12.4 percent, driven primarily by the impact of cost savings and volume leverage, which enabled the Company to continue to invest in strategic growth initiatives. In addition, these drivers more than offset cost inflation, increased restructuring and realignment charges, and acquisition costs. Similarly, strong productivity and volume growth drove a 150-basis-point expansion in the segment adjusted operating margin to 14 percent.

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 2016 revenue was $366 million, down from $369 million in the prior year period and flat in constant currency. Segment sales in Western Europe grew 14 percent as new product sales and channel investments helped drive share gains in the industrial and commercial end markets. This growth was offset by declines in the U.S. and China.
  • Segment operating income was $51 million in the second quarter, flat versus second quarter 2015. Adjusted segment operating income, which excludes restructuring and realignment charges, grew year over year by $1 million to $54 million, reflecting strong productivity and cost control. Segment operating margin increased 10 basis points to 13.9 percent. A strong focus on reducing costs drove this margin expansion, which was partially offset by inflation, ongoing investment in growth initiatives and lower volume. On an adjusted basis, segment operating margin grew 40 basis points to 14.8 percent.

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 2015 revenue of $3.7 billion and more than 12,500 employees worldwide. Xylem was named to the Dow Jones Sustainability Index, North America 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.” 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; 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, 2015, 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. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)

       
Three Months Six Months
For the period ended June 30,     2016   2015 2016   2015
Revenue $ 932 $ 920 $ 1,779 $ 1,757
Cost of revenue 563 572 1,081 1,094
Gross profit 369 348 698 663
Selling, general and administrative expenses 227 218 446 424
Research and development expenses 27 25 52 48
Restructuring charges 6 1 12 4
Operating income 109 104 188 187
Interest expense 20 14 34 28
Other non-operating income, net 1 1 1
Gain from sale of businesses 9
Income before taxes 90 91 155 168
Income tax expense 19 17 18 30
Net income $ 71 $ 74 $ 137 $ 138
Earnings per share:
Basic $ 0.39 $ 0.41 $ 0.77 $ 0.76
Diluted $ 0.39 $ 0.41 $ 0.76 $ 0.76
Weighted average number of shares:
Basic 179.1 181.5 178.8 181.8
Diluted 179.9 182.3 179.6 182.7
Dividends declared per share $ 0.1549 $ 0.1408 $ 0.3098 $ 0.2816
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

     
     

   June 30,   
   2016   

December 31,
2015
 
ASSETS
Current assets:
Cash and cash equivalents $ 586 $ 680
Receivables, less allowances for discounts and doubtful accounts of $26 and $33 in 2016 and 2015, respectively 784 749
Inventories 483 433
Prepaid and other current assets 154   143  
Total current assets 2,007 2,005
Property, plant and equipment, net 438 439
Goodwill 1,616 1,584
Other intangible assets, net 453 435
Other non-current assets 180   194  
Total assets $ 4,694   $ 4,657  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 339 $ 338
Accrued and other current liabilities 390 407
Short-term borrowings and current maturities of long-term debt 91   78  
Total current liabilities 820 823
Long-term debt 1,143 1,196
Accrued postretirement benefits 336 335
Deferred income tax liabilities 117 118
Other non-current accrued liabilities 104   101  
Total liabilities 2,520   2,573  
 
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 191.1 shares and 190.2 shares in 2016 and 2015, respectively 2 2
Capital in excess of par value 1,860 1,834
Retained earnings 966 885
Treasury stock – at cost 11.9 shares and 11.8 shares in 2016 and 2015, respectively (402 ) (399 )
Accumulated other comprehensive loss (252 ) (238 )
Total stockholders’ equity 2,174   2,084  
Total liabilities and stockholders’ equity $ 4,694   $ 4,657  
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

     
For the six months ended June 30,    

     2016     

     2015     

Operating Activities
Net income $ 137 $ 138
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 41 47
Amortization 24 22
Share-based compensation 10 8
Restructuring charges 12 4
Gain from sale of businesses (9 )
Other, net 8 3
Payments for restructuring (6 ) (9 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (19 ) (28 )
Changes in inventories (39 ) (27 )
Changes in accounts payable 9 3
Other, net (52 ) (29 )
Net Cash – Operating activities 125   123  
Investing Activities
Capital expenditures (62 ) (57 )
Acquisition of business, net of cash acquired (70 )
Proceeds from sale of businesses 1
Other, net 5   3  
Net Cash – Investing activities (127 ) (53 )
Financing Activities
Short-term debt issued 89
Short-term debt repaid (77 ) (2 )
Long-term debt issued 540
Long-term debt repaid (608 )
Repurchase of common stock (3 ) (53 )
Proceeds from exercise of employee stock options 16 9
Dividends paid (56 ) (51 )
Other, net 1   1  
Net Cash – Financing activities (98 ) (96 )
Effect of exchange rate changes on cash 6   (37 )
Net change in cash and cash equivalents (94 ) (63 )
Cash and cash equivalents at beginning of year 680   663  
Cash and cash equivalents at end of period $ 586   $ 600  
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 34 $ 26
Income taxes (net of refunds received) $ 49 $ 42
 
 

Xylem Inc. Non-GAAP Measures

 

Management reviews 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 non-GAAP (or "adjusted") 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, including but not limited to, dividends, acquisitions, share repurchases and debt repayment. However, other than with respect to total revenue, we only provide guidance on a non-GAAP basis and do not provide reconciliations of such forward-looking measures to GAAP due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as, integration and acquisition-related costs, special charges and tax related special items. 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 assumes no change in exchange rates from the prior period.
 
“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, 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 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.
 
“Special charges" defined as costs incurred by the Company, such as interest expense related to the early extinguishment of debt during Q2 2016, initial acquisition related costs, costs incurred for the contractual indemnification of tax obligations to ITT and other special non-operating items.
 
“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.
 
 
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
 
Change % Change

Acquisitions /

Change % Change
Orders Orders 2016 v. 2015 2016 v. 2015

Divestitures

FX Contribution Adj. 2016 v. 2015 Adj. 2016 v. 2015
2016 2015
 

Six Months Ended June 30

 
Xylem Inc. 1,811 1,859 (48 ) -3 % (14 ) 44 (18 ) -1 % 0 %
 
Water Infrastructure 1,096 1,147 (51 ) -4 % (14 ) 35 (30 ) -3 % -1 %
Applied Water 715 712 3 0 % - 9 12 2 % 2 %
 

Quarter Ended June 30

 
Xylem Inc. 923 944 (21 ) -2 % (9 ) 13 (17 ) -2 % -1 %
 
Water Infrastructure 562 585 (23 ) -4 % (9 ) 11 (21 ) -4 % -2 %
Applied Water 361 359 2 1 % - 2 4 1 % 1 %
 

Quarter Ended March 31

 
Xylem Inc. 888 915 (27 ) -3 % (5 ) 31 (1 ) 0 % 0 %
 
Water Infrastructure 534 562 (28 ) -5 % (5 ) 24 (9 ) -2 % -1 %
Applied Water 354 353 1 0 % - 7 8 2 % 2 %
 
 
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
 
Change % Change

Acquisitions /

Change % Change
Revenue Revenue 2016 v. 2015 2016 v. 2015

Divestitures

FX Contribution Adj. 2016 v. 2015 Adj. 2016 v. 2015
2016 2015
 

Six Months Ended June 30

 
Xylem Inc. 1,779 1,757 22 1 % (17 ) 40 45 3 % 4 %
 
Water Infrastructure 1,080 1,051 29 3 % (17 ) 32 44 4 % 6 %
Applied Water 699 706 (7 ) -1 % - 8 1 0 % 0 %
 

Quarter Ended June 30

 
Xylem Inc. 932 920 12 1 % (11 ) 13 14 2 % 3 %
 
Water Infrastructure 566 551 15 3 % (11 ) 11 15 3 % 5 %
Applied Water 366 369 (3 ) -1 % - 2 (1 ) 0 % 0 %
 

Quarter Ended March 31

 
Xylem Inc. 847 837 10 1 % (6 ) 27 31 4 % 4 %
 
Water Infrastructure 514 500 14 3 % (6 ) 21 29 6 % 7 %
Applied Water 333 337 (4 ) -1 % - 6 2 1 % 1 %
 
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
                 
Q1 Q2 YTD

2016

 

2015

2016

 

2015

2016

 

2015

Total Revenue
• Total Xylem 847 837 932 920 1,779 1,757
• Water Infrastructure 514 500 566 551 1,080 1,051
• Applied Water 333 337 366 369 699 706
 
Operating Income
• Total Xylem 79 83 109 104 188 187
• Water Infrastructure 54 47 70 65 124 112
• Applied Water 39 46 51 51 90 97
• Total Segments 93 93 121 116 214 209
 
Operating Margin
• Total Xylem 9.3% 9.9% 11.7% 11.3% 10.6% 10.6%
• Water Infrastructure 10.5% 9.4% 12.4% 11.8% 11.5% 10.7%
• Applied Water 11.7% 13.6% 13.9% 13.8% 12.9% 13.7%
• Total Segments     11.0%   11.1%     13.0%   12.6%     12.0%   11.9%
 
Special Charges
• Total Xylem 4 1 1 - 5 1
• Water Infrastructure 4 1 1 - 5 1
• Applied Water - - - - - -
• Total Segments 4 1 1 - 5 1
 
Restructuring & Realignment Costs
• Total Xylem 9 6 11 6 20 12
• Water Infrastructure 4 5 8 4 12 9
• Applied Water 3 1 3 2 6 3
• Total Segments 7 6 11 6 18 12
 
Adjusted Operating Income*
• Total Xylem 92 90 121 110 213 200
• Water Infrastructure 62 53 79 69 141 122
• Applied Water 42 47 54 53 96 100
• Total Segments 104 100 133 122 237 222
 
Adjusted Operating Margin*
• Total Xylem 10.9% 10.8% 13.0% 12.0% 12.0% 11.4%
• Water Infrastructure 12.1% 10.6% 14.0% 12.5% 13.1% 11.6%
• Applied Water 12.6% 13.9% 14.8% 14.4% 13.7% 14.2%
• Total Segments     12.3%   11.9%     14.3%   13.3%     13.3%   12.6%
 
*Adjusted Operating Income excludes restructuring & realignment costs and special charges, which consisted of initial acquisition costs and other acquisition related charges in 2016 and other special non-operating items in 2015.
                 
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
($ Millions, except per share amounts)
   
Q2 2016 Q2 2015

As Reported

Adjustments

Adjusted

As Reported

Adjustments

Adjusted

Total Revenue 932 932 920 920
Operating Income 109 12 a 121 104 6 a 110
Operating Margin 11.7 % 13.0 % 11.3 % 12.0 %
Interest Expense (20 ) 8 b (12 ) (14 ) (14 )
Other Non-Operating Income (Expense)   1       1     1     1   b   2  
Income before Taxes 90 20 110 91 7 98
Provision for Income Taxes   (19 )   (4 ) c   (23 )   (17 )   (3 ) c   (20 )
Net Income   71     16     87     74     4     78  
Diluted Shares         179.9             179.9         182.3             182.3  
Diluted EPS       $ 0.39     $ 0.09       $ 0.48       $ 0.41     $ 0.02       $ 0.43  
 
   
Q2 YTD 2016 Q2 YTD 2015

As Reported

Adjustments

Adjusted

As Reported

Adjustments

Adjusted

Total Revenue 1,779 1,779 1,757 1,757
Operating Income 188 25 a 213 187 13 a 200
Operating Margin 10.6 % 12.0 % 10.6 % 11.4 %
Interest Expense (34 ) 8 b (26 ) (28 ) (28 )
Other Non-Operating Income (Expense) 1 1 - 2 b 2
Gain from sale of businesses   -       -     9     (9 )   -  
Income before Taxes 155 33 188 168 6 174
Provision for Income Taxes   (18 )   (21 ) c   (39 )   (30 )   (6 ) c   (36 )
Net Income   137     12     149     138     -     138  
Diluted Shares         179.6             179.6         182.7             182.7  
Diluted EPS       $ 0.76     $ 0.07       $ 0.83       $ 0.76     $ -       $ 0.76  
a   Restructuring & realignment costs of $11 million and $6 million in the second quarter of 2016 and 2015, respectively, and special charges of $1 million of initial acquisition costs in the second quarter of 2016. Restructuring & realignment costs of $20 million and $12 million in the first half of 2016 and 2015, respectively, and special charges of $5 million of initial acquisition costs and $1 million of other special charges in the first half of 2016 and 2015, respectively.
b Special charges consisting of $8 million of costs related to the early extinguishment of debt for the second quarter and first half of 2016, and $1 million and $2 million of other special charges for the second quarter and first half of 2015, respectively.
c Net tax impact on restructuring & realignment costs of $3 million and $1 million and on special charges of $4 million and $0 million, and tax-related special items of $3 million of benefit and $2 million of expense for the second quarter of 2016 and 2015, respectively. Net tax impact on restructuring & realignment costs of $5 million and $3 million and on special charges of $5 million and $0 million, and tax-related special charges of $11 million and $3 million for the first half of 2016 and 2015, respectively.
 
 
Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
($ Millions)
                 
Q1 Q2 Six Months Ended
2016 2015 2016 2015 2016 2015
 
Net Cash - Operating Activities $ 41 $ 39 $ 84 $ 84 $ 125 $ 123
 
Capital Expenditures (37 ) (37 ) (25 ) (20 ) (62 ) (57 )
           
Free Cash Flow $ 4   $ 2   $ 59   $ 64   $ 63   $ 66  
 
Net Income 66 64 71 74 137 138
 
Gain from sale of businesses - 9 - - - 9
 
Special Charges - Interest   -     -     (8 )   -     (8 )   -  
 

Net Income, excluding gain on sale of businesses and
Special Charges - Interest

$ 66   $ 55   $ 79   $ 74   $ 145   $ 129  
 
Free Cash Flow Conversion   6 %   4 %   75 %   86 %   43 %   51 %