Xylem Reports First Quarter 2019 Results

• First quarter 2019 reported net income was $79 million or $0.43 per share; Adjusted net income for the quarter was $94 million or $0.52 per share, up 12% excluding foreign exchange translation
• Delivered $1.2 billion in revenue for the first quarter, up 6% organically
• Cash flow from operations up 32%
• Reaffirms full-year 2019 organic revenue growth guidance of 4 to 6% and updates full-year guidance for adjusted earnings per share to $3.12 to $3.32

Xylem Inc. XYL, a leading global water technology company dedicated to solving the world's most challenging water issues, today reported first quarter 2019 net income of $79 million, or $0.43 per share. Excluding the impact of restructuring, realignment and special charges, the Company delivered adjusted net income of $94 million or $0.52 per share in the quarter. Excluding the impact of foreign exchange translation, adjusted earnings per share was up 12 percent. First quarter revenue was $1.2 billion, up 6 percent organically driven by strength across all end markets and double-digit growth in the U.S. and Emerging Markets. Reported operating margin in the quarter was 8.8 percent and adjusted operating margin was 10.8 percent, down 30 basis points compared to the prior year due primarily to the impact of unfavorable sales mix and lower absorption of overhead costs.

"We continue to see robust momentum in the demand for our solutions as we help our customers solve their water challenges and drive the digital transformation of the sector," said Patrick Decker, President and Chief Executive Officer of Xylem. "While we're disappointed with our margin performance in the quarter, we're confident in our long-term growth outlook and in continuing to achieve attractive margin expansion."

Full-year 2019 Outlook

Xylem continues to forecast full-year 2019 revenue in the range of $5.3 to $5.4 billion, up 2 to 4 percent. On an organic basis, Xylem's revenue growth also remains unchanged in the range of 4 to 6 percent.

Xylem is revising its full-year 2019 adjusted operating margin outlook from 14.7 to 15.2 percent to 14.5 to 14.9 percent due to the impact of foreign exchange translation and the results from the first quarter. The full-year adjusted earnings per share is now expected to be $3.12 to $3.32 down from $3.20 to $3.40. The Company's adjusted earnings outlook excludes projected restructuring and realignment costs, which are now expected to be approximately $60 to $70 million for the year as a result of actions to simplify the organization. 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.

First Quarter Segment Results

Water Infrastructure

Xylem's Water Infrastructure segment consists of its portfolio of businesses primarily serving wastewater operations for utility and industrial customers through transport, dewatering and treatment applications.

• First quarter 2019 revenue was $482 million, up seven percent organically compared with first quarter 2018. Double digit organic growth in Emerging Markets and the U.S. from strength in the Utilities and Industrial end markets led top-line performance at the high end of guidance.
• First quarter reported operating income for the segment was $51 million. Adjusted operating income for the segment, which excludes $9 million of restructuring and realignment costs, was $60 million, an 11-percent increase over the same period a year ago. Reported operating margin for the Water Infrastructure segment was 10.6 percent, up 40 basis points versus the prior year. Adjusted operating margins of 12.4 percent were up 110 basis points versus prior year as cost reductions, volume leverage and price realization more than offset inflation, lower absorption of overhead costs and growth investments.

Applied Water

Xylem's Applied Water segment consists of its portfolio of businesses primarily serving the end users of water through industrial water management, commercial building services and residential applications.

• First quarter 2019 Applied Water revenue was $379 million, a seven percent increase organically year-over-year, driven by growth in the U.S. and Emerging Markets. There was strength in all end markets led by 12 percent organic revenue growth in the Commercial end market.
• First quarter reported operating income for the segment was $56 million and adjusted operating income, which excludes $3 million of restructuring and realignment costs, was $59 million, an 11-percent increase over the comparable period last year. The segment's reported operating margin was 14.8 percent and adjusted operating margin was 15.6 percent, both up 110 basis points over the prior year period. Cost reductions and price realization more than offset inflationary pressures, lower absorption of overhead costs and foreign exchange headwinds.

Measurement & Control Solutions

Xylem's Measurement & Control Solutions segment consists of its portfolio of businesses primarily serving the clean water and energy operations for utility and industrial customers through smart metering, network technologies, advanced infrastructure analytics and analytic instrumentation applications.

• First quarter 2019 Measurement & Control Solutions revenue was $376 million, up five percent organically versus the prior year. Revenue growth was driven by strength in the North American water business and partially offset by the lapping of a large electric project deployment and software sale in the first quarter of 2018.
• First quarter reported operating income for the segment was $16 million, and adjusted operating income, which excludes $12 million of restructuring and realignment costs and special charges, was $28 million. The Measurement & Control Solutions segment reported operating margin was 4.3 percent. Adjusted operating margin contracted 420 basis points over the prior year period to 7.4 percent as higher volume and cost reductions were more than offset by inflation, higher investments for growth and unfavorable mix.

Supplemental information on Xylem's first quarter 2019 earnings and reconciliations for certain non-GAAP items is posted at www.xylem.com/investors.

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. Xylem also provides a leading portfolio of smart metering, network technologies and advanced infrastructure analytics solutions for water, electric and gas utilities. The Company's approximately 17,000 employees bring broad applications expertise with a strong focus on identifying comprehensive, sustainable solutions. Headquartered in Rye Brook, New York, with 2018 revenue of $5.2 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" 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. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements include any statements that are not historical in nature, including any 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: overall economic and business conditions, political and other risks associated with our international operations, including military actions, economic sanctions or trade barriers including tariffs and embargoes that could affect customer markets and our business, 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 talent and 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; claims or investigations by governmental or regulatory bodies; security breaches or other disruptions of our information technology systems; litigation and contingent liabilities; and other factors set forth under "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018 and in subsequent filings we make with the Securities and Exchange Commission ("SEC").

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 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 and amortization expense. "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, Sensus acquisition related costs, gain or loss from sale of businesses and special charges.

"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 or loss from 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 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, costs related to the recognition of the backlog intangible asset amortization recorded in purchase accounting.

"Special charges" defined as costs incurred by the Company, such as acquisition and integration related costs not included in "Sensus Acquisition Related Costs", non-cash impairment charges 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.

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