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Xylem reports third quarter earnings growth and margin expansion

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  • Third quarter 2019 reported net income was $65 million or $0.36 per share; Adjusted net income for the quarter was $149 million or $0.82 per share, up 10% excluding foreign exchange translation
  • Delivered $1.3 billion in revenue for the third quarter, up 3% organically
  • Lowers full-year 2019 organic revenue growth guidance range to 3% to 4% and adjusted earnings per share to $3.01 to $3.03

Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world's most challenging water issues, today reported third quarter 2019 net income of $65 million, or $0.36 per share. Excluding the impact of restructuring and realignment, impairment charges and one-time tax benefits, the Company delivered adjusted net income of $149 million, or $0.82 per share in the quarter. Excluding the impact of foreign exchange translation, adjusted earnings per share was up 10 percent. Third quarter revenue was $1.3 billion, up 3 percent organically led by healthy growth in the utilities end-market moderated by slower-than-expected growth in industrial and commercial markets. Reported operating margin in the quarter was 0.8 percent and adjusted operating margin was 15.1 percent, up 50 basis points compared to the prior year.

"Solid demand and disciplined execution in our largest markets drove margin expansion and delivery on our earnings commitments," said Patrick Decker, president and CEO of Xylem. "Steady revenue growth in our utilities business has been partially offset, however, by notable weakening in industrial and commercial end-markets."

"The near-term softness in those market environments has caused us to lower our organic revenue and earnings guidance," Decker continued. "Nevertheless, we expect to exit the year with sizable backlogs as our core utilities business remains healthy and the digital transformation of the water sector continues to gather pace. This gives us confidence in our ability to continue to outperform the market in 2020, and deliver mid-single-digit growth over the long term."

Full-year 2019 Outlook

Xylem is updating its forecasted full-year 2019 revenue outlook to be in the range of $5.24 to $5.27 billion. On an organic basis, Xylem's revenue growth is adjusted to a range of 3 to 4 percent (approximately 1 percent on a reported basis) from previous guidance of 5 to 6 percent.

Xylem is revising its full-year 2019 adjusted operating margin outlook from 14.5 to 14.9 percent to 13.8 to 14.0 percent. The full-year adjusted earnings per share is now expected to be $3.01 to $3.03, lowered from previous guidance of $3.12 to $3.22, but reflecting an increase of approximately 5 percent versus prior year — the equivalent of 7 to 8 percent excluding foreign exchange effects. The Company's adjusted earnings outlook excludes projected restructuring and realignment and goodwill impairment costs. 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.

Third 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.

  • Third quarter 2019 revenue was $531 million, up 1 percent organically compared with third quarter 2018. Healthy growth in the utilities market, particularly in the U.S., more than offset declines in our short-cycle industrial business.
  • Third quarter reported operating income for the segment was $97 million and adjusted operating income, which excludes $7 million of restructuring and realignment costs, was $104 million. The segment's reported operating margin was 18.3 percent and adjusted operating margin was 19.6 percent, up 40 basis points versus the prior year due to higher net productivity and price realization, partially offset by the impact of lower volumes and mix.

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.

  • Third quarter 2019 Applied Water revenue was $376 million, a 1 percent increase organically year-over-year. Versus strong prior year comparisons, both industrial and commercial end-markets were slower than expected, influenced by U.S. project delays.
  • Third quarter reported operating income for the segment was $61 million and adjusted operating income, which excludes $3 million of restructuring and realignment costs, was $64 million. The segment's reported operating margin was 16.2 percent and adjusted operating margin was 17.0 percent, an 90 basis point increase over prior year period due to higher price realization and productivity more than off-setting inflation.

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.

  • Third quarter 2019 Measurement & Control Solutions revenue was $389 million, up 8 percent organically versus the prior year. Revenue growth was driven by execution in the metrology water business.
  • Third quarter reported operating income for the segment was a loss of $136 million, and adjusted operating income, which excludes $20 million of restructuring and realignment costs and a $155 million impairment charge, was $39 million. The segment's reported operating margin was -35 percent. Adjusted operating margin was 10 percent, up 50 basis points versus the prior year, driven by productivity and volume gains, as well as increased price realization, which was partially offset by higher growth investments.

Supplemental information on Xylem's third 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 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, data privacy, 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; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; 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" in our Annual Report on Form 10-K for the year ended December 31, 2018 ("2018 Annual Report") and with 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 as of the date of this Report. 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.

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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,

2019

 

2018

 

2019

 

2018

Revenue

$

1,296

 

 

$

1,287

 

 

$

3,878

 

 

$

3,821

 

Cost of revenue

787

 

 

782

 

 

2,369

 

 

2,337

 

Gross profit

509

 

 

505

 

 

1,509

 

 

1,484

 

Selling, general and administrative expenses

273

 

 

279

 

 

870

 

 

868

 

Research and development expenses

44

 

 

46

 

 

142

 

 

137

 

Restructuring and asset impairment charges

33

 

 

4

 

 

58

 

 

19

 

Goodwill impairment charge

148

 

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