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Xylem Management Discusses Q2 2012 Results - Earnings Call Transcript

On a year-over-year basis, YSI is up approximately 11%. We received orders of $970 million, up 2% in constant currency, resulting in a book-to-bill ratio of 1.0. During the quarter, we won some key public utility and industrial transport and treatment projects that spread across the U.S., Europe and emerging markets, which will ship in 2013.

Let me highlight that in the second quarter, we registered our highest order rate in treatment projects since the first quarter 2011. This is a positive sign for next year and we're encouraged by the number of projects still in the funnel. As I mentioned last quarter, good activity for capital projects has continued to increase, but release of orders continued to be slower than anticipated.

A key focus for us has been margin expansion. Despite the lower demand, we continue to reach higher levels of profitability. This performance demonstrates the result of years in disciplined execution, a focused growth strategy and processes put in place to drive price and reduce operating costs. We will cover these details later on the call, but for now, I'd simply note that for the quarter, gross margin was 39.6%, up 60 basis points versus last year and fast approaching the long-term target we set out at our Investor Day.

Operating margin was 14.8%, up 100 basis points, excluding the impact of recurring standalone costs. Earnings per share were $0.49, up 4% on a comparable or normalized year-over-year basis. Core operations and YSI performance drove earnings up 13%, giving us confidence that we can continue to deliver fundamental growth in a tough environment. The negative impact of foreign exchange, 9 points off that growth rate, bringing it down to the 4% you see on the slide. We've generated year-to-date free cash flow of $86 million, which represents 54% conversion of net income and is consistent with our seasonal performance.

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