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Xylem Inc. Reports Third Quarter 2012 Results

Stocks in this article: XYL

*The 2011 normalized earnings per share reflect adjustments (including interest expense, stand-alone costs, and special tax items) to our GAAP results to better illustrate year-over-year performance. The normalized earnings are intended to give a representation of our performance had Xylem been a stand-alone company in 2011.

 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)

 

  Three Months   Nine Months
For the periods ended September 30,     2012     2011     2012     2011
   
Revenue $ 931 $ 939 $ 2,822 $ 2,800
Cost of revenue 557 574 1,702 1,719
Gross profit 374 365 1,120 1,081
Selling, general and administrative expenses 231 215 682 643
Research and development expenses 24 23 80 73
Restructuring and asset impairment charges, net 4 2 4 2
Separation costs 4 46 15 67
Operating income 111 79 339 296
Interest expense 14 1 41 2
Other non-operating income, net 3 4 1 5
Income before taxes 100 82 299 299
Income tax expense 28 5 75 72
Net income $ 72 $ 77 $ 224 $ 227
 
Earnings per share:
Basic $ 0.39 $ 0.42

$

1.20 $ 1.23
Diluted $ 0.38 $ 0.42

$

1.20 $ 1.23
Weighted average number of shares:
Basic 185.9 184.6 185.7 184.6
Diluted 186.3 184.6 186.2 184.6
 
Dividends declared per share $ 0.1012 $ $

0.3036

$
 
 
XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

 
  September 30,

 

December 31,
    2012     2011
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 424 $ 318
Receivables, less allowances for discounts and doubtful accounts

of $33 and $37 in 2012 and 2011, respectively

801

756

Inventories, net 467 426
Prepaid and other current assets 106 97
Deferred income tax assets   36     45
Total current assets 1,834 1,642
 
Property, plant and equipment, net 464 463
Goodwill 1,621 1,610
Other intangible assets, net 485 505
Other non-current assets   192     173
Total assets $ 4,596   $ 4,393
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 316 $ 322
Accrued and other current liabilities 456 490
Short-term borrowings and current maturities of long-term debt   13     5
Total current liabilities 785 817
 
Long-term debt 1,199 1,201
Accrued postretirement benefits 319 316
Deferred income tax liability 170 165
Other non-current accrued liabilities   69     67
Total liabilities   2,542     2,566
Commitments and contingencies

Stockholders’ equity:

Common Stock – authorized 750.0 shares, par value $0.01 per share:
Issued 186.0 shares and 184.6 shares in 2012 and 2011, respectively 2 2
Capital in excess of par value 1,699 1,663
Retained earnings 206 40
Treasury stock – at cost 0.2 shares and 0 shares in 2012 and 2011, respectively (6 )
Accumulated other comprehensive income   153     122
Total stockholders’ equity   2,054     1,827
Total liabilities and stockholders’ equity $ 4,596   $ 4,393
 
   
XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

 
For the nine months ended September 30,   2012     2011  
 
Operating Activities
Net income $ 224 $ 227
Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization 103 104
Share-based compensation 16 7
Non-cash separation costs 8
Restructuring and asset impairment charges 4 2
Payments for restructuring (7 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (33 ) (58 )
Changes in inventories (33 ) (40 )
Changes in accounts payable (7 ) (31 )
Changes in accrued liabilities (30 ) 14
Changes in accrued taxes 1 4
Net changes in other assets and liabilities (14 ) 18
Other, net     (1 )     4  
Net Cash - Operating activities     230       252  
Investing Activities
Capital expenditures (81 ) (79 )
Acquisitions, net of cash required (12 ) (309 )
Proceeds from the sale of property, plant and equipment 4 9
Other, net           2  
Net Cash - Investing activities     (89 )     (377 )
Financing Activities
Net transfer to former parent (9 ) (1,012 )
Issuance of short-term debt 12 5
Issuance of senior notes, net of discount 1,189
Principal payments of debt and capital lease obligations (6 )
Purchase of common stock (4 )
Proceeds from exercise of employee stock options 22
Dividends paid     (56 )      
Net Cash - Financing activities     (41 )     182  
Effect of exchange rate changes on cash     6       (4 )
Net change in cash and cash equivalents     106       53  
Cash and cash equivalents at beginning of year     318       131  
Cash and cash equivalents at end of year   $ 424     $ 184  

Supplemental disclosure of cash flow information: Cash paid during the period for:

Interest $ 38 $
Income taxes (net of refunds received) $ 76 $ 37
 
 
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, intercompany transactions, 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 for non-recurring separation costs associated with the Xylem spin-off from ITT Corporation as well as non-recurring restructuring and realignment costs.

 

"Adjusted Operating Income", "Adjusted Segment Operating Income", and “Adjusted EPS” defined as operating income and earnings per share, adjusted to exclude non-recurring separation costs associated with the Xylem spin-off from ITT Corporation, non-recurring restructuring and realignment costs and tax-related special items.

 

“Normalized EPS” defined as adjusted earnings per share, as well as adjustments to reflect the incremental current period amount of interest expense and stand-alone costs in the prior comparable period.

 

“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.

 
Xylem Inc. Non-GAAP Reconciliation
Reported vs. Organic & Constant Currency Order Growth
($ Millions)
                                       
(As Reported - GAAP) (As Adjusted - Organic) Constant Currency
  (A)   (B)   (C)   (D)   (E)   (F) = B+C+D+E   (G) = F/A (H) = (B + D) / A
 
Change % Change

 

Change % Change
Orders Orders 2012 v. 2011 2012 v. 2011

Acquisitions / Divestitures

FX Contribution Eliminations Adj. 2012 v. 2011 Adj. 2012 v. 2011
2012 2011
Nine Months Ended September 30
 
Xylem Inc. 2,856 2,942 (86 ) -2.9 % (88 ) 108 - (66 ) -2.2 % 0.7 %
 
Water infrastructure 1,819 1,865 (46 ) -2.5 % (88 ) 82 - (52 ) -2.8 % 1.9 %
Applied Water 1,086 1,122 (36 ) -3.2 % - 30 (8 ) (14 ) -1.2 % -0.5 %
 
 
Quarter Ended September 30, 2012
 
Xylem Inc. 882 966 (84 ) -8.7 % (21 ) 39 - (66 ) -6.8 % -4.7 %
 
Water infrastructure 564 621 (57 ) -9.2 % (21 ) 29 - (49 ) -7.9 % -4.5 %
Applied Water 334 358 (24 ) -6.7 % - 12 (5 ) (17 ) -4.7 % -3.4 %
 
Quarter Ended June 30
 
Xylem Inc. 970 998 (28 ) -2.8 % (30 ) 51 - (7 ) -0.7 % 2.3 %
 
Water infrastructure 617 632 (15 ) -2.4 % (30 ) 40 - (5 ) -0.8 % 4.0 %
Applied Water 370 383 (13 ) -3.4 % - 13 (2 ) (2 ) -0.5 % 0.0 %
 
Quarter Ended March 31
 
Xylem Inc. 1,004 978 26 2.7 % (37 ) 18 - 7 0.7 % 4.5 %
 
Water infrastructure 638 612 26 4.2 % (37 ) 13 - 2 0.3 % 6.4 %
Applied Water 382 381 1 0.3 % - 5 (1 ) 5 1.3 % 1.6 %
 
 
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.
 
                   
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) (F) = B+C+D+E (G) = F/A (H) = (B + D) / A
 
Change % Change

 

Change % Change
Revenue Revenue 2012 v. 2011 2012 v. 2011

Acquisitions / Divestitures

FX Contribution Eliminations Adj. 2012 v. 2011 Adj. 2012 v. 2011
2012 2011
Nine Months Ended September 30
 
 
Xylem Inc. 2,822 2,800 22 0.8 % (87 ) 101 - 36 1.3 % 4.4 %
 
Water infrastructure 1,788 1,737 51 2.9 % (87 ) 75 - 39 2.2 % 7.3 %
Applied Water 1,078 1,108 (30 ) -2.7 % - 30 (3 ) (3 ) -0.3 % 0.0 %
 
Quarter Ended September 30, 2012
 
Xylem Inc. 931 939 (8 ) -0.9 % (21 ) 38 - 9 1.0 % 3.2 %
 
Water infrastructure 595 584 11 1.9 % (21 ) 28 - 18 3.1 % 6.7 %
Applied Water 350 368 (18 ) -4.9 % - 12 (2 ) (8 ) -2.2 % -1.6 %
 
Quarter Ended June 30
 
Xylem Inc. 966 971 (5 ) -0.5 % (32 ) 49 - 12 1.2 % 4.5 %
 
Water infrastructure 609 602 7 1.2 % (32 ) 37 (1 ) 11 1.8 % 7.3 %
Applied Water 373 385 (12 ) -3.1 % - 13 (1 ) - 0.0 % 0.3 %
 
Quarter Ended March 31
 
Xylem Inc. 925 890 35 3.9 % (34 ) 14 - 15 1.7 % 5.5 %
 
Water infrastructure 584 551 33 6.0 % (34 ) 10 1 10 1.8 % 7.8 %
Applied Water 355 355 - 0.0 % - 5 - 5 1.4 % 1.4 %
 
 
 
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
For The Three and Nine Months Ended September 30, 2012 & 2011
($ Millions, except per share amounts)
       
 
       
Q1 2012 Q2 2012 Q3 2012 YTD 2012
 
Net Income 63 89 72 224
 
Separation Costs, Net of Tax 4 4 3 11
 
Restructuring & Realignment, Net of Tax - - 4 4
         
Adjusted Net Income before Special Tax Items   67   93     79     239
 
Special Tax Items - (1 ) 4 3
         
Adjusted Net Income   67   92     83     242
 
Diluted Earnings per Share $ 0.34 $ 0.48 $ 0.38 $ 1.20
 
Separation Costs per Share $ 0.02 $ 0.02 $ 0.02 $ 0.06
 
Restructuring & Realignment Costs per Share $ 0.00 $ 0.00   $ 0.02   $ 0.02
 
Adjusted Diluted EPS before Special Tax Items $ 0.36 $ 0.50 $ 0.42 $ 1.28
 
Special Tax Items per Share $ 0.00   ($0.01 ) $ 0.02   $ 0.01
 
Adjusted Diluted EPS $ 0.36 $ 0.49   $ 0.44   $ 1.29
       
Q1 2011 Q2 2011 Q3 2011 YTD 2011
 
Net Income 78 72 77 227
 
Separation Costs, Net of Tax 2 27 25 54
         
Adjusted Net Income before Special Tax Items   80   99     102     281
 
Special Tax Items - 4 (1 ) 3
         
Adjusted Net Income   80   103     101     284
 
Diluted Earnings per Share $ 0.42 $ 0.39 $ 0.42 $ 1.23
 
Separation Costs per Share $ 0.01 $ 0.15   $ 0.13   $ 0.29
 
Adjusted Diluted EPS before Special Tax Items $ 0.43 $ 0.54 $ 0.55 $ 1.52
 
Special Tax Items per Share $ 0.00 $ 0.02     ($0.01 ) $ 0.01
 
Adjusted Diluted EPS $ 0.43 $ 0.56   $ 0.54   $ 1.53
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
                 
Q3 YTD
'12     '11   '12     '11  
Total Revenue
• Total Xylem 931 939 2,822 2,800
• Water Infrastructure 595 584 1,788 1,737
• Applied Water 350 368 1,078 1,108
                 
Operating Income
• Total Xylem 111 79 339 296
• Water Infrastructure 85 87 253 245
• Applied Water 43 37 135 133
 
Operating Margin
• Total Xylem 11.9 % 8.4 % 12.0 % 10.6 %
• Water Infrastructure 14.3 % 14.9 % 14.1 % 14.1 %
• Applied Water   12.3 %   10.0 %   12.5 %   12.0 %
 
Separation Costs
• Total Xylem 4 46 15 67
• Water Infrastructure - 8 3 10
• Applied Water 1 9 2 9
 
Restructuring & Realignment Costs
• Total Xylem 5 - 5 -
• Water Infrastructure 4 - 4 -
• Applied Water - - - -
                 
Adjusted Operating Income*
• Total Xylem 120 125 359 363
• Water Infrastructure 89 95 260 255
• Applied Water 44 46 137 142
 
Adjusted Operating Margin*
• Total Xylem 12.9 % 13.3 % 12.7 % 13.0 %
• Water Infrastructure 15.0 % 16.3 % 14.5 % 14.7 %
• Applied Water   12.6 %   12.5 %   12.7 %   12.8 %
 
 
*Adjusted Operating Income excludes non-recurring separation, restructuring & realignment costs
 
Xylem Inc. Non-GAAP Reconciliation
Normalized and Adjusted Diluted EPS
($ Millions, except per share amounts)
                   
 
 
                                             
                                   
Q3 2011 Q3 2012
As Reported Adjustments Adjusted Adjustments Normalized As Reported Adjustments Adjusted
Total Revenue 939 939 939 931 931
Operating Income 79 46 a 125 (8 ) c 117 111 9 a 120
Operating Margin 8.4 % 13.3 % 12.5 % 11.9 % 12.9 %
Interest Expense (1 ) (1 ) (13 ) d (14 ) (14 ) (14 )
Other Non-Operating Income (Expense)   4       4       4     3       3  
Income before Taxes   82     46     128     (21 )   107   100 9 109
Provision for Income Taxes   (5 )   (22 ) b   (27 )   4   e   (23 )   (28 )   2 b   (26 )
Net Income   77     24     101     (17 )   84     72     11   83  
Diluted Shares     184.6                         184.6       186.3             186.3  
Diluted EPS   $ 0.42     $ 0.12       $ 0.54       $ (0.09 )     $ 0.45     $ 0.38     $ 0.06     $ 0.44  
 
a One time separation, restructuring & realignment costs
b Tax impact of one time separation costs and special tax items
c

Incremental stand-alone costs incurred in 2012

d Incremental interest expense on long-term debt entered into in conjunction with the spin
e

Tax impact of incremental interest expense and stand-alone costs incurred in 2012

 
 
Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
For The Nine Months Ended September 30, 2012 & 2011
($ Millions)
   
 
Nine Months Ended
2012 2011
 
Net Cash - Operating Activities 230 252
 
Capital Expenditures (81 ) (79 )
   
Free Cash Flow, including separation costs 149 173
 
Cash Paid for Separation Costs (incl. Capex) 22 62
   
Free Cash Flow, excluding separation costs 171   235  
 
Net Income 224 227
 
Separation Costs, net of tax (incl. tax friction) 11   54  
 
Adjusted Net Income 235   281  
 
Free Cash Flow Conversion 73 % 84 %
 
Xylem Inc. Non-GAAP Reconciliation
Guidance
($ Millions, except per share amounts)
                 
 
Illustration of Mid Point Guidance
2012 Guidance
                                 
FY '11 FY '12
As Reported Adjustments Adjusted Adjustments Normalized As Projected Adjustments Adjusted
Total Revenue 3,803 3,803 3,803 3,800 3,800
Segment Operating Income 503 29 a 532 (10 ) d 522 516 25 h,i 541
Segment Operating Margin 13.2 % 14.0 % 13.7 % 13.6 % 14.2 %
Corporate Expense   108     (58 ) b   50     18   e 68   68   (15 ) h 53  
Operating Income   395     87     482     (28 ) 454   448   40   488  
Operating Margin 10.4 % 12.7 % 11.9 % 11.8 % 12.8 %
Interest Expense (17 ) (17 ) (39 ) f (56 ) (54 ) (54 )
Other Non-Operating Income (Expense)   5       5     5   (1 )   (1 )
Income before Taxes   383     87     470     (67 ) 403   393 40 433
Provision for Income Taxes   (104 )   (8 ) c   (112 )   16   g (96 ) (99 ) (7 ) j (106 )
Net Income   279     79     358     (51 ) 307   294   33   327  
Diluted Shares     185.3                     185.3     186.2           186.2  
Diluted EPS   $ 1.50     $ 0.43       $ 1.93     $ (0.27 )     1.66     1.58     0.18       1.76  
 
a One time separation costs incurred at the segment level
b One time separation costs incurred at the corporate level
c Net tax impact of above items, plus the addition of 2011 special tax items
d

Incremental stand-alone costs to be incurred in 2012 at the segment level ($10M)

e

Incremental stand-alone costs to be incurred in 2012 at the corporate level ($18M)

f Incremental interest expense on long-term debt to be incurred in 2012
g

Tax impact of incremental interest expense and stand-alone costs to be incurred in 2012

h Expected one time separation costs of $5M and $15M to be incurred at the segments and headquarters, respectively.
i Restructuring & realignment costs of $20M to be incurred at the segments.
j Tax impact of one time separation, restructuring & realignment costs expected to be incurred in 2012 and tax special items realized through Q3 2012.
 
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
         
 
        Mid Point Guidance
2008   2009   2010   2011   2012E
 
Revenue 3,291 2,849 3,202 3,803 3,800
         
Operating Income 315   276   388   395   448  
 
Operating Margin 9.6 % 9.7 % 12.1 % 10.4 % 11.8 %
 
Restructuring & Realignment 41 31 15 - 20
Separation Costs - - - 87 20
         
Adjusted Operating Income 356   307   403   482   488  
 
Adjusted Operating Margin 10.8 % 10.8 % 12.6 % 12.7 % 12.8 %
 

Stand-alone Costs

- - - 5 28
         

Adj. Operating Income, excl. Stand-alone Costs

356   307   403   487   516  
 

Adjusted Operating Margin, excl. Stand-alone Costs

10.8 % 10.8 % 12.6 % 12.8 % 13.6 %
 




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