Xylem Inc. Reports Second Quarter 2012 Results

Xylem Inc. (NYSE: XYL), a leading global water technology company focused on solving the world’s most challenging water issues, today reported second quarter revenue of $966 million, up 4 percent on a constant currency basis, down 1 percent as reported from the second quarter 2011. Second quarter net income was $89 million or $0.48 per share, up $0.09 per share or 23 percent from the same period last year. Adjusting for one-time separation costs resulting from the Xylem spinoff from ITT Corporation on October 31, 2011, and special tax items, net income was $92 million or $0.49 per share, up 4 percent or $0.02 per share over the second quarter 2011 on a normalized basis.* Recognizing soft economic conditions and the anticipated negative currency impact from the recent strengthening of the U.S. dollar, the company announced that it is revising its full-year revenue and earnings outlook downward.

"Our business operations continue to improve, even with lower than anticipated revenue, showing strong gross and operating margin improvement in this tough economy, extending a three-year positive trend: we’re seeing the benefit of disciplined cost control measures we’ve put in place,” said Gretchen McClain, president and chief executive officer of Xylem. “Our leadership team is committed to maximizing the benefit of our Customer Excellence sales initiatives to grow the top line, and we are driving operational excellence to grow the bottom line, as well as controlling costs.”

“We continue to enhance our portfolio, having just closed the acquisition of MJK Automation, a leading manufacturer of flow and level sensors, and measurement and control technology for water and wastewater applications, a business that complements our offerings in the attractive analytical instrumentation space,” McClain said. “Further, we’ve seen our business grow by 22 percent in constant currencies in the emerging markets, or 17 percent on an organic basis, enhancing our footprint, most recently with new sales and service centers in Panama and Vietnam.”

Full-year revenues are now expected to be approximately $3.8 billion, and adjusted net income is expected to be in the range of $321 to $338 million, or $1.72 to $1.82 per share, down from the earlier projection of adjusted net income of $1.80 to $1.95 per share. Full-year GAAP net income is now anticipated to be in the range of $292 to $317 million, or $1.57 to $1.70 per share, which includes $15 to $20 million of restructuring and realignment costs and $15 to $20 million of one-time separation costs. This is down from the earlier projection of GAAP net income of $1.72 to $1.89 per share.

Second Quarter Segment Results

Water Infrastructure

Xylem’s Water Infrastructure businesses provide equipment and services focused on the transport, treatment and testing of water and wastewater in the public utility and industrial markets.
  • Second quarter 2012 segment revenue was $609 million, up 1 percent as reported, and up 7 percent in constant currencies from the second quarter of 2011. A 58 percent increase in the test business, driven by the newly acquired YSI business, and 38 percent growth in the emerging markets on a constant currency basis, more than offset weakness in treatment.
  • Second quarter adjusted segment operating margin was down 50 basis points from the second quarter 2011 to 15.4 percent, driven by the impact of incremental stand-alone costs and inflation, which was partially offset by price and cost actions. Stand-alone costs negatively impacted operating margin by 70 basis points for the second quarter 2012.

Applied Water

Xylem’s Applied Water businesses provide equipment and services in the residential and commercial building services, general industrial and agricultural markets.
  • Second quarter 2012 segment revenue was $373 million, flat on a constant currency basis and down 3 percent over the second quarter of 2011, attributable to slowing commercial and residential demand, which was partially offset by strength in the U.S. industrial business.
  • Second quarter adjusted segment operating margin was 13.9 percent, up 90 basis points from the second quarter 2011, thanks to significant productivity and price initiatives which more than offset incremental stand-alone costs. Stand-alone costs negatively impacted operating margin 50 basis points for the second quarter of 2012.

More detail available

Supplemental information on Xylem’s second quarter earnings, including reconciliations for certain non-GAAP items, is posted at investors.xyleminc.com.

About Xylem

Xylem (NYSE: 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. Launched in 2011 from the spinoff of the water-related businesses of ITT Corporation, Xylem is headquartered in White Plains, N.Y., with 2011 annual revenues of $3.8 billion and 12,500 employees worldwide.

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.xyleminc.com.

Forward-Looking Statements

This document 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,” “believe,” “target” 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, but are not limited to, statements about the separation of Xylem Inc. (the “Company”) from ITT Corporation, the terms and the effect of the separation, the nature and impact of the separation, capitalization of the Company, future strategic plans and other statements that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to orders, sales, operating margins and earnings per share growth, and statements expressing general views about future operating results — are forward-looking statements.

Caution should be taken not to place undue reliance on any such forward-looking statements because they involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements. 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. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those set forth in Item 1A in our Annual Report on Form 10-K, and those described from time to time in subsequent reports filed with the Securities and Exchange Commission.

*The 2011 normalized earnings per share reflect adjustments (including one-time separation costs, 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   Six Months
For the periods ended June 30,     2012     2011     2012     2011
   
Revenue $ 966 $

971

 
$ 1,891 $

1,861

 
Cost of revenue 583   592   1,145   1,145  
Gross profit 383 379 746 716
Selling, general and administrative expenses 220 219 451 429
Research and development expenses 28 26 56 50
Separation costs 6   18   11   21  
Operating income 129 116 228 216
Interest expense 13 1 27 1
Other non-operating (expense) income, net (1 )   (2 ) 1  
Income before taxes 115 115 199 216
Income tax expense 26   43   47   66  
Net income $ 89   $ 72   $ 152   $ 150  
 
Earnings per share:
Basic $ 0.48 $ 0.39

$
0.82 $ 0.82
Diluted $ 0.48 $ 0.39

$
0.82 $ 0.82
Weighted average number of shares:
Basic 185.8 184.6 185.6 184.6
Diluted 186.2 184.6 186.1 184.6
 
Dividends declared per share $ 0.1012 $ $

0.2024
$
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)
 
  June 30,

 
December 31,
    2012   2011
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 358 $

318

 

Receivables, less allowances for discounts and doubtful accounts of $32 and $37 in 2012 and 2011, respectively
770

756
Inventories, net 467 426
Prepaid and other current assets 107 97
Deferred income tax assets   47     45  
Total current assets 1,749 1,642
 
Property, plant and equipment, net 459 463
Goodwill 1,601 1,610
Other intangible assets, net 485 505
Other non-current assets   188     173  
Total assets $ 4,482   $ 4,393  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 327 $ 322
Accrued and other current liabilities 445 490
Short-term borrowings and current maturities of long-term debt   7     5  
Total current liabilities 779 817
 
Long-term debt 1,199 1,201
Accrued postretirement benefits 313 316
Deferred income tax liability 176 165
Other non-current accrued liabilities   67     67  
Total liabilities   2,534     2,566  

Commitments and contingencies (Note 14)

Stockholders’ equity:
Common Stock – authorized 750.0 shares, par value $0.01 per share:
Issued 185.7 shares and 184.6 shares in 2012 and 2011, respectively 2 2
Capital in excess of par value 1,690 1,663
Retained earnings 153 40
Treasury stock – at cost 0.1 shares and 0 shares in 2012 and 2011, respectively (3 )

Accumulated other comprehensive income   106     122  
Total stockholders’ equity   1,948     1,827  
Total liabilities and stockholders’ equity $ 4,482   $ 4,393  
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)
 
For the six months ended June 30,   2012   2011
   
Operating Activities
Net income $ 152 $ 150

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 67 68
Share-based compensation 10 5
Payments for restructuring (6 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (16 ) (54 )
Changes in inventories (44 ) (31 )
Changes in accounts payable 12 (14 )
Changes in accrued liabilities (24 ) 3
Changes in accrued taxes (5 ) 26
Net changes in other assets and liabilities (20 ) 11
Other, net     (7 )     3  
Net Cash - Operating activities     125       161  
Investing Activities
Capital expenditures (57 ) (53 )
Proceeds from the sale of property, plant and equipment 3 5
Other, net     1        
Net Cash - Investing activities     (53 )     (48 )
Financing Activities
Net transfer to former parent (6 ) (112 )
Issuance of short-term debt 3
Principal payments of debt and capital lease obligations (3 )
Purchase of common stock (3 )
Proceeds from exercise of employee stock options 16
Dividends paid (39 )
Other, net     1        
Net Cash - Financing activities     (31 )     (112 )
Effect of exchange rate changes on cash     (1 )     6  
Net change in cash and cash equivalents 40 7
Cash and cash equivalents at beginning of year     318       131  
Cash and cash equivalents at end of year   $ 358     $ 138  

Supplemental disclosure of cash flow information:

Cash paid during the period for:
Interest $ 26 $

Income taxes (net of refunds received) $ 54 $ 18
 
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 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 one-time separation costs associated with the Xylem spin-off from ITT Corporation.
 
“Operating Income * ”, "Adjusted Operating Income" and “Adjusted EPS” defined as operating income and earnings per share, adjusted to exclude restructuring and realignment and one-time separation costs associated with the Xylem spin-off from ITT Corporation 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

Acquisitions /

FX

Adj. 2012

Adj. 2012
Orders Orders 2012 v. 2011 2012 v. 2011

Divestitures

Contribution
Eliminations

v. 2011

v. 2011
 
2012 2011

Six Months Ended June 30

 
 
Xylem Inc.

1,974

 

1,976

 
(2 ) -0.1 % (67 )

69

 
- - 0.0 % 3.4 %
 
Water infrastructure 1,255 1,244 11 0.9 % (67 ) 53 - (3 ) -0.2 % 5.1 %
Applied Water 752 764 (12 ) -1.6 % - 18 (3 ) 3 0.4 % 0.8 %
 
 

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

Acquisitions /

FX

Adj. 2012

Adj. 2012
Revenue Revenue 2012 v. 2011 2012 v. 2011

Divestitures

Contribution
Eliminations

v. 2011

v. 2011
 
2012 2011

Six Months Ended June 30

 
 
Xylem Inc.

1,891

 

1,861

 
30 1.6 % (66 )

63

 
-

27

 
1.5 % 5.0 %
 
Water infrastructure 1,193 1,153 40 3.5 % (66 ) 47 - 21 1.8 % 7.5 %
Applied Water 728 740 (12 ) -1.6 % - 18 (1 ) 5 0.7 % 0.8 %
 

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 Six Months Ended June 30, 2012 & 2011
($ Millions, except per share amounts)
 
           
Q1 2012 Q2 2012

 
YTD 2012
 
Net Income

63

 
89 152
 
Separation costs, net of tax 4 4 8
       
Adjusted Net Income before Special Tax Items   67     93  

 
  160  
 
Special Tax Items - (1 ) (1 )
       
Adjusted Net Income   67     92  

 
  159  
 
Diluted Earnings per Share $ 0.34 $ 0.48 $ 0.82
 
Separation costs per Share $ 0.02   $ 0.02   $ 0.04  
 
Adjusted diluted EPS before Special Tax Items $ 0.36 $ 0.50 $ 0.86
 
Special Tax Items per Share $ 0.00     ($0.01 )   ($0.01 )
 
Adjusted diluted EPS $ 0.36   $ 0.49   $ 0.85  
     
Q1 2011 Q2 2011

 
YTD 2011
 
Net Income 78 72 150
 
Separation costs, net of tax 2 27 29
       
Adjusted Net Income before Special Tax Items   80     99     179  
 
Special Tax Items - 4 4
       
Adjusted Net Income   80     103     183  
 
Diluted Earnings per Share $ 0.42 $ 0.39 $ 0.82
 
Separation costs per Share $ 0.01   $ 0.15   $ 0.16  
 
Adjusted diluted EPS before Special Tax Items $ 0.43 $ 0.54 $ 0.97
 
Special Tax Items per Share $ 0.00   $ 0.02   $ 0.02  
 
Adjusted diluted EPS $ 0.43   $ 0.56   $ 0.99  
 
Xylem Inc. Non-GAAP Reconciliation
Normalized and Adjusted Diluted EPS
($ Millions, except per share amounts)
 
 
         
Q2 2011 Q2 2012

As Reported
 

Adjustments
 

Adjusted
 

Adjustments
 

Normalized

As Reported
 

Adjustments
 

Adjusted
Total Revenue 971 971 971 966 966
Operating Income 116

18

 
a 134 (8 ) c 126 129 6 a 135
Operating Margin 11.9 % 13.8 % 13.0 % 13.4 % 14.0 %
Interest Expense (1 ) (1 ) (13 ) d (14 ) (13 ) (13 )
Other Non-Operating Income (Expense)   -       -       -     (1 )     (1 )
Income before Taxes   115     18     133     (21 )   112   115 6 121
Provision for Income Taxes   (43 )   13   b   (30 )   5   e   (25 )   (26 )   (3 ) b   (29 )
Net Income   72     31     103     (16 )   87     89     3     92  
Diluted Shares     184.6                       184.6         186.2             186.2  
Diluted EPS   $ 0.39     $ 0.17       $ 0.56     $ (0.09 )     $ 0.47       $ 0.48     $ 0.01       $ 0.49  
 
a One time separation 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
Segment Operating Income
($ Millions)
 
Adjusted Segment Operating Income
               
Q1 Q2 YTD

'12
 

'11

'12
 

'11

'12
 

'11
Total Revenue

• Water Infrastructure
584 551 609 602 1,193 1,153
• Applied Water 355 355 373 385 728 740
 
Operating Income

• Water Infrastructure
75 64 93 94 167 158
• Applied Water 40 46 52 50 92 96
 
Separation Costs

• Water Infrastructure
2 - 1 2 3 2
• Applied Water 1 - - - 1 -
 
Adjusted Operating Income*

• Water Infrastructure
77 64 94 96 170 160
• Applied Water 41 46 52 50 93 96
 
Operating Margin

• Water Infrastructure
12.8% 11.6% 15.2% 15.6% 14.0% 13.7%
• Applied Water 11.3% 13.0% 13.9% 13.0% 12.6% 13.0%
 
Adjusted Operating Margin*

• Water Infrastructure
13.2% 11.6% 15.4% 15.9% 14.2% 13.9%
• Applied Water 11.5% 13.0% 13.9% 13.0% 12.8% 13.0%
 
*Adjusted Operating Income excludes non-recurring separation costs
 
Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
For The Six Months Ended June 30, 2012 & 2011
($ Millions)
 
  Six Months Ended
2012   2011
 
Net Cash - Operating Activities 125 161
 
Capital Expenditures (57 ) (53 )
   
Free Cash Flow, including separation costs 68 108
 
Separation Costs (Cash Paid incl. Capex) 18 26
   
Free Cash Flow, excluding separation costs 86   134  
 
Net Income 152 150
 
Separation Costs, net of tax (incl. tax friction) 8   29  
 
Adjusted Net Income 160   179  
 
Free Cash Flow Conversion 54 % 75 %
 
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 522 524 25 h,i 549
Segment Operating Margin 13.2 % 14.0 % 13.7 % 13.8 % 14.4 %
Corporate Expense   108     (58 ) b   50     18   e 68   66   (11 ) h 55  
Operating Income   395     87     482     (28 ) 454   458   36   494  
Operating Margin 10.4 % 12.7 % 11.9 % 12.1 % 13.0 %
Interest Expense (17 ) (17 ) (39 ) f (56 ) (54 ) (54 )
Other Non-Operating Income (Expense)   5       5     5   (2 )   (2 )
Income before Taxes   383     87     470     (67 ) 403   402 36 438
Provision for Income Taxes   (104 )   (8 ) c   (112 )   16   g (96 ) (99 ) (10 ) j (109 )
Net Income   279     79     358     (51 ) 307   303   26   329  
Diluted Shares     185.3                     185.3     186.3           186.3  
Diluted EPS   $ 1.50     $ 0.43       $ 1.93     $ (0.27 )     1.66     1.63     0.14       1.77  
 
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 $7M and $11M to be incurred at the segments and headquarters, respectively.
i Restructuring & realignment costs of $18M 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 Q2 2012.

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