Xylem Inc. Reports Second Quarter 2013 Results

Xylem Inc. (NYSE: XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported second quarter 2013 net income of $46 million, or $0.25 per share. Adjusted net income was $66 million, or $0.36 per share, excluding the impact of special items that included restructuring and realignment charges, and special tax items. Second quarter revenue was $960 million, down $6 million from the second quarter 2012. Strength in the company’s U.S. residential, commercial and agriculture business was more than offset by continued softness in Europe, as well as in the public utilities and industrial markets. Second quarter 2013 adjusted operating margins were 10.2 percent, excluding the impact of restructuring and realignment costs, down 380 basis points resulting from lower volume and continued investments in growth initiatives, the unfavorable impact of foreign exchange rates, and other items.

"While our second quarter results were lower than expected, we captured important contract wins in June, resulting in record orders of more than $1 billion in the quarter,” said Gretchen McClain, president and chief executive officer of Xylem Inc. “We continue to take strong and decisive actions to position the company for efficient operation and profitable growth. While we’re seeing the initial benefits from our on-going restructuring and organizational realignment, we are accelerating additional short- and long-term actions to further reduce our cost base and drive more efficiencies throughout our business.”

McClain said the company expects to benefit from investments in growth initiatives and from continued efforts to transform the business and improve growth execution.

“We are encouraged by our second quarter order rate and several new products that we launched during the second quarter, including our ‘smart’ dewatering solutions from Flygt and Godwin that are efficient, compact and meet our customers’ needs for more reliable and durable technologies,” McClain said. “These new products and some key contract wins give us confidence in an improved second half of the year and position us for long-term growth.”

Notable business wins in the second quarter include:

  • The company began working with its local partner Visenti in Singapore to monitor and improve that country’s water infrastructure and help preserve its limited water supply;
  • In China, Xylem was awarded a large contract from the Beijing Drainage Group to improve downtown Beijing water stations’ storage capability by installing its Flygt pumps;
  • In Spain, the company received its first order for the newly launched open channel ultraviolet disinfection system, WEDECO Duron;
  • The company won several large orders for industrial fire protection systems with oil and gas giant CNOOC in China; and
  • Xylem also won a contract for a pre-treatment system to remove harmful microorganisms from seawater prior to desalination in the United Arab Emirates.

Full-year 2013 Outlook

Xylem’s full-year revenues are now expected to be approximately $3.7 billion, and adjusted net income is expected to be in the range of $260 to $279 million, or $1.40 to $1.50 per share, down from the earlier projection of adjusted net income of $1.79 to $1.89 per share. Full-year GAAP net income is now anticipated to be in the range of $205 to $237 million, or $1.10 to $1.27 per share, which includes $60 to $80 million of restructuring and realignment costs.

Second Quarter Segment Results

Water Infrastructure

Xylem’s Water Infrastructure segment consists of its businesses serving clean water delivery, wastewater transport and treatment, dewatering and analytical instrumentation.
  • Second quarter 2013 revenue was $596 million, down 6 percent organically compared with the second quarter 2012, reflecting U.S. industrial weakness, European economic challenges and decreased treatment project shipments.
  • Second quarter adjusted segment operating income was $63 million. Adjusted operating margin was 10.6 percent, down 480 basis points from last year reflecting lower volumes, acquisition impacts, continued investments, unfavorable foreign exchange rates, and other items.

Applied Water

Xylem’s Applied Water segment consists of its portfolio of businesses in residential and commercial building services, industrial and agricultural applications.
  • Second quarter 2013 revenue was $381 million, up 1 percent organically compared with the second quarter 2012, reflecting strong growth in U.S. residential, commercial and agricultural end markets, partially offset by weak industrial demand and European economic challenges.
  • Second quarter adjusted segment operating income was $51 million. Adjusted operating margin was 13.4 percent, down 50 basis points from last year reflecting higher volume more than offset by continued investment and other items.

Supplemental information on Xylem’s second quarter earnings and reconciliations for certain non-GAAP items are posted at http://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. Xylem is headquartered in White Plains, N.Y., with 2012 annual revenues of $3.8 billion and approximately 12,900 employees worldwide. In 2012, Xylem was named to the Dow Jones Sustainability World Index for advancing sustainable business practices and solutions 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 in 2011, 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.
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)
       
Three Months, Six Months,
For the period ended June 30,     2013     2012 2013     2012
Revenue $ 960 $ 966 $ 1,839 $ 1,891
Cost of revenue 589   583   1,134   1,145  
Gross profit 371 383 705 746
Selling, general and administrative expenses 252 220 488 451
Research and development expenses 28 28 54 56
Restructuring charges 20

25
Separation costs 1   6   2   11  
Operating income 70 129 136 228
Interest expense 14 13 27 27
Other non-operating income (expense), net 1  

(1
) (1 ) (2 )
Income before taxes 57 115 108 199
Income tax expense 11   26   21   47  
Net income $ 46   $ 89   $ 87   $ 152  
Earnings per share:
Basic $ 0.25 $ 0.48 $ 0.47 $ 0.82
Diluted $ 0.25 $ 0.48 $ 0.47 $ 0.82
Weighted average number of shares:
Basic 185.4 185.8 185.6 185.6
Diluted 186.1 186.2 186.3 186.1
Dividends declared per share $ 0.1164 $ 0.1012 $ 0.2328 $ 0.2024
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)
         
        June 30, 2013 December 31,2012
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 360 $ 504
Receivables, less allowances for discounts and doubtful accounts of $27 and $34 in 2013 and 2012, respectively 792 776
Inventories, net 471 443
Prepaid and other current assets 113 110
Deferred income tax assets 43   41  
Total current assets 1,779 1,874
Property, plant and equipment, net 470 487
Goodwill 1,674 1,647
Other intangible assets, net 498 484
Other non-current assets 190   187  
Total assets $ 4,611   $ 4,679  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 311 $ 332
Accrued and other current liabilities 420 443
Short-term borrowings and current maturities of long-term debt 5   6  
Total current liabilities 736 781
Long-term debt 1,199 1,199
Accrued postretirement benefits 393 400
Deferred income tax liabilities 179 173
Other non-current accrued liabilities 52   52  
Total liabilities 2,559   2,605  
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 186.4 shares and 186.2 shares in 2013 and 2012, respectively 2 2
Capital in excess of par value 1,718 1,706
Retained earnings 308 264
Treasury stock – at cost 1.1 shares and 0.5 shares in 2013 and 2012, respectively (31 ) (13 )
Accumulated other comprehensive income 55   115  
Total stockholders’ equity 2,052   2,074  
Total liabilities and stockholders’ equity $ 4,611   $ 4,679  
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)
         
For the six months ended June 30,      

  2013  

  2012  
Operating Activities
Net income $ 87 $ 152
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 49 44
Amortization 25 23
Share-based compensation 12 10
Restructuring charges 25
Other, net 7 (5 )
Payments for restructuring (11 )
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (31 ) (16 )
Changes in inventories (44 ) (44 )
Changes in accounts payable (4 ) 12
Other, net (53 ) (51 )
Net Cash – Operating activities 62   125  
Investing Activities
Capital expenditures (60 ) (57 )
Acquisitions, net of cash acquired (81 )
Proceeds from the sale of property, plant and equipment 3 3
Other, net   1  
Net Cash – Investing activities (138 ) (53 )
Financing Activities
Repurchase of common stock (18 ) (3 )
Proceeds from exercise of employee stock options 1 16
Dividends paid (43 ) (39 )
Other, net   (5 )
Net Cash – Financing activities (60 ) (31 )
Effect of exchange rate changes on cash (8 ) (1 )
Net change in cash and cash equivalents (144 ) 40
Cash and cash equivalents at beginning of year 504   318  
Cash and cash equivalents at end of period $ 360   $ 358  
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 26 $ 26
Income taxes (net of refunds received) $ 52 $ 54
 
 
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.
 
“Realignment costs” defined as non-recurring costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, relocation, travel and other costs.
 
                       

Xylem Inc. Non-GAAP ReconciliationReported 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) = (F - C) / A
 

 

 

 

 

 
Orders Orders

Change

2013 v. 2012

% Change

2013 v. 2012

Acquisitions /

Divestitures
FX Contribution Eliminations

Change

Adj. 2013 v. 2012

% Change

Adj. 2013 v. 2012
2013 2012

Six Months Ended June 30
 
Xylem Inc. 1,971 1,974 (3 ) 0 % (51 ) - - (54 ) -3 % 0 %
 
Water infrastructure 1,248 1,255 (7 ) -1 % (51 ) 1 - (57 ) -5 % 0 %
Applied Water 756 752 4 1 % - (1 ) - 3 0 % 0 %
 

Quarter Ended June 30
 
Xylem Inc. 1,009 970 39 4 % (25 ) (2 ) - 12 1 % 4 %
 
Water infrastructure 647 617 30 5 % (25 ) (1 ) - 4 1 % 5 %
Applied Water 378 370 8 2 % - (1 ) 1 8 2 % 2 %
 

Quarter Ended March 31
 
Xylem Inc. 962 1,004 (42 ) -4 % (26 ) 2 - (66 ) -7 % -4 %
 
Water infrastructure 601 638 (37 ) -6 % (26 ) 2 - (61 ) -10 % -5 %
Applied Water 378 382 (4 ) -1 % - - (1 ) (5 ) -1 % -1 %
 
 
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) = (F - C) / A
 
Revenue Revenue

Change2013 v. 2012

% Change2013 v. 2012

Acquisitions /

Divestitures

FX Contribution

Eliminations

ChangeAdj. 2013 v. 2012

% ChangeAdj. 2013 v. 2012
2013 2012

Six Months Ended June 30
 
Xylem Inc. 1,839 1,891 (52 ) -3 % (46 ) (2 ) - (100 ) -5 % -3 %
 
Water infrastructure 1,147 1,193 (46 ) -4 % (46 ) (1 ) - (93 ) -8 % -4 %
Applied Water 726 728 (2 ) 0 % - (1 ) (4 ) (7 ) -1 % -1 %
 

Quarter Ended June 30
 
Xylem Inc. 960 966 (6 ) -1 % (23 ) (4 ) - (33 ) -3 % -1 %
 
Water infrastructure 596 609 (13 ) -2 % (23 ) (2 ) - (38 ) -6 % -2 %
Applied Water 381 373 8 2 % - (1 ) (2 ) 5 1 % 1 %
 

Quarter Ended March 31
 
Xylem Inc. 879 925 (46 ) -5 % (23 ) 2 - (67 ) -7 % -5 %
 
Water infrastructure 551 584 (33 ) -6 % (23 ) 1 - (55 ) -9 % -5 %
Applied Water 345 355 (10 ) -3 % - - (2 ) (12 ) -3 % -3 %
 
 
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.
 
                 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
               
Q2 Q2 YTD

'13

'12

'13

'12
Total Revenue
• Total Xylem 960 966 1,839 1,891
• Water Infrastructure 596 609

 
1,147 1,193
• Applied Water 381 373

 
726 728
                           
Operating Income
• Total Xylem 70 129 136 228
• Water Infrastructure 41 93

 
83 167
• Applied Water 45 52

 
85 92
 
Operating Margin
• Total Xylem 7.3% 13.4% 7.4% 12.1%
• Water Infrastructure 6.9% 15.2% 7.2% 14.0%
• Applied Water       11.8%     13.9%     11.7%     12.6%
 
Separation Costs
• Total Xylem - 6 - 11
• Water Infrastructure - 1 - 3
• Applied Water - - - 1
 
Restructuring & Realignment Costs
• Total Xylem 28 - 40 -
• Water Infrastructure 22 - 32 -
• Applied Water 6 - 8 -
                           
Adjusted Operating Income*
• Total Xylem 98 135 176 239
• Water Infrastructure 63 94

 
115 170
• Applied Water 51 52

 
93 93
 
Adjusted Operating Margin*
• Total Xylem 10.2% 14.0% 9.6% 12.6%
• Water Infrastructure 10.6% 15.4% 10.0% 14.2%
• Applied Water       13.4%     13.9%     12.8%     12.8%
 

*Adjusted Operating Income excludes restructuring & realignment costs in 2013 and excludes non-recurring separation costs in 2012.
 

Xylem Inc. Non-GAAP Reconciliation

Adjusted Diluted EPS

($ Millions, except per share amounts)
                                 
 
                                   
Q2 2012 Q2 2013
As Reported Adjustments Adjusted As Reported Adjustments Adjusted
Total Revenue 966 966 960 960
Operating Income 129 6 a 135 70 28 c 98
Operating Margin 13.4 % 14.0 % 7.3 % 10.2 %
Interest Expense (13 ) (13 ) (14 ) (14 )
Other Non-Operating Income (Expense)   (1 )     (1 )   1       1  
Income before Taxes   115     6     121   57 28 85
Provision for Income Taxes   (26 )   (3 ) b   (29 )   (11 )   (8 ) d   (19 )
Net Income   89     3     92     46     20     66  
Diluted Shares         186.2                   186.2             186.1                   186.1  
Diluted EPS       $ 0.48         $ 0.01         $ 0.49           $ 0.25         $ 0.11         $ 0.36  
 
 
 
 
                                   
Q2 YTD 2012 Q2 YTD 2013
As Reported Adjustments Adjusted As Reported Adjustments Adjusted
Total Revenue 1,891 1,891 1,839 1,839
Operating Income 228 11 a 239 136 40 c 176
Operating Margin 12.1 % 12.6 % 7.4 % 9.6 %
Interest Expense (27 ) (27 ) (27 ) (27 )
Other Non-Operating Income (Expense)   (2 )     (2 )   (1 )     (1 )
Income before Taxes   199     11     210     108     40     148  
Provision for Income Taxes   (47 )   (4 ) b   (51 )   (21 )   (11 ) d   (32 )
Net Income   152     7     159     87     29     116  
Diluted Shares         186.1                   186.1             186.3                   186.3  
Diluted EPS       $ 0.82         $ 0.03         $ 0.85           $ 0.47         $

0.15
        $

0.62
 
 
 

a  One time separation costs

b  Net tax impact of separation costs and special tax items

c  Restructuring & realignment costs

d  Net tax impact of restructuring & realignment costs and special tax items
 
       
Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
($ Millions)
 
 

  Six Months Ended  
2013 2012
 
Net Cash - Operating Activities $ 62 $ 125
 
Capital Expenditures (60 ) (57 )
   
Free Cash Flow, including separation costs 2 68
 
Cash Paid for Separation Costs (incl. Capex) - 18
   
Free Cash Flow, excluding separation costs* $ 2   $ 86  
 
Net Income 87 152
 
Separation Costs, net of tax (incl. tax friction)   -     8  
 
Net Income, excluding separation costs* $ 87   $ 160  
 
Free Cash Flow Conversion   2 %   54 %
 
* Separation costs are not excluded in 2013
 
                               

Xylem Inc. Non-GAAP Reconciliation

Guidance

($ Millions, except per share amounts)
 
 
Illustration of Mid Point Guidance
2013 Guidance                                                
                                   
FY '12 FY '13
As Reported Adjustments Adjusted As Projected Adjustments Adjusted
Total Revenue 3,791 3,791 3,720 3,720
Segment Operating Income 512 30 a 542 391 70 c 461
Segment Operating Margin 13.5 % 14.3 % 10.5 % 12.4 %
Corporate Expense   69     (16 ) b   53     63     -     63  
Operating Income   443     46     489     328     70     398  
Operating Margin 11.7 % 12.9 % 8.8 % 10.7 %
Interest Expense (55 ) (55 ) (55 ) (55 )
Other Non-Operating Income (Expense)   -       -     (2 )     (2 )
Income before Taxes   388     46     434   271 70 341
Provision for Income Taxes   (91 )   (13 ) d   (104 )   (50 )   (22 ) d   (72 )
Net Income   297     33     330     221     48     269  
Diluted Shares         186.2                   186.2           186.4                   186.4  
Diluted EPS       $ 1.59         $ 0.18         $ 1.77         $ 1.19         $ 0.27         $ 1.45  
 
a   One time separation, restructuring and realignment costs incurred at the segment level
b One time separation, restructuring and realignment costs incurred at the corporate level
c Restructuring and realignment costs incurred at the segment level
d Net tax impact of above items, plus the addition of special tax items
 
 
Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
                         
 
          Mid Point Guidance
2008 2009 2010 2011 2012 2013E
 
Revenue 3,291 2,849 3,202 3,803 3,791 3,720
           
Operating Income 315 276 388 395 443 328
 
Operating Margin 9.6% 9.7% 12.1% 10.4% 11.7% 8.8%
 
Restructuring & Realignment 41 31 15 - 24 70
Separation Costs* - - - 87 22 -
           
Adjusted Operating Income 356 307 403 482 489 398
 
Adjusted Operating Margin 10.8% 10.8% 12.6% 12.7% 12.9% 10.7%
 

Stand-alone Costs
- - - 5 28 -
           

Adj. Operating Income, excl. Stand-alone Costs
356 307 403 487 517 398
 

Adjusted Operating Margin, excl. Stand-alone Costs
10.8% 10.8% 12.6% 12.8% 13.6% 10.7%
 
* 2013 separation costs are not excluded from adjusted operating income.

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