OREANDA-NEWS. Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported second quarter 2016 net income of $71 million, or $0.39 per share, a decrease of five percent year-over-year reflecting debt refinancing costs and higher restructuring and realignment charges. Excluding those and other special charges, adjusted net income in the quarter was $87 million or $0.48 per share, a 12-percent increase over the prior year period. Second quarter revenue was $932 million, an increase of one percent, or three percent in constant currency, which includes one point of growth attributable to acquisitions. Revenue growth reflects primarily a robust public utility end market globally, with particular strength in the U.S. Reported operating margin in the quarter expanded 40 basis points to 11.7 percent. On an adjusted basis, operating margin grew 100 basis points to 13 percent as strong execution on productivity initiatives more than offset inflation and funded targeted investments in strategic growth initiatives.

“With our second quarter results, we are continuing to build a compelling track record of growth that reflects a strong focus on elevating our execution and driving productivity to expand margins,” said Patrick Decker, Xylem President and Chief Executive Officer. “We continued to capitalize on robust growth in the global public utility sector, which helped to offset softness in the industrial end market. Our teams also delivered strong performance in executing against our productivity initiatives. These results enabled us to continue to invest in key growth initiatives, which will drive our long-term performance.”

Full-year 2016 Outlook

Xylem reaffirmed its forecast of full-year 2016 revenue of approximately $3.7 billion, including approximately one-percent growth from completed acquisitions and the unfavorable impacts of foreign exchange. On an organic basis, Xylem’s revenue growth now is anticipated to be in the range of two to three percent.

Xylem is narrowing the range of its full-year earnings outlook, while maintaining the same adjusted EPS mid-point. Xylem now expects to generate full-year 2016 adjusted operating income of $495 million to $510 million, or adjusted EPS of $2.00 to $2.06. The Company’s adjusted earnings outlook continues to exclude projected restructuring and realignment costs of approximately $25 million for the year. 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 integration and acquisition-related costs, special charges and discrete tax impacts.

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 2016 Water Infrastructure revenue was $566 million, up three percent over the prior year period on a reported basis and up five percent in constant currency, which includes two points of growth attributable to acquisitions. This growth reflects continued strength in the public utility end market, which was up 15 percent on a global basis in the quarter and 22 percent in the U.S. In addition, major projects in the Emerging Markets, particularly in India, contributed to the gains. This progress was partially offset by weakness in the industrial end market, notably the ongoing declines in oil and gas in North America and the global mining sector.
  • Reported segment operating income was $70 million in the second quarter, up from $65 million in the prior year. Excluding restructuring, realignment and special charges, adjusted segment operating income was$79 million, a 15-percent increase over the $69 million generated in the comparable period a year ago. Operating margin for the quarter increased 60 basis points to 12.4 percent, driven primarily by the impact of cost savings and volume leverage, which enabled the Company to continue to invest in strategic growth initiatives. In addition, these drivers more than offset cost inflation, increased restructuring and realignment charges, and acquisition costs. Similarly, strong productivity and volume growth drove a 150-basis-point expansion in the segment adjusted operating margin to 14 percent.

Applied Water

Xylem’s Applied Water segment consists of its portfolio of businesses in residential and commercial building services, and industrial and agricultural applications.

  • Second quarter 2016 revenue was $366 million, down from $369 million in the prior year period and flat in constant currency. Segment sales in Western Europe grew 14 percent as new product sales and channel investments helped drive share gains in the industrial and commercial end markets. This growth was offset by declines in the U.S. and China.
  • Segment operating income was $51 million in the second quarter, flat versus second quarter 2015. Adjusted segment operating income, which excludes restructuring and realignment charges, grew year over year by $1 million to $54 million, reflecting strong productivity and cost control. Segment operating margin increased 10 basis points to 13.9 percent. A strong focus on reducing costs drove this margin expansion, which was partially offset by inflation, ongoing investment in growth initiatives and lower volume. On an adjusted basis, segment operating margin grew 40 basis points to 14.8 percent.

About Xylem

Xylem (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 Rye Brook, New York, with 2015 revenue of $3.7 billion and more than 12,500 employees worldwide. Xylem was named to the Dow Jones Sustainability Index, North America for the last four years for advancing sustainable business practices and solutions worldwide, and the Company has satisfied the requirements to be a constituent of the FTSE4Good Index Series each year since 2013.

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. 

Forward-Looking Statements

This press release 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,” “forecast,” “believe,” “target,” “will,” “could,” “would,” “should” 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 statements about the capitalization of Xylem Inc. (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: economic, political and other risks associated with our international operations, including military actions, economic sanctions or trade embargoes that could affect customer markets, and non-compliance with laws, including foreign corrupt practice laws, 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; ability to retain and attract 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; changes in the value of goodwill or intangible assets; risks relating to product defects, product liability and recalls; governmental investigations; security breaches or other disruptions of our information technology systems; litigation and contingent liabilities; and other factors set forth in Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2015, and those described from time to time in subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements made herein are based on information currently available to the Company. 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.

   
   

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,     2016   2015     2016   2015  
Revenue     $ 932   $ 920     $ 1,779   $ 1,757  
Cost of revenue     563   572     1,081   1,094  
Gross profit     369   348     698   663  
Selling, general and administrative expenses     227   218     446   424  
Research and development expenses     27   25     52   48  
Restructuring charges     6   1     12   4  
Operating income     109   104     188   187  
Interest expense     20   14     34   28  
Other non-operating income, net     1   1     1   —  
Gain from sale of businesses     —   —     —   9  
Income before taxes     90   91     155   168  
Income tax expense     19   17     18   30  
Net income     $ 71   $ 74     $ 137   $ 138  
Earnings per share:                      
Basic     $ 0.39   $ 0.41     $ 0.77   $ 0.76  
Diluted     $ 0.39   $ 0.41     $ 0.76   $ 0.76  
Weighted average number of shares:                      
Basic     179.1   181.5     178.8   181.8  
Diluted     179.9   182.3     179.6   182.7  
Dividends declared per share     $ 0.1549   $ 0.1408     $ 0.3098   $ 0.2816  
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)
           
     

   June 30,   
   2016   

   December 31,
2015
           
ASSETS          
Current assets:          
Cash and cash equivalents     $ 586     $ 680  
Receivables, less allowances for discounts and doubtful accounts of $26 and $33 in 2016 and 2015, respectively     784     749  
Inventories     483     433  
Prepaid and other current assets     154     143  
Total current assets     2,007     2,005  
Property, plant and equipment, net     438     439  
Goodwill     1,616     1,584  
Other intangible assets, net     453     435  
Other non-current assets     180     194  
Total assets     $ 4,694     $ 4,657  
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable     $ 339     $ 338  
Accrued and other current liabilities     390     407  
Short-term borrowings and current maturities of long-term debt     91     78  
Total current liabilities     820     823  
Long-term debt     1,143     1,196  
Accrued postretirement benefits     336     335  
Deferred income tax liabilities     117     118  
Other non-current accrued liabilities     104     101  
Total liabilities     2,520     2,573  
           
Stockholders’ equity:          
Common Stock – par value $0.01 per share:          
Authorized 750.0 shares, issued 191.1 shares and 190.2 shares in 2016 and 2015, respectively     2     2  
Capital in excess of par value     1,860     1,834  
Retained earnings     966     885  
Treasury stock – at cost 11.9 shares and 11.8 shares in 2016 and 2015, respectively     (402 )   (399 )
Accumulated other comprehensive loss     (252 )   (238 )
Total stockholders’ equity     2,174     2,084  
Total liabilities and stockholders’ equity     $ 4,694     $ 4,657  
 
 

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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

     2016     

  

     2015     
Operating Activities          
Net income     $ 137     $ 138  
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation     41     47  
Amortization     24     22  
Share-based compensation     10     8  
Restructuring charges     12     4  
Gain from sale of businesses     —     (9 )
Other, net     8     3  
Payments for restructuring     (6 )   (9 )
Changes in assets and liabilities (net of acquisitions):          
Changes in receivables     (19 )   (28 )
Changes in inventories     (39 )   (27 )
Changes in accounts payable     9     3  
Other, net     (52 )   (29 )
Net Cash – Operating activities     125     123  
Investing Activities          
Capital expenditures     (62 )   (57 )
Acquisition of business, net of cash acquired     (70 )   —  
Proceeds from sale of businesses     —     1  
Other, net     5     3  
Net Cash – Investing activities     (127 )   (53 )
Financing Activities          
Short-term debt issued     89     —  
Short-term debt repaid     (77 )   (2 )
Long-term debt issued     540     —  
Long-term debt repaid     (608 )   —  
Repurchase of common stock     (3 )   (53 )
Proceeds from exercise of employee stock options     16     9  
Dividends paid     (56 )   (51 )
Other, net     1     1  
Net Cash – Financing activities     (98 )   (96 )
Effect of exchange rate changes on cash     6     (37 )
Net change in cash and cash equivalents     (94 )   (63 )
Cash and cash equivalents at beginning of year     680     663  
Cash and cash equivalents at end of period     $ 586     $ 600  
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Interest     $ 34     $ 26  
Income taxes (net of refunds received)     $ 49     $ 42  
   
   
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) = B+C+D   (F) = E/A     (G) = (E - C) / A  
                                             
              Change   % Change    

Acquisitions /

       Change   % Change        
      Revenue   Revenue   2016 v. 2015   2016 v. 2015    

Divestitures

   FX Contribution   Adj. 2016 v. 2015   Adj. 2016 v. 2015        
      2016   2015                                  
                                             

Six Months Ended June 30

                                            
                                             
Xylem Inc.     1,779   1,757   22     1 %     (17 )   40   45     3 %     4 %  
                                             
Water Infrastructure     1,080   1,051   29     3 %     (17 )   32   44     4 %     6 %  
Applied Water     699   706   (7 )   -1 %     -     8   1     0 %     0 %  
                                             

Quarter Ended June 30

                                            
                                             
Xylem Inc.     932   920   12     1 %     (11 )   13   14     2 %     3 %  
                                             
Water Infrastructure     566   551   15     3 %     (11 )   11   15     3 %     5 %  
Applied Water     366   369   (3 )   -1 %     -     2   (1 )   0 %     0 %  
                                             

Quarter Ended March 31

                                            
                                             
Xylem Inc.     847   837   10     1 %     (6 )   27   31     4 %     4 %  
                                             
Water Infrastructure     514   500   14     3 %     (6 )   21   29     6 %     7 %  
Applied Water     333   337   (4 )   -1 %     -     6   2     1 %     1 %  
   
   
Xylem Inc. Non-GAAP Reconciliation  
Adjusted Operating Income  
($ Millions)  
                     
      Q1     Q2     YTD  
     

2016

  

2015

    

2016

  

2015

    

2016

  

2015

  
Total Revenue                                
• Total Xylem     847   837     932   920     1,779   1,757  
• Water Infrastructure     514   500     566   551     1,080   1,051  
• Applied Water     333   337     366   369     699   706  
   
Operating Income                                
• Total Xylem     79   83     109   104     188   187  
• Water Infrastructure     54   47     70   65     124   112  
• Applied Water     39   46     51   51     90   97  
• Total Segments     93   93     121   116     214   209  
                                 
Operating Margin                                
• Total Xylem     9.3%   9.9%     11.7%   11.3%     10.6%   10.6%  
• Water Infrastructure     10.5%   9.4%     12.4%   11.8%     11.5%   10.7%  
• Applied Water     11.7%   13.6%     13.9%   13.8%     12.9%   13.7%  
• Total Segments     11.0%   11.1%     13.0%   12.6%     12.0%   11.9%  
                                 
Special Charges                                
• Total Xylem     4   1     1   -     5   1  
• Water Infrastructure     4   1     1   -     5   1  
• Applied Water     -   -     -   -     -   -  
• Total Segments     4   1     1   -     5   1  
                                 
Restructuring & Realignment Costs                                
• Total Xylem     9   6     11   6     20   12  
• Water Infrastructure     4   5     8   4     12   9  
• Applied Water     3   1     3   2     6   3  
• Total Segments     7   6     11   6     18   12  
   
Adjusted Operating Income*                                
• Total Xylem     92   90     121   110     213   200  
• Water Infrastructure     62   53     79   69     141   122  
• Applied Water     42   47     54   53     96   100  
• Total Segments     104   100     133   122     237   222  
                                 
Adjusted Operating Margin*                                
• Total Xylem     10.9%   10.8%     13.0%   12.0%     12.0%   11.4%  
• Water Infrastructure     12.1%   10.6%     14.0%   12.5%     13.1%   11.6%  
• Applied Water     12.6%   13.9%     14.8%   14.4%     13.7%   14.2%  
• Total Segments     12.3%   11.9%     14.3%   13.3%     13.3%   12.6%  
 
*Adjusted Operating Income excludes restructuring & realignment costs and special charges, which consisted of initial acquisition costs and other acquisition related charges in 2016 and other special non-operating items in 2015.
                                   
                                   
Xylem Inc. Non-GAAP Reconciliation
Adjusted Diluted EPS
($ Millions, except per share amounts)
               
        Q2 2016     Q2 2015
       

As Reported

  

Adjustments

    

Adjusted

    

As Reported

  

Adjustments

    

Adjusted
Total Revenue         932             932         920             920  
Operating Income         109       12   a     121         104       6   a     110  
Operating Margin         11.7 %           13.0 %       11.3 %           12.0 %
Interest Expense         (20 )     8   b     (12 )       (14 )           (14 )
Other Non-Operating Income (Expense)         1             1         1       1   b     2  
Income before Taxes         90       20         110         91       7         98  
Provision for Income Taxes         (19 )     (4 ) c     (23 )       (17 )     (3 ) c     (20 )
Net Income         71       16         87         74       4         78  
Diluted Shares         179.9             179.9         182.3             182.3  
Diluted EPS       $ 0.39     $ 0.09       $ 0.48       $ 0.41     $ 0.02       $ 0.43  
                                   
               
        Q2 YTD 2016     Q2 YTD 2015
       

As Reported

  

Adjustments

    

Adjusted

    

As Reported

  

Adjustments

    

Adjusted
Total Revenue         1,779             1,779         1,757             1,757  
Operating Income         188       25   a     213         187       13   a     200  
Operating Margin         10.6 %           12.0 %       10.6 %           11.4 %
Interest Expense         (34 )     8   b     (26 )       (28 )           (28 )
Other Non-Operating Income (Expense)         1             1         -       2   b     2  
Gain from sale of businesses         -             -         9       (9 )       -  
Income before Taxes         155       33         188         168       6         174  
Provision for Income Taxes         (18 )     (21 ) c     (39 )       (30 )     (6 ) c     (36 )
Net Income         137       12         149         138       -         138  
Diluted Shares         179.6             179.6         182.7             182.7  
Diluted EPS       $ 0.76     $ 0.07       $ 0.83       $ 0.76     $ -       $ 0.76  
a   Restructuring & realignment costs of $11 million and $6 million in the second quarter of 2016 and 2015, respectively, and special charges of $1 million of initial acquisition costs in the second quarter of 2016. Restructuring & realignment costs of $20 million and $12 million in the first half of 2016 and 2015, respectively, and special charges of $5 million of initial acquisition costs and $1 million of other special charges in the first half of 2016 and 2015, respectively.  
b   Special charges consisting of $8 million of costs related to the early extinguishment of debt for the second quarter and first half of 2016, and $1 million and $2 million of other special charges for the second quarter and first half of 2015, respectively.  
c   Net tax impact on restructuring & realignment costs of $3 million and $1 million and on special charges of $4 million and $0 million, and tax-related special items of $3 million of benefit and $2 million of expense for the second quarter of 2016 and 2015, respectively. Net tax impact on restructuring & realignment costs of $5 million and $3 million and on special charges of $5 million and $0 million, and tax-related special charges of $11 million and $3 million for the first half of 2016 and 2015, respectively.