Xylem Inc. reports improved third quarter earnings

• Third quarter 2014 adjusted net income was $97 million or $0.53 per share, up 8 percent over third quarter 2013; GAAP net income was $106 million or $0.58 per share, up 49 percent
• Third quarter orders exceeded $1 billion, growing 8 percent year-over-year and outpacing third quarter revenue of $963 million
• Strong operational performance drove a 40 basis-point improvement in third quarter 2014 adjusted operating margin to 13.9 percent; up 330 basis points to 13.5 percent on a GAAP basis
• Company narrows guidance range for 2014 full-year adjusted earnings per share to $1.92 to $1.98; GAAP earnings per share of $1.79 to $1.88

RYE BROOK, N.Y.--(BUSINESS WIRE)--Oct. 28, 2014-- Xylem Inc. (NYSE:XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today announced third quarter 2014 net income of $106 million, or $0.58 per share. Excluding the gain on the sale of a business, impact of restructuring and realignment costs and other special charges, adjusted net income was $97 million or $0.53 per share, an increase of 4 cents or 8 percent from the comparable period in 2013. Third quarter revenue was $963 million, up 1 percent organically, reflecting strength in the U.S. and emerging markets, which was partially offset by weaker market conditions in Europe. Third quarter adjusted operating margin improved 40 basis points, driven by increased operating efficiencies and ongoing cost-reduction initiatives.

“We are continuing on a strong path and are on track to deliver on our full-year commitments. We generated strong order growth this quarter and further expanded our operating margin to a third quarter record performance,” said Patrick Decker, president and chief executive officer of Xylem. “We continued to see strength in emerging markets that, among other big wins, included a nearly $20 million order for customized column pumps as part of a hydropower dam in the Mekong River in Laos and a $7 million win in India that is part of a large project to divert excess flood water from the Narmada River.”

Decker continued, “As we look ahead to 2015, we intend to further focus on the growing strength we see in key developing markets, while improving operational execution across the Company. We are continuing to evolve our organization to ensure we have the right capabilities to solve our customers’ most challenging water issues in order to drive further growth and deliver greater shareholder value.”

Full-year 2014 Outlook

Xylem narrowed its EPS guidance, and now expects to deliver adjusted EPS of $1.92 to $1.98, reflecting 15 to 19-percent growth over its 2013 results. Full-year 2014 adjusted net income now is expected to be in the range of $355 to $365 million. Revenue is expected to be approximately $4 billion for 2014, up 2 percent versus the prior year. The Company anticipates that restructuring and realignment costs will range from $40 to $50 million for the year.

Third 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.

• The Company delivered third quarter 2014 revenue of $619 million, up 1 percent organically compared with the prior year period, with growth driven by strength in U.S. water, wastewater and dewatering transport applications, and continued strength in Xylem’s test platform. This growth was partially offset by weaker European market conditions and year-over-year timing in public utility treatment projects.
• Third quarter adjusted segment operating income increased 1 percent year-over-year to $97 million. Adjusted operating margin for the quarter increased 20 basis points to 15.7 percent, primarily driven by the impact of significant cost reductions and higher volume, which was partially offset by unfavorable mix and price.

Applied Water

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

• Third quarter 2014 revenue was $362 million, up 1 percent organically compared with the third quarter 2013. This result reflects growth across all U.S. end markets and applications, as well as continued strength in China. Partially offsetting these gains was weakness in the Company’s Southern and Eastern European markets, and Latin America.
• Third quarter adjusted segment operating income grew 20 percent to $53 million versus the comparable period last year. Adjusted operating margin grew 240 basis points to 14.6 percent, primarily driven by the impact of cost reduction actions and modest price realization.

Supplemental information on Xylem’s third quarter earnings and reconciliations for certain non-GAAP items are posted at http://investors.xyleminc.com.

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 2013 revenues of $3.8 billion and more than 12,500 employees worldwide. Xylem was named to the Dow Jones Sustainability Index for the last three years 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.xylem.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 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, 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, revenues, 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 of our Annual Report on Form 10-K for the year ended December 31, 2013, 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								Nine Months
For the periods ended September 30,		2014				2013				2014				2013
Revenue		$	963			$	965			$	2,874			$	2,804
Cost of revenue		587				581				1,768				1,715
Gross profit		376				384				1,106				1,089
Selling, general and administrative expenses		222				257				688				747
Research and development expenses		24				24				78				78
Restructuring charges		—				5				18				30
Operating income		130				98				322				234
Interest expense		14				14				41				41
Other non-operating income (expense), net		1				(1		)		1				(2		)
Gain from sale of business		11				—				11				—
Income before taxes		128				83				293				191
Income tax expense		22				10				52				31
Net income		$	106			$	73			$	241			$	160
Earnings per share:
Basic		$	0.58			$	0.39			$	1.31			$	0.86
Diluted		$	0.58			$	0.39			$	1.31			$	0.86
Weighted average number of shares:
Basic		182.2				185.2				183.4				185.5
Diluted		183.4				186.0				184.6				186.2
Dividends declared per share		$	0.1280			$	0.1164			$	0.3840			$	0.3492

XYLEM INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except per share amounts)
		September 30, 2014				December 31, 2013
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	529			$	533
Receivables, less allowances for discounts and doubtful accounts of $30 and $31 in 2014 and 2013, respectively		804				817
Inventories, net		516				475
Prepaid and other current assets		141				143
Deferred income tax assets		35				41
Total current assets		2,025				2,009
Property, plant and equipment, net		454				488
Goodwill		1,667				1,718
Other intangible assets, net		448				488
Other non-current assets		220				193
Total assets		$	4,814			$	4,896
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	314			$	332
Accrued and other current liabilities		495				479
Short-term borrowings and current maturities of long-term debt		41				42
Total current liabilities		850				853
Long-term debt		1,199				1,199
Accrued postretirement benefits		319				348
Deferred income tax liabilities		183				191
Other non-current accrued liabilities		70				64
Total liabilities		2,621				2,655
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 188.4 shares and 187.6 shares in 2014 and 2013, respectively		2				2
Capital in excess of par value		1,785				1,753
Retained earnings		575				405
Treasury stock – at cost 6.5 shares and 3.0 shares in 2014 and 2013, respectively		(218		)		(86		)
Accumulated other comprehensive income		49				167
Total stockholders’ equity		2,193				2,241
Total liabilities and stockholders’ equity		$	4,814			$	4,896

XYLEM INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
For the nine months ended September 30,		2014				2013
Operating Activities
Net income		$	241			$	160
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		70				72
Amortization		37				38
Share-based compensation		14				21
Restructuring charges		18				30
Gain from sale of businesses		(11		)		—
Other, net		(2		)		11
Payments for restructuring		(20		)		(24		)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables		(40		)		(71		)
Changes in inventories		(62		)		(59		)
Changes in accounts payable		(2		)		4
Other, net		10				(19		)
Net Cash – Operating activities		253				163
Investing Activities
Capital expenditures		(77		)		(91		)
Acquisitions of businesses and assets, net of cash acquired		—				(81		)
Proceeds from sale of business		30				—
Proceeds from the sale of property, plant and equipment		2				7
Net Cash – Investing activities		(45		)		(165		)
Financing Activities
Issuance of short-term debt		2				—
Principal payments of debt and capital lease obligations		—				(2		)
Repurchase of common stock		(132		)		(44		)
Proceeds from exercise of employee stock options		17				2
Dividends paid		(71		)		(65		)
Excess tax benefit from share based compensation		1				—
Other, net		1				—
Net Cash – Financing activities		(182		)		(109		)
Effect of exchange rate changes on cash		(30		)		1
Net change in cash and cash equivalents		(4		)		(110		)
Cash and cash equivalents at beginning of year		533				504
Cash and cash equivalents at end of period		$	529			$	394
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	36			$	37
Income taxes (net of refunds received)		$	69			$	61

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 non-recurring restructuring and realignment costs, gain on sale of business and special charges.

"Adjusted Operating Income," "Adjusted Segment Operating Income," and “Adjusted EPS” defined as operating income, segment operating income and earnings per share, adjusted to exclude non-recurring restructuring and realignment costs, gain on sale of business, special charges and tax-related special items, as applicable.

“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.

“Special charges” defined as costs incurred by the Company associated with the settlement of legal proceedings with Xylem Group LLC and certain costs incurred for the change in chief executive officer made during the third quarter of 2013, as well as costs incurred in the fourth quarter of 2013 for the contractual indemnification of federal tax obligations to ITT and costs associated with a legal judgment arising from a historical acquisition matter.

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) = (F - C) / A
					Change		% Change			Acquisitions /									Change			% Change
	Orders		Orders		2014 v. 2013		2014 v. 2013			Divestitures			FX Contribution			Eliminations			Adj. 2014 v. 2013			Adj. 2014 v. 2013
	2014		2013
Nine Months Ended September 30
Xylem Inc.	3,051		2,926		125		4	%		(3	)		(3	)		-			119			4	%		4	%
Water Infrastructure	1,973		1,865		108		6	%		(8	)		7			3			110			6	%		6	%
Applied Water	1,135		1,111		24		2	%		5			(11	)		(9	)		9			1	%		0	%
Quarter Ended September 30
Xylem Inc.	1,027		955		72		8	%		5			2			-			79			8	%		8	%
Water Infrastructure	680		617		63		10	%		-			4			1			68			11	%		11	%
Applied Water	363		355		8		2	%		5			(2	)		-			11			3	%		2	%
Quarter Ended June 30
Xylem Inc.	1,031		1,009		22		2	%		(1	)		(8	)		-			13			1	%		1	%
Water Infrastructure	674		647		27		4	%		(1	)		(3	)		-			23			4	%		4	%
Applied Water	378		378		-		0	%		-			(5	)		(6	)		(11	)		-3	%		-3	%
Quarter Ended March 31
Xylem Inc.	993		962		31		3	%		(7	)		3			-			27			3	%		4	%
Water Infrastructure	619		601		18		3	%		(7	)		6			2			19			3	%		4	%
Applied Water	394		378		16		4	%		-			(4	)		(3	)		9			2	%		2	%
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
					Change			% Change			Acquisitions /									Change			% Change
	Revenue		Revenue		2014 v. 2013			2014 v. 2013			Divestitures			FX Contribution			Eliminations			Adj. 2014 v. 2013			Adj. 2014 v. 2013
	2014		2013
Nine Months Ended September 30
Xylem Inc.	2,874		2,804		70			2	%		1			(1	)		-			70			2	%		2	%
Water Infrastructure	1,823		1,766		57			3	%		(6	)		9			3			63			4	%		4	%
Applied Water	1,105		1,086		19			2	%		7			(11	)		(7	)		8			1	%		0	%
Quarter Ended September 30
Xylem Inc.	963		965		(2	)		0	%		7			2			-			7			1	%		0	%
Water Infrastructure	619		619		-			0	%		-			4			-			4			1	%		1	%
Applied Water	362		360		2			1	%		7			(2	)		(3	)		4			1	%		-1	%
Quarter Ended June 30
Xylem Inc.	1,005		960		45			5	%		(1	)		(7	)		-			37			4	%		4	%
Water Infrastructure	636		596		40			7	%		(1	)		(2	)		2			39			7	%		7	%
Applied Water	388		381		7			2	%		-			(6	)		(3	)		(2	)		-1	%		-1	%
Quarter Ended March 31
Xylem Inc.	906		879		27			3	%		(5	)		4			-			26			3	%		4	%
Water Infrastructure	568		551		17			3	%		(5	)		7			1			20			4	%		5	%
Applied Water	355		345		10			3	%		-			(3	)		(1	)		6			2	%		2	%
Note: Due to rounding the sum of segment amounts may not agree to Xylem totals.

Xylem Inc. Non-GAAP Reconciliation
Adjusted Operating Income
($ Millions)
		Q3				YTD
		2014		2013		2014		2013
Total Revenue
• Total Xylem		963		965		2,874		2,804
• Water Infrastructure		619		619		1,823		1,766
• Applied Water		362		360		1,105		1,086
Operating Income
• Total Xylem		130		98		322		234
• Water Infrastructure		94		88		217		171
• Applied Water		52		40		145		125
• Total Segments		146		128		362		296
Operating Margin
• Total Xylem		13.5%		10.2%		11.2%		8.3%
• Water Infrastructure		15.2%		14.2%		11.9%		9.7%
• Applied Water		14.4%		11.1%		13.1%		11.5%
• Total Segments		15.2%		13.3%		12.6%		10.6%
Special Charges
• Total Xylem		-		20		-		20
Restructuring & Realignment Costs
• Total Xylem		4		12		31		52
• Water Infrastructure		3		8		20		40
• Applied Water		1		4		11		12
• Total Segments		4		12		31		52
Adjusted Operating Income*
• Total Xylem		134		130		353		306
• Water Infrastructure		97		96		237		211
• Applied Water		53		44		156		137
• Total Segments		150		140		393		348
Adjusted Operating Margin*
• Total Xylem		13.9%		13.5%		12.3%		10.9%
• Water Infrastructure		15.7%		15.5%		13.0%		11.9%
• Applied Water		14.6%		12.2%		14.1%		12.6%
• Total Segments		15.6%		14.5%		13.7%		12.4%
*Adjusted Operating Income excludes restructuring & realignment costs and special charges.

Xylem Inc. Non-GAAP Reconciliation Adjusted Diluted EPS ($ Millions, except per share amounts)
		Q3 2013										Q3 2014
		As Reported			Adjustments			Adjusted				As Reported			Adjustments			Adjusted
	Total Revenue	965						965				963						963
	Operating Income	98			32		a	130				130			4		c	134
	Operating Margin	10.2	%					13.5	%			13.5	%					13.9	%
	Interest Expense	(14	)					(14	)			(14	)					(14	)
	Other Non-Operating Income (Expense)	(1	)					(1	)			1						1
	Gain on sale of business	-						-				11			(11	)		-
	Income before Taxes	83			32			115				128			(7	)		121
	Provision for Income Taxes	(10	)		(13	)	b	(23	)			(22	)		(2	)	b	(24	)
	Net Income	73			19			92				106			(9	)		97
	Diluted Shares	186.0						186.0				183.4						183.4
	Diluted EPS	$ 0.39			$ 0.10			$ 0.49				$ 0.58			$ (0.05	)		$ 0.53
		Q3 YTD 2013										Q3 YTD 2014
		As Reported			Adjustments			Adjusted				As Reported			Adjustments			Adjusted
	Total Revenue	2,804						2,804				2,874						2,874
	Operating Income	234			72		a	306				322			31		c	353
	Operating Margin	8.3	%					10.9	%			11.2	%					12.3	%
	Interest Expense	(41	)					(41	)			(41	)					(41	)
	Other Non-Operating Income (Expense)	(2	)					(2	)			1						1
	Gain on sale of business	-						-				11			(11	)		-
	Income before Taxes	191			72			263				293			20			313
	Provision for Income Taxes	(31	)		(24	)	b	(55	)			(52	)		(13	)	b	(65	)
	Net Income	160			48			208				241			7			248
	Diluted Shares	186.2						186.2				184.6						184.6
	Diluted EPS	$ 0.86			$ 0.26			$ 1.12				$ 1.31			$ 0.04			$ 1.35
a	Restructuring & realignment costs and special charges
b	Net tax impact of restructuring & realignment costs, special charges and special tax items
c	Restructuring & realignment costs

Xylem Inc. Non-GAAP Reconciliation
Net Cash - Operating Activities vs. Free Cash Flow
($ Millions)
		Nine Months Ended
			2014				2013
Net Cash - Operating Activities		$	253			$	163
Capital Expenditures			(77	)			(91	)
Free Cash Flow		$	176			$	72
Net Income			241				160
Gain on Sale of Business			11				-
Net Income, excluding gain on sale of business		$	230			$	160
Free Cash Flow Conversion			77	%			45	%

Source: Xylem Inc.

Xylem Inc.
Media:
Kelly McAndrew. +1-914-323-5969
Kelly.McAndrew@xyleminc.com
or
Investors:
Phil DeSousa, +1-914-323-5930
Phil.DeSousa@xyleminc.com

Xylem