Xylem Inc. reported third quarter 2018 net income of $130 million, or $0.72 per share. Excluding the impact of restructuring, realignment and other special items, the Company delivered adjusted net income of $139 million or $0.77 per share in the quarter, an 18-percent increase over the prior year period.
Third quarter revenue was $1.3 billion, up eight percent excluding the impact of foreign exchange and acquisitions. Revenue for the quarter increased eight percent on an organic basis, driven by continued strong growth in all end markets and across all major geographies. Orders also increased eight percent organically for the second consecutive quarter. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin improved by 110 basis points year-over-year to 20.3 percent driven by volume leverage, savings from productivity initiatives and price realization. Reported operating margin in the quarter was 13.7 percent and adjusted operating margin increased 50 basis points year over year to 14.6 percent, including a 20-basis-point negative impact due to purchase accounting.
Patrick Decker, President and Chief Executive Officer of Xylem, said, “Our team delivered another quarter of strong results, positioning us well to meet our long-term growth and financial commitments. The organic growth we delivered in revenue and orders reflects strong performance in each of our major geographies and across all end markets. We see momentum strengthening in our ongoing efforts to drive commercial excellence and leverage our expanded portfolio, which are yielding more wins and share gains. Our focus on executing productivity initiatives and realizing additional pricing has enabled us to continue to mitigate ongoing inflationary pressures. I’m pleased with our teams’ marketplace execution, which has continued to gain momentum throughout the year and sets us up for continued strong growth ahead.”
Full-year 2018 Outlook
Xylem continues to forecast full-year 2018 revenue of approximately $5.2 billion, up approximately 10 percent versus the prior year, including growth from previously announced acquisitions. On an organic basis, Xylem now anticipates revenue growth in the range of seven to eight percent.
Xylem has narrowed the range of its full-year 2018 earnings expectations to reflect the Company’s strong operational performance year-to-date and the negative impact of foreign exchange translation. Full-year 2018 adjusted operating margin is now expected to be in the range of 13.9 to 14.0 percent, resulting in adjusted earnings per share of $2.87 to $2.89. This represents an increase of approximately 20 percent from Xylem’s 2017 adjusted results. The Company’s adjusted earnings outlook excludes projected integration, restructuring and realignment costs, which are expected to be approximately $45 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 discrete tax items, without unreasonable effort.
Third Quarter Segment Results
Xylem’s Water Infrastructure segment consists of its portfolio of businesses serving clean water delivery, wastewater transport and treatment, and dewatering.
- Third quarter 2018 revenue was $541 million, up eight percent organically compared with third quarter 2017. This growth includes an eight-percent increase in the utilities end market, which continues to show strength, particularly in Emerging Markets and North America. The industrial end market delivered mid-single-digit growth, driven by growing demand for Xylem’s dewatering applications in construction, mining and the oil and gas sector.
- Third quarter reported operating income for the segment was $99 million. Adjusted operating income for the segment, which excludes $5 million of restructuring and realignment costs, was $104 million, an 11-percent increase over the same period a year ago. Adjusted EBITDA margin for the Water Infrastructure segment increased 120 basis points to 22.2 percent. Reported operating margin for the segment was 18.3 percent, up 80 basis points versus the prior year, and adjusted operating margin increased 110 basis points to 19.2 percent. This growth reflects productivity gains, volume leverage and price realization, partially offset by inflation and higher investments in strategic growth initiatives.
Xylem’s Applied Water segment consists of its portfolio of businesses in residential and commercial building services, and industrial applications.
- Third quarter 2018 Applied Water revenue was $378 million, an eight-percent increase organically year over year. This performance reflects high-single-digit growth in the U.S., Western Europe and Emerging Markets. Strength in the commercial end market was driven by project activity as well as market share gains in U.S. and Europe. The Company’s business in the industrial end market was particularly strong in the U.S., driven by healthy project business.
- Third quarter reported operating income for the segment was $59 million and adjusted operating income, which excludes $2 million of restructuring and realignment costs, was $61 million, an 11-percent increase over the comparable period last year. Adjusted EBITDA margin for the Applied Water segment was 18 percent, an increase of 50 basis points over the prior year. Reported operating margin was 15.6 percent, up 150 basis points year over year, and adjusted operating margin increased 60 basis points to 16.1 percent as productivity initiatives, price realization and volume leverage more than offset inflation and unfavorable foreign exchange impacts.
Measurement & Control Solutions
Xylem’s Measurement & Control Solutions segment consists of its portfolio of businesses in smart metering, network technologies, advanced infrastructure analytics and analytic instrumentation.
- Third quarter 2018 Measurement & Control Solutions revenue was $368 million, up eight percent organically versus the prior year period. This reflects solid growth in the Sensus business, up high single digits year over year, driven by large project deployments in the gas sector and double-digit growth in the water sector in North America.
- Third quarter reported operating income for the segment was $31 million, and adjusted operating income, which excludes $4 million of restructuring and realignment costs and acquisition-related costs, was $35 million, a nine-percent increase over the prior-year period. Adjusted EBITDA margin for the Measurement & Control Solutions segment increased 90 basis points to 19 percent. Reported operating margin for the segment was 8.4 percent, flat versus the prior year period. The benefits of volume leverage and productivity initiatives were more than offset by the funding of strategic growth investments, inflation and purchase accounting. This resulted in a 50-basis-point decrease in adjusted operating margin to 9.5 percent.