Xylem 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
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.
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.