Xylem Reports Fourth Quarter and Full-Year 2020 Earnings

Fourth quarter reported operating margin was 13.0 percent, and adjusted operating margin was 13.8 percent, eachdeclining 120 basis points year-over-year. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA)margin declined 170 basis points to 18.8 percent. COVID-related impacts and inflation drove the margin decline,exceeding productivity improvements and cost savings. Xylem generated net income of $148 million, or $0.82 per share,and adjusted net income of $145 million, or $0.81 per share, which excludes the impact of restructuring, realignment andspecial charges.

For the full year, Xylem delivered reported operating margin of 7.5 percent, down 180 basis points versus the prior year,and adjusted operating margin of 10.8 percent, down 310 basis points for the same period. Adjusted EBITDA margin was16.3 percent, down 320 basis points year-over-year. The margin declines for the full year were driven by the same factorsas in the fourth quarter. Full-year reported net income was $254 million, or $1.40 per share, with a reported operatingmargin of 7.5 percent. Adjusted net income, which excludes the impact of restructuring, realignment and special charges,was $374 million, or $2.06 per share. The Company generated $824 million of operating cash flow, representing a 324percent conversion, and $641 million of free cash flow, representing a 181 percent conversion.

“Our team again delivered solid operational performance, exceeding expectations across all major indicators, includingrevenue, margin, and EPS,” said Patrick Decker, president and CEO of Xylem. “We drove better-than-anticipated top-lineimprovements in all segments, taking full advantage of stabilizing demand, demonstrated by sequential gains globally, andwith particularly strong performance in Europe and China. Our improved bottom-line performance reflects effective costcontainment and supply chain execution through the pandemic, and over-delivery on our free cash flow conversioncommitments on the back of disciplined working capital management.”

“That performance gives us positive momentum entering 2021,” Decker continued, “as our end markets showedencouraging signs of recovery in the fourth quarter, with healthy orders trends and significant backlog growth. We alsodelivered strong performance with our industry-leading digital portfolio, as the pandemic continues to accelerate customeradoption of digital technologies across the water sector. This clearly positions Xylem well in both the near and long term.”

Xylem announced that its Board of Directors declared a dividend in the amount of $0.28 per share, an increase of 8percent. The dividend is payable on March 18, 2021, to shareholders of record as of February 18, 2021.

Full-year 2021 Outlook
Xylem forecasts full-year 2021 revenue in the range of $5.16 to $5.26 billion, up 6 to 8 percent on a reported basis and up3 to 5 percent on an organic basis.

Full-year 2021 adjusted EBITDA margin is expected to be in the range of 16.7 to 17.7 percent and adjusted operatingmargin is expected to be in the range of 11.5 to 12.5 percent. This results in adjusted earnings per share of $2.35 to $2.60,which represents an increase of 14 to 26 percent from Xylem’s 2020 adjusted results. The Company’s adjusted earningsoutlook excludes projected restructuring and realignment costs of approximately $50 to $60 million for the year. Further2021 planning assumptions are included in Xylem’s fourth quarter 2020 earnings materials posted atwww.xylem.com/investors. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherentdifficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, withoutunreasonable effort.

Fourth Quarter Segment Results

Water Infrastructure
Xylem’s Water Infrastructure segment consists of its portfolio of businesses serving clean water delivery, wastewatertransport and treatment, and dewatering.

Fourth quarter 2020 revenue was $616 million, flat organically compared with fourthquarter 2019. This result, achieved despite difficult market conditions, was driven bymodest growth in the wastewater utility end market in Europe, Asia and Canada offsetby softness in the U.S. industrial market.

Fourth quarter reported operating income for the segment was $117 million. Adjustedoperating income for the segment, which excludes $7 million of restructuring andrealignment, was $124 million, a less than one percent decrease versus the comparableperiod last year. Reported operating margin for the segment was 19.0 percent, down 70basis points versus the prior year, and adjusted operating margin was 20.1 percent,down 60 basis points versus prior year. Adjusted EBITDA margin was 22.2 percent,down 70 basis points from the prior year. Productivity benefits, cost control and modestprice realization were more than offset by inflation, increased reserves, and unfavorablevolume and mix impacts.

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

Fourth quarter 2020 Applied Water revenue was $395 million, a one percent declineorganically year-over-year. Volume weakness in industrial end markets continued in the quarter, with particular softness in the U.S. and Middle East, partly offset by robustgrowth in the residential market in the U.S. and China.

Fourth quarter reported operating income for the segment was $61 million and adjustedoperating income, which excludes $1 million of restructuring and realignment costs, was$62 million, a 5 percent decrease versus the comparable period last year. The segmentreported operating margin was 15.4 percent, down 40 basis points versus the prior yearperiod. Adjusted operating margin declined 90 basis points to 15.7 percent. AdjustedEBITDA margin was 17.2 percent, down 170 basis points from the prior year.Productivity benefits, favorable mix and modest price realization were more than offsetby inflation and lower volumes.

Measurement & Control Solutions
Xylem’s Measurement & Control Solutions segment consists of its portfolio of businesses in smart metering, networktechnologies, advanced infrastructure analytics and analytic instrumentation.

Fourth quarter 2020 Measurement & Control Solutions revenue was $362 million, down5 percent organically versus the prior year, lapping large project deployments in the U.S.and Middle East. Strong sequential improvement reflects healthy demand in the testbusiness and Advanced Infrastructure Analytics, both of which were up high singledigits.

Fourth quarter reported operating income for the segment was $14 million, and adjustedoperating income, which excludes $2 million of restructuring and realignment costs, was$16 million, a 45 percent decrease versus the comparable period last year. TheMeasurement & Control Solutions segment reported operating margin was 3.9 percent,down 330 basis points versus the prior year period. Adjusted operating margin of 4.4percent also decreased 330 basis points over the prior year period. Adjusted EBITDAmargin was 14.6 percent, down 350 basis points from the prior year. Strong productivityresults and cost savings programs partly offset lower volume, inflation and unfavorablemix.