Xylem Reports 7 % Organic Revenue Increase and Strong Double-Digit Growth in 1. Quarter 2018 Earnings

Excluding the impact of restructuring, realignment, acquisition-related charges and other special items, the Company delivered adjusted net income of $93 million or $0.51 per share in the quarter, a 31-% increase over the prior year period. First quarter revenue was $1.2 billion, up 14 % including the impact of foreign exchange and acquisitions. Revenue for the quarter increased seven % on an organic basis, driven by a strong performance in the utilities and industrial end markets in nearly every geography and continued solid growth in the commercial and residential end markets. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) improved by 130 basis points year-over-year to 17.5 % driven by volume leverage and savings from productivity initiatives. Reported operating margin in the quarter was 9.3 % and adjusted operating margin increased 60 basis points year-over-year to 11.1 %, including a 40-basis-point negative impact due to purchase accounting amortization.

“Focused execution and increased collaboration by our teams resulted in a strong start to 2018,” said Patrick Decker, President and Chief Executive Officer of Xylem. “We delivered another consecutive quarter of strong growth in revenue, orders and backlog, which sets us up for a solid year ahead. We’re encouraged by the continuing momentum we see in both the utilities and industrial end markets, where we are capturing share. In addition, our growing portfolio of advanced technologies is opening up new opportunities to expand our relationship with current customers and cultivate new ones. We continue to successfully execute against our productivity plans, which is helping to fund our growth initiatives and mitigate inflation. Looking ahead, we have strong confidence in our plans to drive continued profitable growth as we deepen our customer relationships and partnerships.”

Full-year 2018 Outlook

Xylem continues to forecast full-year 2018 revenue in the range of $5.1 to $5.2 billion, up eight to 10 %, including growth from previously announced acquisitions. On an organic basis, Xylem continues to anticipate revenue growth in the range of four to six %.

Full-year 2018 adjusted operating margin is expected to be in the range of 13.9 to 14.3 %, resulting in adjusted earnings per share of $2.82 to $2.97. This represents an increase of 18 to 24 % from Xylem’s 2017 adjusted results. The Company’s adjusted earnings outlook excludes projected integration, restructuring and realignment costs of approximately $35 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.

First Quarter Segment Results

Water Infrastructure

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

• First quarter 2018 revenue was $480 million, up nine % organically compared with first quarter 2017. This growth includes strong results in the utilities end market, particularly in the U.S. which was up 10 %. The industrial end market also continued to show solid growth, reflecting healthy market conditions in the U.S. for dewatering applications.

• First quarter reported operating income for the segment was $49 million. Adjusted operating income for the segment, which excludes $5 million of restructuring and realignment costs, was $54 million, a 20-% increase over the same period a year ago. Adjusted EBITDA for the Water Infrastructure segment increased 30 basis points to 14.6 %. Reported operating margin for the segment was 10.2 %, up 40 basis points versus the prior year, and adjusted operating margin increased 60 basis points to 11.3 %. This growth reflects volume leverage and productivity gains, partially offset by inflation, a higher mix of treatment project deliveries and foreign exchange impacts.

Applied Water

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

• First quarter 2018 Applied Water revenue was $366 million, a seven-% increase organically year-over-year. This performance reflects double-digit growth in Western Europe and solid increases in the U.S. and Emerging Markets. In the U.S., the business experienced continued improvement in large industrial projects, and also captured share gains across all end markets in Western Europe. In addition, commercial building applications showed solid growth from demand for projects.

• First quarter reported operating income for the segment was $50 million and adjusted operating income, which excludes $3 million of restructuring and realignment costs, was $53 million, an 18-% increase over the comparable period last year. Adjusted EBITDA for the Applied Water segment was 16.1 %, an increase of 110 basis points over the prior year. Reported operating margin was 13.7 %, up 290 basis points year-over-year, and adjusted operating margin increased 100 basis points to 14.5 % as volume leverage and productivity initiatives more than offset inflation and unfavorable mix.

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.

• First quarter 2018 Measurement & Control Solutions revenue was $371 million, up five % organically versus the prior year period. This reflects solid growth in the Sensus business, up six % year-over-year, primarily driven by strength in North America. Double-digit growth in the electric, gas and services businesses was partially offset by modest declines in the water sector, which primarily reflects the timing of large project deliveries in Western Europe and the Middle East in the year-ago period. Xylem’s legacy analytics business increased three % organically in the quarter.

• First quarter reported operating income for the segment was $33 million, and adjusted operating income, which excludes $10 million of restructuring and realignment costs and acquisition-related costs, was $43 million. Adjusted EBITDA for the Measurement & Control Solutions segment increased 270 basis points to 21.8 %. Reported operating margin for the segment was 8.9 %. Adjusted operating margin increased 90 basis points year-over-year to 11.6 % as volume leverage and price combined with cost reductions more than offset inflation, the funding of strategic R&D investments and higher purchase accounting amortization.