Xylem Reports Eight Percent Increase in Organic Revenue and Orders, and Strong Double-Digit Growth in 2nd Quarter 2018 Earnings

Second quarter revenue was $1.3 billion, up 13 percent including the impact of foreign exchange and acquisitions. Revenue for the quarter increased eight percent on an organic basis, driven by double-digit growth in utilities and continued strength in the industrial and commercial end markets across nearly all major geographies. Orders increased eight percent organically in the quarter. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin improved by 70 basis points year-over-year to 19.3 percent driven by volume leverage and savings from productivity initiatives. Reported operating margin in the quarter was 13 percent and adjusted operating margin increased 70 basis points year-over-year to 13.8 percent, including a 20-basis-point negative impact due to purchase accounting amortization.

Patrick Decker, President and Chief Executive Officer of Xylem, said, “Our second quarter results were very strong as our team continued to successfully execute on our strategy to generate consistent, profitable growth. Once again, we delivered high single-digit organic growth in revenue and orders globally, reflecting solid growth in each of the major geographic markets in which we operate. We are capturing share in the utilities end market where strong orders and backlog growth reflect continued momentum. As we indicated previously, we began implementing price increases earlier this year and I’m pleased with the traction we’ve gained in the marketplace. Our ability to successfully realize meaningful pricing impact, while continuing to execute our productivity initiatives, has and will continue to help us mitigate higher input costs from inflationary pressures and tariffs. Our strong operational performance in the first half of the year and continued momentum underpins our confidence in our updated expectations for the full year.”

Updated Full-year 2018 Outlook

Xylem now forecasts full-year 2018 revenue of approximately $5.2 billion, up more than 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 six to seven percent.

The Company has narrowed the range of its full-year 2018 earnings expectations. Reflected in this expectation is $0.04 of operational improvement driven by stronger operational execution and price realization offset by the impact of a strengthening dollar and divestiture of a non-core business. Full-year 2018 adjusted operating margin is now expected to be in the range of 13.9 to 14.2 percent, resulting in adjusted earnings per share of $2.85 to $2.95. This represents an increase of 19 to 23 percent from Xylem’s 2017 adjusted results. The Company’s adjusted earnings outlook excludes projected integration, restructuring and realignment costs, which now 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.

Second 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.

• Second quarter 2018 revenue was $546 million, up 11 percent organically compared with second quarter 2017. This growth includes strong results in the utilities end market, particularly in the U.S., which was up 13 percent in the quarter. Large project deliveries along with strong aftermarket performance drove a nearly 30 percent year-over-year increase in the Company’s treatment business. The industrial end market also continued to show solid growth, reflecting solid global demand in dewatering.

• Second quarter reported operating income for the segment was $92 million. Adjusted operating income for the segment, which excludes $5 million of restructuring and realignment costs, was $97 million, a 23-percent increase over the same period a year ago. Adjusted EBITDA margin for the Water Infrastructure segment increased 80 basis points to 20.1 percent. Reported operating margin for the segment was 16.8 percent, up 140 basis points versus the prior year, and adjusted operating margin increased 140 basis points to 17.8 percent. This growth reflects volume leverage, productivity gains and price realization, partially offset by inflation and a higher mix of treatment project deliveries.

Applied Water

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

• Second quarter 2018 Applied Water revenue was $388 million, a six-percent increase organically year-over-year. This performance reflects solid growth in the U.S. in both the industrial and commercial sectors, and double-digit growth in Emerging Markets. Increased project business as well as continued commercial growth drove a double-digit increase in China.

• Second quarter reported operating income for the segment was $61 million and adjusted operating income, which excludes $2 million of restructuring and realignment costs, was $63 million, a 19-percent increase over the comparable period last year. Adjusted EBITDA margin for the Applied Water segment was 18 percent, an increase of 110 basis points over the prior year. Reported operating margin was 15.7 percent, up 240 basis points year-over-year, and adjusted operating margin increased 150 basis points to 16.2 percent as volume leverage, productivity initiatives and price realization 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.

• Second quarter 2018 Measurement & Control Solutions revenue was $383 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 energy sector in North America. Revenue in Xylem’s analytics business increased six percent organically in the quarter.

• Second 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 three-percent increase over the prior-year period. Adjusted EBITDA margin for the Measurement & Control Solutions segment decreased 140 basis points to 18.5 percent. Reported operating margin for the segment was 8.1 percent. The benefits of volume leverage were more than offset by the negative impact of mix driven by large deployments in the energy business as well as the funding of strategic R&D and commercial investments to accelerate growth and higher purchase accounting amortization. This resulted in a 150-basis-point decrease in adjusted operating margin to 9.1 percent.