Xylem Reports First Quarter 2023 Results

While first-quarter orders were down 8 percent on a reported basis and down 5 percent organically, the Company grew backlog on resilient underlying demand. First-quarter earnings exceeded Xylem’s previous guidance. Net income was $99 million, or $0.54 per share. Net income margin increased 40 basis points to 6.8 percent. These Xylem stand-alone results include acquisition and integration costs related to the pending acquisition of Evoqua and higher taxes during the quarter. Adjusted net income was $130 million, or $0.72 per share, which excludes the impacts of restructuring, realignment, and special charges. First quarter adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin was 16.3 percent, reflecting a year-over-year increase of 210 basis points. Strong price realization offset inflation and, coupled with productivity savings and higher volume, drove the margin expansion, exceeding the impact of strategic investments.

“The team delivered a very strong first-quarter performance, well ahead of expectations,” said Patrick Decker, Xylem president and CEO. “Market demand remains robust, reflected in healthy backlog growth and book-to-bill greater than one in all segments. We continue to see solid results on revenue and margin driven by commercial momentum, price realization, and supply chain improvements.”

“Looking ahead, we’re confident in raising our 2023 guidance despite a dynamic macro-economic environment and are excited about the opportunity for growth and value creation from our pending combination with Evoqua. We have made significant progress with regulatory approvals and integration planning, and expect the transaction to close by mid-year. From day one, we will build on the combined strengths of Xylem and Evoqua to create a transformative platform for solving our customers’ and communities’ most urgent water challenges.”

Outlook
Xylem’s full-year 2023 guidance does not reflect the planned acquisition of Evoqua, which was announced on January 23, 2023, and is expected to close by mid-year 2023. Xylem now expects full-year 2023 revenue growth of 8 to 9 percent on an organic and reported basis. This represents an increase from the Company’s previous full-year organic revenue guidance of 4 to 6 percent, and 3 to 5 percent on a reported basis. Full-year 2023 adjusted EBITDA margin is expected to be in the range of 17.5 to 18.0 percent. This results in adjusted earnings per share of $3.15 to $3.35, raised from the previous range of $3.00 to $3.25. The increased guidance reflects our expectations of continuing strong demand, commercial momentum, and improved chip supply. 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

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 2023 revenue was $406 million, up 29 percent, 32 percent organically, versus the prior year period. The robust growth is driven by improved chip supply compared to the prior year, and strength in our water quality test and pipeline assessment applications.
• First-quarter reported operating income for the segment was $20 million, compared to a $10 million loss in the same period last year. Adjusted operating income, which excludes $5 million of restructuring and realignment costs and $2 million of special charges, was $27 million, compared to an $8 million loss in the same period last year. The segment reported operating margin was 4.9 percent, up 810 basis points versus the prior year period. Adjusted operating margin of 6.7 percent increased 920 basis points over the prior year period. Adjusted EBITDA margin was 15.5 percent, up 690 basis points from the prior year period. Higher volume, strong price realization, and productivity savings exceeded the impact of inflation and unfavorable mix.

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 2023 revenue was $589 million, an 11 percent increase, 15 percent organically, compared with first quarter 2022. This strong growth was driven by price realization and robust utilities and industrial demand, particularly in the U.S. and Western Europe.
• First-quarter reported operating income for the segment was $70 million, a 5 percent decrease versus the same period last year. Adjusted operating income, which excludes $3 million of restructuring and realignment costs, was $73 million, a 3 percent decrease versus the prior year period. Reported operating margin for the segment was 11.9 percent, down 200 basis points versus the prior year period, and adjusted operating margin was 12.4 percent, down 170 basis points versus the prior year period. Adjusted EBITDA margin was 15.1 percent, down 80 basis points from the prior year. Favorable price realization net of inflation was offset by strategic investments and unfavorable mix.

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

• First-quarter 2023 revenue was $453 million, a 7 percent increase, 10 percent organically, year-over-year. The robust growth was driven by strong price realization and demand across commercial building and industrial end-markets, particularly in the U.S. and Western Europe.
• First-quarter reported operating income for the segment was $83 million, a 41 percent increase versus the same period last year. Adjusted operating income, which excludes $3 million of restructuring and realignment costs, was $86 million, a 43 percent increase versus the same period last year. The segment reported operating margin was 18.3 percent, up 440 basis points versus the prior year period. Adjusted operating margin increased 490 basis points over the prior year period to 19.0 percent. Adjusted EBITDA margin was 20.1 percent, up 480 basis points from the prior year. Margin expansion was driven by strong price realization and productivity savings, more than offsetting inflation.