Xylem Reports Fourth Quarter and Full-Year 2022 Earnings

While fourth quarter orders were down 9 percent on a reported basis and down 3 percent organically, the Company grew backlog 14 percent organically on resilient underlying demand. On January 23, Xylem announced it had agreed to acquire Evoqua in a $7.5 billion, all-stock transaction, creating a transformative platform to address intensifying water challenges, globally.

Fourth quarter earnings exceeded Xylem’s previous guidance. Net income was $149 million, or $0.82 per share. Net income margin increased 140 basis points to 9.9 percent. These results included increased restructuring and realignment costs and higher taxes during the quarter. Adjusted net income was $168 million, or $0.92 per share, which excludes the impacts of restructuring, realignment and special charges. Fourth quarter adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin was 18.7 percent, reflecting a year-over-year increase of 250 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.

For the full year, net income was $355 million, or $1.96 per share. Net income margin decreased 180 basis points to 6.4 percent. These results were mainly driven by a previously announced, one-time noncash pension plan settlement. Adjusted net income was $516 million, or $2.85 per share, which excludes the impacts of restructuring, realignment and special charges. Full-year adjusted EBITDA margin was 17.0 percent, reflecting a year-over-year decrease of 10 basis points. Inflation, strategic investments and the impact of chip shortages in the first half exceeded the benefits of price realization and productivity savings. The Company generated $596 million of operating cash flow, representing a 168 percent conversion, and $388 million of free cash flow, representing an 80 percent conversion of net income excluding the non-cash impairment charges and non-cash pension plan settlement.

“The team drove fourth quarter results well above expectations, with very strong performance across all business segments and regions,” said Patrick Decker, Xylem president and CEO. “Resilient demand and strong backlog execution delivered robust double-digit revenue growth with significant margin expansion. That out-performance in the fourth quarter and throughout 2022 has fueled healthy momentum coming into 2023.”

“Our customer focus and operational discipline are building on a foundation of resilient underlying demand for the value of Xylem’s offering in our largest end-markets,” continued Decker. “As trends driving water investment continue to intensify, we are confident about delivering full-year 2023 growth in the mid-single digits, with significant margin expansion, tracking solidly toward Xylem’s longer-term growth milestones. Of course, we’re very excited about the transformative agreement we have announced to acquire Evoqua. The combination will be positioned to have greater impact in addressing the world’s water challenges and create even more value for shareholders. Until the transaction closes, however, we remain focused on delivering our commitments to our stakeholders, as we plan for a smooth integration.”

Xylem announced that its Board of Directors declared a first quarter dividend in the amount of $0.33 per share, an increase of 10 percent. The dividend is payable on March 22, 2023, to shareholders of record as of February 22, 2023.

Full-year 2023 Outlook
Xylem’s full-year and first quarter 2023 guidance does not reflect the planned acquisition of Evoqua, which was announced on January 23, 2023, and is expected to close mid-year 2023.

Xylem forecasts full-year 2023 revenue in the range of $5.70 to $5.80 billion, up 3 to 5 percent on a reported basis and up 4 to 6 percent on an organic basis.

Full-year 2023 adjusted EBITDA margin is expected to be in the range of 17.5 to 18.0 percent, an increase of 50 to 100 basis points. This results in adjusted earnings per share of $3.00 to $3.25, which represents an increase of 5 to 14 percent from Xylem’s 2022 adjusted results. Full-year free cash flow conversion to net income is expected to be 100 percent.

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.

Fourth 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.

• Fourth quarter 2022 revenue was $668 million, a 7 percent increase, 15 percent organically, compared with fourth quarter 2021. This strong growth was driven by price realization, robust utilities and industrials demand in the US and Western Europe, and dewatering demand in Emerging Markets.
• Fourth quarter reported operating income for the segment was $132 million, an 8 percent increase versus the comparable period last year. Adjusted operating income for the segment, which excludes $4 million of restructuring and realignment costs, was $136 million, a 10 percent increase versus the comparable period last year. Reported operating margin for the segment was 19.8 percent, up 20 basis points versus the prior year, and adjusted operating margin was 20.4 percent, up 50 basis points versus the prior year. Adjusted EBITDA margin was 22.5 percent, up 80 basis points from the prior year. Favorable price realization net of inflation and higher volume more than offset strategic investments.

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

• Fourth quarter 2022 revenue was $455 million, a 12 percent increase, 17 percent organically, year-over-year. The robust growth was driven by strong price realization across all end-markets and regions.
• Fourth quarter reported operating income for the segment was $61 million, a 22 percent increase versus comparable period last year, and adjusted operating income, which excludes $9 million of restructuring and realignment costs, was $70 million, a 35 percent increase versus the comparable period last year. The segment reported operating margin was 13.4 percent, up 110 basis points versus the prior year period. Adjusted operating margin increased 260 basis points over the prior year period to 15.4 percent. Adjusted EBITDA margin was 16.5 percent, up 270 basis points from the prior year. Margin expansion was driven by strong price realization, more than offsetting inflation, coupled with productivity savings.

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.

• Fourth quarter 2022 revenue was $383 million, up 30 percent, 35 percent organically, versus the prior year. The robust growth is driven by improved chip supply compared to prior year, as well as strength in our water quality test and pipeline assessment applications.
• Fourth quarter reported operating income for the segment was $19 million, compared to $17 million loss in the comparable period last year, and adjusted operating income, which excludes $3 million of restructuring and realignment costs and $1 million of special charges, was $23 million, compared to $15 million loss in comparable period last year. The segment reported operating margin was 5.0 percent, up 1080 basis points versus the prior year period. Adjusted operating margin of 6.0 percent increased 1110 basis points over the prior year period. Adjusted EBITDA margin was 15.1 percent, up 800 basis points from the prior year. Strong price realization offset inflation and, coupled with productivity savings and higher volume, drove the margin expansion, exceeding the impact of strategic investments.