Xylem Reports Second Quarter 2023 Results

Orders were up 10 percent on a reported basis and down 2 percent organically, while backlog grew to $5.3 billion, up 7 percent organically and including $1.3 billion from Evoqua, with resilient underlying demand. Second-quarter earnings, excluding the acquisition, exceeded Xylem’s previous stand-alone guidance.

“This past quarter, we took another transformative step as a leading water solutions company to help our communities and customers solve the greatest water challenges facing our society and economies: water scarcity, resilience of our infrastructure to climate change, and the need to address these challenges affordably with the power of technology and innovation,” said Patrick Decker, Xylem president and CEO. “These challenges are intensifying every day and our powerful portfolio is now even more strongly positioned to deliver solutions at scale.”

“We are already seeing the momentum created by integrating two strong companies. On the strength of the market’s continuing underlying demand and our team’s disciplined execution, we are further raising our full-year guidance on revenues, margins and earnings per share.”

Net income was $92 million, or $0.45 per share. Net income margin decreased 290 basis points to 5.3 percent. These results are driven by higher acquisition and integration costs related to the Evoqua transaction, higher purchase accounting intangible amortization, and higher restructuring and realignment costs, more than offsetting strong operational performance. Coinciding with the Evoqua acquisition, Xylem has updated its adjusted operating income and earnings per share to add back non-cash purchase accounting intangible amortization and recast the 2022 amounts to reflect the change on a comparative basis. Adjusted net income was $202 million, or $0.98 per share, which excludes the impacts of special items of purchase accounting intangible amortization, restructuring, realignment, and special charges.

Second-quarter adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) margin was 19.1 percent, reflecting a year-over-year increase of 250 basis points. Excluding Evoqua results, adjusted EBITDA margin was 18.6 percent, up 200 basis points over the prior year period. Strong price realization more than offset inflation and, coupled with productivity savings and higher volume, drove the margin expansion, exceeding the impact of strategic investments.

Following the close of the Evoqua acquisition, Xylem is now reporting in four segments: Measurement & Control Solutions; Water Infrastructure, now including legacy-Evoqua’s Applied Product Technologies segment; Applied Water; and Integrated Solutions & Services as a new stand-alone segment (with the same perimeter as the legacy-Evoqua segment of the same name) to provide continued transparency on the segment’s performance.

Outlook
Xylem is updating its full-year 2023 guidance to reflect strong organic performance, the combination with Evoqua and the adjustment of purchase accounting intangible amortization. Xylem now expects full-year 2023 revenue of approximately $7.2 billion, up approximately 30 percent on a reported basis and up 9 to 10 percent on an organic basis. This represents an increase from the Company’s previous full-year guidance of 8 to 9 percent on an organic and reported basis. Full-year 2023 adjusted EBITDA margin is expected to be approximately 18 percent, lifted from the previous range of 17.5 to 18.0 percent. This results in adjusted earnings per share of $3.50 to $3.70, raised from the previous range of $3.15 to $3.35. This increase of $0.35 at the mid-point includes an organic increase of $0.15 driven by continuing strong demand, and commercial and operational momentum. Further 2023 planning assumptions are included in Xylem’s second-quarter 2023 earnings materials posted at www.xylem.com/investors. 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

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 2023 revenue was $415 million, up 20 percent on a reported basis and 21 percent organically, versus the prior year period. Growth was robust across the portfolio and led primarily by strong demand and backlog execution in smart metering.
• Second-quarter reported operating income for the segment was $26 million, compared to a $5 million loss in the same period last year. Adjusted operating income, which excludes $3 million of restructuring and realignment costs and $17 million of purchase accounting intangible amortization, was $46 million, a 188 percent increase versus the prior year period, recast to add back $17 million of non-cash purchase accounting amortization. The segment reported operating margin was 6.3 percent, up 770 basis points versus the prior year period. Adjusted operating margin of 11.1 percent increased 650 basis points over the prior year period. Adjusted EBITDA margin was 15.7 percent, up 590 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, now including legacy-Evoqua’s Applied Product Technologies segment, consists of its portfolio of businesses serving clean water delivery, wastewater transport and treatment, and dewatering.

• Second-quarter 2023 revenue was $704 million, a 20 percent increase on a reported basis and 13 percent organically, compared with second-quarter 2022. This strong growth was driven by price realization and robust utilities and industrial demand, particularly in the U.S. and Western Europe.
• Second-quarter reported operating income for the segment was $106 million, a 2 percent decrease versus the same period last year. Adjusted operating income, which excludes $12 million of special charges, $3 million of restructuring and realignment costs, and $8 million of purchase accounting intangible amortization, was $129 million. This represents a 15 percent increase versus the prior year period, which was recast to add back $1 million of non-cash purchase accounting amortization. Reported operating margin for the segment was 15.1 percent, down 320 basis points versus the prior year period, and adjusted operating margin was 18.3 percent, down 70 basis points versus the prior year period. Adjusted EBITDA margin was 21.4 percent, flat from the prior year. Excluding Evoqua, adjusted EBITDA margin was 21.6 percent, up 20 basis points on the prior year. Favorable price realization and volume improvements were offset by investments, foreign exchange effects, and unfavorable mix.

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

• Second-quarter 2023 revenue was $478 million, an 11 percent increase on a reported basis and 12 percent organically, year-over-year. Growth was driven by strong price realization and demand across both industrial and building solutions end-markets, particularly in the U.S. and Emerging Markets.
• Second-quarter reported operating income for the segment was $84 million, a 38 percent increase versus the same period last year. Adjusted operating income, which excludes $2 million of restructuring and realignment costs, was $86 million, a 37 percent increase versus the same period last year. The segment reported operating margin was 17.6 percent, up 340 basis points versus the prior year period. Adjusted operating margin increased 330 basis points over the prior year period to 18.0 percent. Adjusted EBITDA margin was 19.0 percent, up 290 basis points from the prior year. Margin expansion was driven by strong price realization, more than offsetting inflation, coupled with productivity savings.

Integrated Solutions & Services
Xylem’s new Integrated Solutions & Services segment, as of May 24, consists of its portfolio of businesses providing water treatment systems and solutions, with an extensive service branch network and fleet of mobile assets.

• Second-quarter 2023 included revenue of $125 million.
• Second-quarter reported operating loss for the segment was $7 million. Adjusted operating income was $18 million, which excludes $7 million of special charges, $7 million of restructuring and realignment costs, and $11 million of purchase accounting intangible amortization. The segment reported operating margin was (5.6) percent. Adjusted operating margin was 14.4 percent. Adjusted EBITDA margin was 24.0 percent reflecting strong margin performance driven by effective price-cost discipline and productivity.

Supplemental information on Xylem’s second quarter 2023 earnings and reconciliations for certain non-GAAP items is posted at www.xylem.com/investors.