Xylem Reports Third Quarter 2022 Results

Earnings also exceeded Xylem’s previous guidance, with strong margin performance. Net income was $12 million, or $0.07 per share. Net income margin decreased 810 basis points to 0.9 percent. These results were mainly driven by a previously announced, one-time non-cash pension plan settlement. Adjusted net income was $144 million, or $0.79 per share, which excludes the impacts of restructuring, realignment and special charges. Third quarter adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin was 18.3 percent, reflecting a year-over-year increase of 40 basis points. Strong price realization offset inflation and, coupled with productivity savings, drove the margin expansion, exceeding the impact of strategic investments.

“The team delivered very strong performance across all our regions, driving third quarter results well above expectations on all key metrics,” said Patrick Decker, Xylem president and CEO. “Demand remains resilient across our largest end-markets, and disciplined operational execution delivered double-digit revenue growth with strong margin expansion.”

“We anticipate our momentum will continue driven by the essential nature of the services we provide. Our strong backlog and bidding pipelines support that outlook. The team, from our factories to our channel partners, continues to demonstrate resilience in managing through a dynamic environment, as our customers and communities invest in essential water infrastructure. Based on this strength, we are

further raising our full-year guidance for both revenue and earnings per share, with continued confidence in Xylem’s longer-term growth outlook.”

Outlook
Xylem now expects full-year 2022 organic revenue growth to be in the range of 9 to 10 percent, and approximately 4 percent on a reported basis. This represents a raise of the low end of the Company’s previous full-year organic revenue guidance of 8 to 10 percent, and 3 to 5 percent on a reported basis. Full-year 2022 adjusted EBITDA margin is now expected to be approximately 17.0 percent, raising the low end of the previous range of 16.5 to 17.0 percent. This results in adjusted earnings per share of $2.65 to $2.75, an increase from the previous range of $2.50 to $2.70. The increased guidance reflects strong demand, gradual easing of supply chain constraints, and price realization, partially offset by inflation and foreign exchange headwinds.

Further 2022 planning assumptions are included in Xylem’s third quarter 2022 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.

Third 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.

• Third quarter 2022 revenue was $574 million, a 5 percent increase, 13 percent organically, compared with third quarter 2021. This strong growth was driven by price realization, robust utilities demand in the US and Western Europe, and dewatering demand in the US and Emerging Markets.
• Third quarter reported operating income for the segment was $104 million, a 3.0 percent increase versus the comparable period last year. Adjusted operating income for the segment, which excludes $3 million of restructuring and realignment costs, was $107 million, a 4.9 percent increase versus the comparable period last year. Reported operating margin for the segment was 18.1 percent, down 40 basis points versus the prior year, and adjusted operating margin was 18.6 percent, flat versus the prior year. Adjusted EBITDA margin was 20.7 percent, down 50 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.

• Third quarter 2022 Applied Water revenue was $458 million, a 15 percent increase, 20 percent organically, year-over-year. The robust growth was driven by strong price realization and backlog execution across all end markets.
• Third quarter reported operating income for the segment was $77 million, a 28.3 percent increase versus comparable period last year, and adjusted operating income, which excludes $1 million of restructuring and realignment costs, was $78 million, a 25.8 percent increase versus the comparable period last year. The segment reported operating margin was 16.8 percent, up 180 basis points versus the prior year period. Adjusted operating margin increased 150 basis points over the prior year period to 17.0 percent. Adjusted EBITDA margin was 18.1 percent, up 110 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.

• Third quarter 2022 Measurement & Control Solutions revenue was $348 million, up 9 percent, 15 percent organically, versus the prior year. While chip supply remains constrained, we continue to see modest sequential improvement, and strength in our water quality test applications.
• Third quarter reported operating income for the segment was $(2) million, a 128.6 percent decrease versus the comparable period last year, and adjusted operating income, which excludes $2 million of restructuring and realignment costs and $12 million of special charges, was $12 million, a 100 percent increase versus the comparable period last year. The segment reported operating margin was (0.6) percent, down 280 basis points versus the prior year period. Adjusted operating margin of 3.4 percent increased 150 basis points over the prior year period. Adjusted EBITDA margin was 13.8 percent, down 40 basis points from the prior year. Strong price realization, volume growth and productivity savings were more than offset by higher inflation.