Xylem Reports Third Quarter 2023 Results

Orders were up 43 percent on a reported basis and up 3 percent organically, while backlog grew 5 percent organically to $5.2 billion, including $1.3 billion from Evoqua. Third-quarter earnings exceeded Xylem’s previous guidance.

“The team capitalized on resilient demand to deliver another quarter of robust growth and continued margin expansion, with each of our segments outperforming expectations,” said Patrick Decker, Xylem president and CEO. “In addition to healthy organic growth, we saw strong operational performance in both our legacy business and in our recent Evoqua acquisition. The combination of these two great enterprises is delivering a robust pipeline of new commercial opportunities, and integration cost synergies are well on track. The team’s performance and continuing underlying demand give us confidence in raising our full-year guidance.”

“We are in a unique position as water challenges continue to intensify – bringing a transformative platform of solutions to customers and communities around the world. I have full confidence in the team to keep building on the foundation we’ve built to deliver the full potential of our strategy, drive further durability in our business model, and continue to create distinctive value for all our stakeholders.”

Net income was $152 million, or $0.63 per share. Net income margin increased 640 basis points to 7.3 percent. These results are driven by lapping a prior-year one-time pension settlement and strong operational performance, partially offset by higher acquisition and integration costs related to the Evoqua transaction, higher purchase accounting intangible amortization, and higher restructuring and realignment costs. Adjusted net income was $240 million, or $0.99 per share, which excludes the impacts of special charges, purchase accounting intangible amortization, and restructuring and realignment costs.

Third-quarter adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) margin was 19.8 percent, reflecting a year-over-year increase of 150 basis points. Excluding Evoqua’s results, adjusted EBITDA margin was 18.9 percent, up 60 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.

Outlook
Xylem now expects full-year 2023 revenue of approximately $7.3 billion, up approximately 32 percent on a reported basis and up approximately 11 percent on an organic basis. This represents an increase from the Company’s previous full-year guidance of 30 percent on a reported basis and 9 to 10 percent on an organic basis.

Full-year 2023 adjusted EBITDA margin is expected to be approximately 19 percent, lifted from the previous guide of approximately 18 percent. This results in adjusted earnings per share of $3.71 to $3.73, raised from the previous range of $3.50 to $3.70.

Third 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.

• Third-quarter 2023 revenue was $440 million, up 26 percent on a reported basis and 25 percent organically, versus the prior year period. Growth was led by backlog execution in smart metering and test and measurement.
• Third-quarter reported operating income for the segment was $27 million, compared to a $2 million loss in the same period last year. Adjusted operating income, which excludes $1 million of special charges, $6 million of restructuring and realignment costs, and $16 million of purchase accounting intangible amortization, was $50 million, a 72 percent increase versus the prior year period, which was recast to add back $17 million of non-cash purchase accounting amortization. The segment reported operating margin was 6.1 percent, up 670 basis points versus the prior year period. Adjusted operating margin of 11.4 percent increased 310 basis points over the prior year period. Adjusted EBITDA margin was 15.7 percent, up 190 basis points from the prior year period. Higher volume, strong price realization, and productivity savings exceeded the impact of inflation and strategic investments.

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.

• Third-quarter 2023 revenue was $803 million, a 40 percent increase on a reported basis and 7 percent organically, compared with the prior year period. This strong growth was driven by price realization and robust utilities and industrial demand, particularly in the U.S., and resilience in Western Europe, partially offset by a decline in Emerging Markets.
• Third-quarter reported operating income for the segment was $128 million, a 23 percent increase versus the same period last year. Adjusted operating income, which excludes $6 million of special charges, $3 million of restructuring and realignment costs, and $15 million of purchase accounting intangible amortization, was $152 million. This represents a 41 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 15.9 percent, down 220 basis points versus the prior year period, and adjusted operating margin was 18.9 percent, up 10 basis points versus the prior year period. Adjusted EBITDA margin was 21.2 percent, up 50 basis points versus the prior year. Excluding Evoqua, adjusted EBITDA margin was 21.5 percent, up 80 basis points on the prior year. Favorable price realization net of inflation, productivity initiatives 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.

• Third-quarter 2023 revenue was $465 million, a 2 percent increase on a reported basis and 1 percent organically, year-over-year. Growth was driven by strong price realization, backlog execution in U.S. building solutions, and resilient industrial demand in developed markets, partially offset by softness in Emerging Markets.
• Third-quarter reported operating income for the segment was $73 million, a 5 percent decrease versus the same period last year. Adjusted operating income, which excludes $6 million of restructuring and realignment costs, was $79 million, a 1 percent increase versus the same period last year. The segment reported operating margin was 15.7 percent, down 110 basis points versus the prior year period. Adjusted operating margin of 17.0 percent was flat to the prior year period. Adjusted EBITDA margin was 18.3 percent, up 20 basis points from the prior year. Adjusted margin expansion was driven by price realization net of inflation and productivity savings, more than offsetting volume declines and strategic investments.

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

• Third-quarter 2023 revenue was $368 million.
• Third-quarter reported operating loss for the segment was $3 million. Adjusted operating income was $49 million, which excludes $9 million of special charges, $8 million of restructuring and realignment costs, and $35 million of purchase accounting intangible amortization. The segment reported operating margin was (0.8) percent. Adjusted operating margin was 13.3 percent. Adjusted EBITDA margin was 22.6 percent, reflecting strong margin performance driven by effective price-cost discipline and volume conversion.