Xylem Reports Third Quarter 2022 Results

Xylem Inc. (NYSE: XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported third quarter revenue of $1.4 billion, surpassing previous guidance, with strong commercial and operational execution. While orders were down 7 percent on a reported basis, they were down 1 percent organically, with the difference due to currency. The Company reported resilient underlying global demand with strong backlog growth.

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.

Supplemental information on Xylem’s third quarter 2022 earnings and reconciliations for certain non-GAAP items is posted at www.xylem.com/investors.

About Xylem

Xylem (XYL) is a leading global water technology company committed to solving critical water and infrastructure challenges with innovation. Our 17,000 diverse employees delivered revenue of $5.2 billion in 2021. We are creating a more sustainable world by enabling our customers to optimize water and resource management, and helping communities in more than 150 countries become water-secure. Join us at www.xylem.com.

Forward-Looking Statements

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Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by impacts from changes in international conditions, including as a result of the war between Russia and Ukraine, the coronavirus (“COVID-19”) pandemic and macroeconomic conditions, including inflation. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector spending, inflation, interest rates and related monetary policy by governments in response to inflation, and the strength of the residential and commercial real estate markets, on economic activity and our operations; geopolitical events, including the war between Russia and Ukraine, and regulatory, economic and other risks associated with our global sales and operations, including with respect to domestic content requirements applicable to projects with governmental funding; continued uncertainty around the ongoing impacts of the COVID-19 pandemic on the macroeconomy and our business, operations, growth, and financial condition; actual or potential other epidemics, pandemics or global health crises; availability, shortage or delays in receiving electronic components (in particular, semiconductors), parts, and raw materials from our supply chain; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, energy supply, supply chain shortages, logistics challenges, tight labor markets, prevailing price changes, tariffs and other factors; demand for our products; disruption, competition or pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; ability to retain and attract senior management and other diverse and key talent, as well as competition for overall talent and labor; difficulty predicting our financial results; defects, security, warranty and liability claims, and recalls with respect to products; availability, regulation or interference with radio spectrum used by certain of our products; uncertainty related to restructuring and realignment actions and related costs and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; volatility in served markets or impacts on business and operations due to weather conditions, including the effects of climate change; fluctuations in foreign currency exchange rates; our ability to borrow or refinance our existing indebtedness and uncertainty around the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, our products, competition, and the environment and climate change; changes in our effective tax rates or tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”) and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).

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