Xylem Inc. 2024 Q1 Form 10-Q Summary
Business Context and Reporting Period
Xylem is a global water technology company serving municipal, industrial, residential and commercial customers across the water cycle. The filing covers the unaudited three months ended March 31, 2024. Xylem reports four segments: Water Infrastructure, Applied Water, Measurement and Control Solutions, and Water Solutions and Services.
Effective January 1, 2024, Xylem changed its segment structure and recast prior-period segment data. The May 2023 Evoqua acquisition materially affects year-over-year comparability, particularly in Water Solutions and Services.
Financial Highlights
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $2,033 million | $1,448 million | +40.4% |
| Gross profit | $752 million | $546 million | +37.7% |
| Gross margin | 37.0% | 37.7% | (70) basis points |
| Operating income | $209 million | $131 million | +59.5% |
| Operating margin | 10.3% | 9.0% | +130 basis points |
| Net income | $153 million | $99 million | +54.5% |
| Diluted EPS | $0.63 | $0.54 | +16.7% |
| Net cash from operating activities | $89 million | $(19) million | +$108 million |
| Free cash flow | $15 million | $(35) million | +$50 million |
Management reported organic revenue growth of 7.1%, with $480 million of net acquisition and divestiture contribution. Orders increased 43.1% to $2,246 million, including 3.4% organic growth. Backlog was $5,272 million, up 40.8% year over year and 3.6% from December 31, 2023; approximately 45% was expected to convert to revenue during the remainder of 2024.
Adjusted operating income was $294 million, or a 14.5% margin, versus $185 million and 12.8% in the prior-year quarter. Adjusted EBITDA was $391 million, or a 19.2% margin, versus $236 million and 16.3%. These are non-GAAP measures and are not substitutes for GAAP results.
Segment Performance
| Segment | Q1 2024 Revenue | Year-over-Year Revenue Change | Q1 2024 Operating Margin |
|---|---|---|---|
| Water Infrastructure | $574 million | +40.0% | 10.5% |
| Applied Water | $436 million | (3.8%) | 14.0% |
| Measurement and Control Solutions | $462 million | +22.2% | 15.2% |
| Water Solutions and Services | $561 million | +171.0% | 8.9% |
Applied Water was the only segment with lower revenue and operating income, reflecting weaker building solutions and industrial water demand, inflation and unfavorable mix. Measurement and Control Solutions benefited from higher smart-metering volumes. Water Solutions and Services reflected substantial Evoqua contribution and organic growth in dewatering services.
Cash, Liquidity and Debt
- Cash and cash equivalents were $947 million at March 31, 2024, compared with $1,019 million at December 31, 2023.
- Total debt was $2,270 million, including $285 million classified as short-term or current maturities and $1,985 million classified as long-term debt.
- The $1 billion revolving credit facility was undrawn and available; management reported approximately $1.9 billion of liquidity, consisting of cash and available credit facilities.
- The $270 million term loan was classified as current at quarter-end and was settled with cash on April 19, 2024.
- Capital expenditures were $74 million, dividends paid were $88 million, and share repurchases were $15 million, primarily for employee tax-withholding obligations.
Material Changes, Outlook and Unusual Items
- Revenue, amortization, depreciation and debt-related interest increased substantially because of the Evoqua acquisition. Evoqua contributed $480 million of revenue and $6 million of pretax income in the quarter.
- Gross margin declined 70 basis points. Management cited inflation, Evoqua-related effects and strategic investment spending, partly offset by productivity savings, favorable mix and price realization.
- Restructuring and asset impairment charges were $10 million. Adjusted results also excluded $54 million of acquired-intangible amortization, $16 million of special charges, $15 million of restructuring and realignment costs, and a $5 million loss on sale of businesses.
- Management expects full-year 2024 restructuring costs of approximately $30 million to $40 million.
- Full-year 2024 revenue growth guidance is 15% to 16%, including organic revenue growth guidance of 4% to 6%. The filing does not provide a GAAP EPS or operating-income outlook.
- Comprehensive income declined to $77 million from $134 million, primarily because of a $65 million unfavorable foreign-currency translation adjustment.
- Management identified risks including macroeconomic and interest-rate conditions, inflation, supply-chain and labor constraints, geopolitical events, cybersecurity, project execution, Evoqua integration and synergy realization, foreign exchange, environmental and regulatory matters, tax outcomes, product liability and potential goodwill or intangible-asset impairments.
Contingencies and Controls
Xylem is cooperating with a U.S. Attorney investigation relating to previously disclosed Evoqua financial-reporting matters and cannot predict the outcome; management currently does not expect a material adverse effect. The company also disclosed a Swedish tax appeal involving an approximately $78 million assessment, although management believes it is more likely than not to prevail. Accrued general legal matters were $15 million and environmental liabilities were $4 million at March 31, 2024. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Separate the underlying 7.1% organic revenue growth from the $480 million acquisition and divestiture contribution.
- Assess whether Applied Water demand weakness persists and whether margin recovery offsets inflation and strategic-investment costs.
- Track Evoqua integration costs, restructuring spending, synergy realization and the effect of acquired-intangible amortization on GAAP earnings.
- Reconcile adjusted EPS and adjusted EBITDA to GAAP results and evaluate the recurring nature of excluded items.
- Confirm the post-quarter settlement of the $270 million term loan and the resulting debt and liquidity profile.
- Monitor backlog conversion, cancellations, project execution and the expected recognition of approximately 45% of March 31 backlog during the remainder of 2024.
- Follow developments in the U.S. Attorney investigation, the Swedish tax appeal and environmental, warranty and other contingent liabilities.