Xylem Inc. 2021 First-Quarter Form 10-Q Summary
Business context and reporting period
Xylem is a global water technology company serving water and wastewater applications through three segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions. This unaudited quarterly report covers the three months ended March 31, 2021, compared with the corresponding 2020 period.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1,256 million | $1,123 million | Up 11.8% |
| Gross profit / margin | $490 million / 39.0% | $409 million / 36.4% | Margin up 260 bps |
| Operating income / margin | $133 million / 10.6% | $61 million / 5.4% | Income up 118.0%; margin up 520 bps |
| Adjusted operating income / margin | $143 million / 11.4% | $70 million / 6.2% | Margin up 520 bps |
| Net income | $87 million | $38 million | Up 128.9% |
| Diluted EPS | $0.48 | $0.21 | Up 128.6% |
| Operating cash flow | $(26) million | $(2) million | Use increased $24 million |
| Free cash flow | $(65) million | $(53) million | Use increased $12 million |
| Adjusted EBITDA / margin | $215 million / 17.1% | $138 million / 12.3% | Margin up 480 bps |
Revenue growth on a constant-currency basis was 7.9%, including organic growth of 8.1%; foreign-currency translation contributed $44 million. Orders increased 22.0% to $1,538 million, and backlog increased 27.3% year over year to $2,403 million. Approximately 54% of March 31 backlog was expected to convert to revenue during the remainder of 2021.
- Water Infrastructure revenue increased 16.2% to $509 million; operating income increased to $71 million from $39 million.
- Applied Water revenue increased 16.3% to $393 million; operating income increased to $66 million from $47 million.
- Measurement & Control Solutions revenue increased 2.0% to $354 million, but was down 0.6% on a constant-currency basis; operating income improved to $9 million from a $12 million loss.
Cash and cash equivalents were $1,688 million at March 31, 2021, down from $1,875 million at December 31, 2020. Total debt was $3,060 million, including $600 million of current maturities and $2,460 million of long-term debt. The $800 million revolving credit facility was undrawn, and management reported approximately $2.5 billion of available liquidity, consisting of cash and available credit facilities. The $600 million Senior Notes due in October 2021 were expected to be repaid from cash; the next long-term debt maturity was in March 2023.
Material changes versus the prior comparable period
- Revenue growth reflected recovery from COVID-19 impacts, particularly in China and emerging markets, as well as strength in Western Europe. U.S. organic revenue was comparatively weaker.
- Gross margin and operating margin improved substantially due to productivity and procurement savings, favorable volume, lower quality-management costs, and operating leverage. Cost inflation, logistics costs, unfavorable mix, and strategic investments partially offset these benefits.
- Interest expense increased to $21 million from $16 million, primarily due to the Green Bond issued in the second quarter of 2020.
- The effective tax rate increased to 23.3% from 10.0%, driven primarily by tax settlements and the GILTI inclusion, partly offset by favorable earnings mix.
- Operating cash flow was negative as higher earnings were more than offset by working-capital investment, higher interest and tax payments, and timing of compensation payments.
- Restructuring and asset impairment charges increased to $6 million from $2 million. The restructuring accrual declined to $21 million from $29 million at year-end after $12 million of payments.
- Share repurchases totaled $67 million, including $60 million under the board-authorized program; $228 million remained available under that program at March 31, 2021. The quarterly dividend was $0.28 per share versus $0.26 in the prior-year quarter.
Guidance, outlook, risks, and unusual items
Management projected 2021 total revenue growth of 8% to 10% and organic revenue growth of 5% to 7%. Expected organic growth was mid- to high-single-digit for utilities, mid-single-digit for industrial markets, low-single-digit for commercial markets, and high-single-digit to low-double-digit for residential markets.
The filing contains differing restructuring outlook amounts: the executive summary states expected 2021 restructuring and realignment costs of $50 million to $60 million and approximately $40 million of net savings, while the later MD&A discussion states expected restructuring costs of $35 million to $45 million and approximately $35 million of incremental savings from 2020 actions, with approximately $4 million of total net savings during 2021. This discrepancy should be reconciled against subsequent company guidance.
- COVID-19 and related supply-chain disruptions caused component, parts, and raw-material shortages, supplier interruptions, and higher logistics costs. Electronic-component shortages remained a specific concern.
- Management reported global operating capacity at approximately normal levels but continued to monitor pandemic effects on demand, operations, employees, customers, and liquidity.
- Future results remain exposed to inflation, foreign-exchange movements, economic and industry conditions, geopolitical and regulatory risks, cybersecurity incidents, supply-chain disruption, product liability and warranty claims, acquisitions, goodwill impairment, tax matters, and changes in financing access.
- The company had an approximately $80 million Swedish tax assessment, including tax, penalties, and interest, related to a 2013 intercompany intellectual-property transfer. Management believed it was more likely than not to prevail and had not recorded unrecognized tax benefits for this matter.
- Goodwill related to the Advanced Infrastructure Analytics reporting unit remained exposed to potential impairment if forecast cash flows deteriorate. The remaining goodwill balance was $112 million after a $58 million impairment charge in 2020.
- General legal and environmental accruals were $5 million and $3 million, respectively. Surety bonds, bank guarantees, insurance letters of credit, and standby letters of credit totaled $392 million.
Most important facts for investors to verify
- Reconcile the conflicting 2021 restructuring-cost and savings outlook presented in the executive summary and MD&A.
- Track repayment or refinancing of the $600 million Senior Notes due October 2021 and the company’s post-repayment liquidity.
- Assess whether strong orders and backlog convert to revenue amid supply-chain, component-availability, inflation, and logistics pressures.
- Monitor the sustainability of margin expansion after COVID-19 recovery benefits and cost-reduction actions.
- Review the effective tax rate, tax settlements, the Swedish tax litigation, and potential changes in unrecognized tax benefits.
- Evaluate future goodwill impairment risk, particularly for the Advanced Infrastructure Analytics reporting unit.
- Confirm future operating cash-flow conversion, working-capital requirements, capital expenditures, dividends, and share repurchases.