Xylem Inc. 2021 Form 10-K Summary
Business context and reporting period
Xylem is a global water technology company serving utility, industrial, commercial and residential markets across the water cycle. Its three reportable segments are Water Infrastructure, Applied Water, and Measurement & Control Solutions. This Form 10-K covers the fiscal year ended December 31, 2021; it does not provide a separately presented fourth-quarter income statement or cash flow statement.
- Revenue: $5.195 billion; approximately 17,300 employees; operations and sales in approximately 150 countries.
- Revenue mix: Water Infrastructure $2.247 billion, Applied Water $1.613 billion, and Measurement & Control Solutions $1.335 billion.
- Geographic mix: United States 44%, Western Europe 27%, emerging markets 21%, and other regions 8%.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $5,195 million | $4,876 million | 6.5% increase |
| Gross profit | $1,975 million | $1,830 million | 7.9% increase |
| Gross margin | 38.0% | 37.5% | 50 basis-point increase |
| Operating income | $585 million | $367 million | 59.4% increase |
| Operating margin | 11.3% | 7.5% | 380 basis-point increase |
| Net income | $427 million | $254 million | 68.1% increase |
| Diluted EPS | $2.35 | $1.40 | 67.9% increase |
| Adjusted EPS | $2.49 | $2.06 | 20.9% increase |
| Operating cash flow | $538 million | $824 million | 34.7% decrease |
| Free cash flow | $330 million | $641 million | 49% decrease |
Adjusted operating income was $611 million, or an 11.8% adjusted operating margin, compared with $525 million and 10.8% in 2020. Adjusted EBITDA was $890 million, or 17.1% of revenue, compared with $795 million and 16.3% in 2020. Orders increased 25.2% to $6.300 billion, including 22.6% organic growth, and year-end backlog increased 52.6% to $3.240 billion. Approximately 60% of backlog was expected to convert to revenue in 2022.
Cash flow from operations declined primarily because of higher working capital, including increased safety stock, higher interest payments, and higher tax payments. Capital expenditures were $208 million, compared with $183 million in 2020. Dividends paid were $203 million, and share repurchases were $68 million.
- Cash and cash equivalents at December 31, 2021: $1.349 billion.
- Total debt: $2.440 billion, down from $3.084 billion, following repayment of $600 million of notes due in 2021.
- Available liquidity: approximately $2.1 billion, consisting of $1.3 billion of cash and $800 million of available credit facilities.
- The $800 million revolving credit facility was undrawn, and Xylem reported compliance with its debt covenants.
- The next long-term debt maturity was the $564 million carrying value of 2.250% senior notes due in 2023.
Material changes versus the prior comparable period
- Revenue growth was led by Applied Water, up 12.5%, and Water Infrastructure, up 8.1%. Measurement & Control Solutions revenue declined 2.1% because of component shortages and utility deployment constraints.
- Operating profit benefited from lower restructuring and special charges. The 2020 period included a $58 million goodwill impairment charge and substantially higher restructuring and asset impairment charges; no goodwill impairment was recorded in 2021.
- Adjusted margin expansion reflected productivity and restructuring savings, favorable volume and price realization, partly offset by inflation, logistics costs and strategic investment spending.
- Inventories increased to $700 million from $558 million, primarily reflecting safety stock and supply-chain mitigation.
- Foreign currency translation increased reported revenue by $122 million, while total cash declined by $526 million during 2021.
Guidance, outlook, commentary and risks
Management projected 2022 total revenue growth of 1% to 3% and organic revenue growth of 3% to 5%. It expected low-single-digit organic growth in utilities, mid-single-digit growth in industrial and commercial markets, and low-single-digit to mid-single-digit growth in residential markets. Management expected supply constraints to ease and certain delayed utility deployments to accelerate in the second half of 2022.
Xylem expected to incur $25 million to $30 million of restructuring and realignment costs in 2022 and anticipated approximately $8 million of incremental net savings from prior actions. Management identified maximizing semiconductor allocation, price realization, margin expansion and strategic capital deployment as key priorities.
- COVID-19, semiconductor and other component shortages, port congestion, labor constraints, inflation and freight costs continued to affect production, delivery times and margins.
- U.S. Buy America and other domestic-content requirements under the Infrastructure Investment and Jobs Act could limit eligibility for federally funded projects if Xylem cannot meet applicable requirements.
- International operations expose Xylem to foreign exchange, geopolitical, regulatory, tax, trade and supply-chain risks; 56% of 2021 revenue was generated outside the United States.
- Cybersecurity, product quality, warranty, radio-spectrum availability, environmental regulation and legal or regulatory proceedings could adversely affect operations or financial results.
- The company had approximately $3 billion of goodwill and other indefinite-lived intangible assets. Although 2021 testing showed substantial excess fair value, future impairment remains possible.
- Xylem had initiated a buyout of its largest U.K. defined-benefit plan and anticipated an approximately $170 million settlement charge in 2022, primarily from unrecognized actuarial losses.
- A Swedish tax assessment related to a 2013 European reorganization sought approximately $80 million including tax, penalties and interest; Xylem is appealing and had not recorded unrecognized tax benefits for the matter as of year-end.
- Environmental accruals were $3 million, general legal accruals were $4 million, and outstanding letters of credit, guarantees and surety bonds totaled $415 million.
Most important facts for investors to verify
- Whether backlog converts into revenue as expected, particularly the approximately 60% targeted for 2022.
- Whether semiconductor availability, inflation and logistics costs improve sufficiently to support the 2022 revenue and margin outlook.
- The timing and final amount of the anticipated approximately $170 million U.K. pension settlement charge.
- Refinancing and liquidity plans for the 2023 senior-note maturity, including future access to the revolving credit and debt markets.
- The effect of Buy America requirements on federally funded U.S. projects and the company’s mitigation actions.
- Progress in Measurement & Control Solutions, where 2021 revenue declined and adjusted operating margin was only 1.1%.
- The status and potential exposure of the Swedish tax assessment and other legal, environmental and indemnification matters.