Xylem Inc. Form 10-Q Summary
Business Context and Reporting Period
Xylem is a global water technology company serving utility, industrial, residential, and commercial markets across the water cycle. Its reportable segments are Water Infrastructure, Applied Water, and Measurement & Control Solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial Performance and Position
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $1,351 million | $1,160 million | $2,607 million | $2,283 million |
| Gross profit / margin | $520 million / 38.5% | $434 million / 37.4% | $1,010 million / 38.7% | $843 million / 36.9% |
| Operating income / margin | $160 million / 11.8% | $54 million / 4.7% | $293 million / 11.2% | $115 million / 5.0% |
| Net income | $113 million | $31 million | $200 million | $69 million |
| Diluted EPS | $0.62 | $0.17 | $1.10 | $0.38 |
| Operating cash flow | Not separately provided | Not separately provided | $206 million | $179 million |
| Free cash flow | Not separately provided | Not separately provided | $126 million | $84 million |
Q2 adjusted operating income was $166 million, with a 12.3% adjusted operating margin, versus $108 million and 9.3% in the prior-year quarter. Adjusted EBITDA was $234 million, or 17.3% of revenue, compared with $177 million, or 15.3%, in Q2 2020. Management attributes margin improvement primarily to productivity, restructuring, cost-saving initiatives, favorable volume, and COVID-19 recovery, partly offset by inflation, logistics costs, and strategic investment spending.
- Q2 revenue increased 16.5%; constant-currency growth was 10.8%, including 11.0% organic growth. Six-month revenue increased 14.2%, including 9.4% constant-currency growth and 9.6% organic growth.
- Q2 segment revenue was $569 million for Water Infrastructure, $414 million for Applied Water, and $368 million for Measurement & Control Solutions.
- Q2 orders were $1,660 million, up 34.7% year over year and 28.7% on a constant-currency basis. Backlog was $2,779 million at June 30, 2021, up 30.8% from December 31, 2020; approximately 50% was expected to convert to revenue during the remainder of 2021.
- Cash and equivalents were $1,840 million at June 30, 2021, compared with $1,875 million at year-end 2020. Total debt was $3,066 million, including $600 million of notes due in October 2021 and $592 million of notes due in March 2023.
- The $800 million revolving credit facility was undrawn, and management reported approximately $2.6 billion of available liquidity, consisting of cash and available credit facilities. The company expected to fund the $600 million 2021 debt maturity from cash.
- Capital expenditures were $80 million for the first six months, down from $95 million in the prior-year period. Dividends paid were $102 million, and share repurchases were $68 million.
Material Changes Versus the Prior Comparable Period
- Operating income increased 196.3% in Q2 and 154.8% for the first six months, substantially reflecting lower restructuring and special charges. Q2 2020 included $48 million of restructuring and asset impairment charges and $11 million of special charges; Q2 2021 included $3 million and no special charges, respectively.
- Measurement & Control Solutions returned to profitability, reporting Q2 operating income of $13 million versus a $46 million loss in Q2 2020. The prior-year period included significant restructuring, product-line discontinuation, software impairment, and other charges.
- Gross margin expanded 110 basis points in Q2 and 180 basis points for the first six months. SG&A as a percentage of revenue declined 230 basis points in Q2 and 240 basis points year to date.
- Net cash from operations increased $27 million year to date, while financing cash flow changed from $774 million of inflow in 2020, driven by debt issuance, to $162 million of outflow in 2021, primarily due to the absence of 2020 debt issuance and the payment of dividends and repurchases.
- Interest expense increased to $21 million in Q2 and $42 million year to date, primarily due to the Green Bond issued in June 2020.
Guidance, Outlook, Commentary, and Risks
Management maintained 2021 revenue growth guidance of 8% to 10%, including organic revenue growth of 6% to 8%. Expected organic growth was mid- to high-single-digit in utilities and commercial markets, high-single-digit in industrial markets, and low-teens in residential markets.
Management expected $30 million to $40 million of 2021 restructuring and realignment costs and $35 million to $40 million of net savings. The filing also describes a narrower restructuring-cost estimate of $15 million to $25 million and anticipated total net savings of $1 million to $3 million for 2021; investors should reconcile these differing disclosures in the filing.
COVID-19 and broader market conditions continued to cause component and raw-material shortages, supplier interruptions, logistics capacity constraints, and higher freight costs. Electronic-component shortages were affecting the timing of large utility project deployments. Other disclosed risks include inflation, foreign-exchange volatility, cybersecurity and information-technology disruptions, supply-chain interruptions, demand and project timing, product liability and warranty claims, regulatory and environmental matters, tax disputes, future goodwill or intangible-asset impairments, and refinancing or liquidity risk.
- The company is defending an approximately $80 million Swedish tax assessment related to an intercompany intellectual-property transfer and has recorded no unrecognized tax benefit for the position.
- Goodwill in the Advanced Infrastructure Analytics reporting unit remained exposed to potential impairment if forecast cash flows deteriorate; the remaining balance was $112 million after a $58 million impairment recorded in 2020.
- Surety bonds, bank guarantees, insurance letters of credit, and standby letters of credit totaled $410 million at June 30, 2021. General legal and environmental accruals were $5 million and $3 million, respectively.
- Management stated that the company was in compliance with debt covenants and that disclosure controls were effective.
Investor Verification Checklist
- Verify the funding plan and refinancing or repayment of the $600 million senior-note maturity due in October 2021.
- Assess whether backlog conversion, elevated orders, and approximately 50% remaining-2021 backlog recognition offset supply-chain and component constraints.
- Separate sustainable organic growth and margin expansion from favorable COVID-19 comparisons, foreign-currency translation, and lower prior-year restructuring and impairment charges.
- Reconcile the differing 2021 restructuring-cost and savings disclosures and track whether projected savings are realized.
- Monitor inflation, logistics costs, working-capital requirements, and cash conversion, particularly as inventories increased to $642 million from $558 million at year-end 2020.
- Follow the Swedish tax litigation, potential goodwill impairment at Advanced Infrastructure Analytics, environmental and product-liability matters, and other contingent obligations.