Xylem Inc. Form 10-K Summary
Business context and reporting period
Xylem is a global water technology company serving utility, industrial, residential and commercial customers across the water cycle. Its principal offerings include water transport and treatment, applied water systems, smart metering, measurement and control technologies, digital solutions, and water services. The filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a quarterly Q4 filing.
Xylem completed its all-stock acquisition of Evoqua Water Technologies on May 24, 2023. Legacy Evoqua shareholders received approximately 25% of the combined company, and Evoqua contributed $1.177 billion of revenue from the acquisition date through year-end.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $7.364 billion | $5.522 billion | 33.4% increase |
| Gross profit | $2.717 billion | $2.084 billion | 30.4% increase |
| Gross margin | 36.9% | 37.7% | Down 80 basis points |
| Operating income | $652 million | $622 million | 4.8% increase |
| Operating margin | 8.9% | 11.3% | Down 240 basis points |
| Net income | $609 million | $355 million | 71.5% increase |
| Diluted EPS | $2.79 | $1.96 | 42.3% increase |
| Adjusted EPS | $3.78 | $3.15 | 20.0% increase |
| Cash flow from operations | $837 million | $596 million | 40.4% increase |
| Free cash flow | $599 million | $388 million | 54% increase |
| Adjusted operating margin | 14.6% | 13.5% | Up 110 basis points |
| Adjusted EBITDA | $1.392 billion | $940 million | 48.1% increase |
Revenue growth included $690 million of organic growth, $1.177 billion from acquisitions and a $25 million unfavorable foreign-currency translation impact. Orders increased 19.9% to $7.501 billion, although organic orders increased only 1.0%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.019 billion at December 31, 2023, compared with $944 million a year earlier.
- Total debt was $2.284 billion, including $1.9 billion of fixed-rate senior notes, $278 million under a term loan and $123 million of equipment financings. Net debt was approximately $1.265 billion based on reported cash and total debt.
- The $1 billion revolving credit facility was undrawn, and management reported approximately $2 billion of liquidity, consisting of cash and available credit facilities.
- Capital expenditures were $271 million. Cash used in investing activities was $628 million, including $476 million for acquisitions, net of cash acquired.
- Dividends paid were $299 million, and dividends declared increased to $1.32 per share from $1.20 in 2022. The company repurchased $25 million of stock, primarily for employee tax-withholding obligations; no shares were repurchased under the $500 million authorization during 2023.
- The company stated that it expects sufficient liquidity to meet funding requirements and service debt and other obligations over the next twelve months.
Material changes versus the prior comparable period
- The Evoqua acquisition materially increased revenue, assets, goodwill, intangible assets, debt and share count. Xylem issued 58.8 million shares to Evoqua shareholders and recorded $4.813 billion of acquisition-related goodwill.
- Goodwill increased to $7.587 billion from $2.719 billion, and net intangible assets increased to $2.529 billion from $930 million.
- Revenue increased across all legacy segments. Water Infrastructure revenue rose 25.5%, Applied Water rose 4.9%, and Measurement and Control Solutions rose 24.3%. Integrated Solutions and Services contributed $815 million of revenue.
- Water Infrastructure operating margin declined to 14.1% from 17.7%, while Applied Water increased to 16.7% from 14.6% and Measurement and Control Solutions increased to 6.5% from 0.1%. The newly acquired Integrated Solutions and Services segment reported a 1.0% GAAP operating margin and a 12.9% adjusted operating margin.
- Margins were pressured by inflation, unfavorable mix, strategic investment spending and Evoqua-related costs, but benefited from price realization and productivity savings.
- Restructuring and realignment costs increased to $106 million from $34 million on an adjusted operating-income basis. Special charges primarily reflected $126 million of acquisition and integration costs.
- The effective tax rate fell to 4.1% from 19.2%, primarily due to audit settlements and tax-rate changes. This lower rate materially benefited reported net income.
- Backlog increased 41.1% to $5.088 billion, including $1.268 billion contributed by Evoqua. More than half of year-end backlog was expected to convert to revenue in 2024.
Guidance, outlook, commentary and risks
For 2024, management expects total revenue growth of 14% to 15% and organic revenue growth of 3% to 5%. Expected organic growth is mid-single-digit for Water Infrastructure, low-single-digit decline for Applied Water, low-double-digit growth for Measurement and Control Solutions, and mid-single-digit growth for Integrated Solutions and Services. Management expects 2024 restructuring and realignment costs of $50 million to $70 million.
Effective January 1, 2024, Xylem combined Integrated Solutions and Services with its dewatering and assessment-services businesses into a new Water Solutions and Services segment. Recast segment information was expected to be provided in the first quarter of 2024. Management stated that Evoqua integration was on track and that backlog, recurring service revenue and resilient end markets supported its 2024 commitments.
- Key operating risks include inflation, tariffs, supply-chain disruption, labor constraints, semiconductor availability, logistics disruption and foreign-currency volatility.
- Geopolitical risks include the Russia-Ukraine and Middle East conflicts, Red Sea shipping disruptions, China-related trade restrictions and China-Taiwan semiconductor risks.
- Demand depends partly on government and utility infrastructure spending, customer financing, regulatory requirements and domestic-content rules under U.S. infrastructure programs.
- Successful integration of Evoqua, realization of expected synergies and retention of key talent remain material execution risks.
- Cybersecurity risks affect enterprise systems, connected products, digital services and third-party providers. The company reported no material cybersecurity incident as of the filing date.
- Large projects may face delays, cost overruns, performance guarantees, warranty claims and contractual liabilities.
- Goodwill and indefinite-lived intangible assets totaled approximately $8 billion. No material impairment was recorded in 2023, but future impairment charges remain possible.
- Xylem is involved in ordinary-course legal, environmental and regulatory matters. Accrued environmental liabilities were $4 million and general legal accruals were $18 million at year-end.
- An ongoing Swedish tax appeal relates to an approximately $82 million assessment; management believes it is more likely than not to prevail, but the outcome is uncertain. Evoqua-related financial-misstatement investigations are ongoing, and management currently does not expect a material adverse effect.
Investor verification checklist
- Verify the final Evoqua purchase-price allocation, integration costs, synergy realization and the effect of acquisition accounting on future amortization and margins.
- Assess whether organic orders and revenue growth can improve from the 2023 levels, particularly in Applied Water and Measurement and Control Solutions.
- Monitor conversion of the $5.088 billion backlog into revenue and cash flow, including potential project delays or cancellations.
- Reconcile GAAP results with adjusted metrics and evaluate the recurring versus non-recurring nature of restructuring, acquisition, amortization and tax items.
- Review leverage, variable-rate debt, covenant compliance and liquidity after the Evoqua acquisition.
- Evaluate goodwill and intangible-asset impairment sensitivity, especially for Measurement and Control Solutions and the newly acquired Evoqua businesses.
- Track the 2024 segment recast and the performance of the new Water Solutions and Services segment.
- Review exposure to inflation, tariffs, supply-chain constraints, geopolitical disruptions, cybersecurity incidents and environmental or regulatory claims.
- Confirm the status and potential financial impact of the Swedish tax appeal and the former Evoqua investigation.