Xylem Inc. 2019 Form 10-K Summary
Business context and reporting period
Xylem is a global water technology company serving utility, industrial, residential and commercial customers through three segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions. The filing covers the fiscal year ended December 31, 2019. Although the request references 2019 Q4, this is an annual Form 10-K; fourth-quarter data are included in the filing’s unaudited quarterly disclosures.
Xylem reported approximately $5.2 billion of revenue and approximately 16,300 employees in 2019. Its products and services address water transport, treatment, testing, smart metering, leak detection, infrastructure assessment, digital analytics and building services.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $5,249 million | $5,207 million | Up 0.8% |
| Gross profit | $2,046 million | $2,026 million | Up 1.0% |
| Gross margin | 39.0% | 38.9% | Up 10 basis points |
| Operating income | $486 million | $654 million | Down 25.7% |
| Operating margin | 9.3% | 12.6% | Down 330 basis points |
| Net income attributable to Xylem | $401 million | $549 million | Down 27.0% |
| Diluted EPS | $2.21 | $3.03 | Down 27.1% |
| Cash flow from operations | $839 million | $586 million | Up $253 million |
| Free cash flow | $613 million | $349 million | Up 75% |
Adjusted net income was $547 million, or $3.02 per diluted share, compared with $522 million, or $2.88 per diluted share, in 2018. Adjusted operating income was $727 million, with an adjusted operating margin of 13.9%, versus $714 million and 13.7%, respectively, in 2018.
Revenue growth on a constant-currency basis was 3.2%, including organic growth of 3.6%. Foreign currency translation reduced reported revenue by $124 million, or 2.4%. Orders were $5,339 million, down 1.8% reported but up 0.9% organically. Backlog increased 6.6% to $1,801 million at year-end, with approximately 60% expected to convert to revenue in 2020.
- Water Infrastructure: Revenue of $2,177 million, up slightly reported and up 3.3% on a constant-currency basis; operating income of $365 million.
- Applied Water: Revenue of $1,541 million, up 0.5% reported and 2.3% on a constant-currency basis; operating income of $241 million.
- Measurement & Control Solutions: Revenue of $1,531 million, up 2.3% reported and 3.9% on a constant-currency basis; operating loss of $67 million after impairment and restructuring charges.
At December 31, 2019, cash and cash equivalents were $724 million, compared with $296 million at year-end 2018. Total debt was $2,316 million, including $276 million of commercial paper, and long-term debt was $2,040 million. The $800 million revolving credit facility was undrawn, and the company reported compliance with applicable debt covenants. Fixed-rate senior notes totaled approximately $2.1 billion.
Material changes versus the prior comparable period
- Reported revenue grew modestly, while organic constant-currency growth was stronger across all three segments. Measurement & Control Solutions contributed the largest organic revenue increase but experienced weaker organic orders.
- Operating income declined primarily because of a $148 million non-cash goodwill impairment charge related to the Advanced Infrastructure Analytics reporting unit, $10 million of other asset impairment charges, and higher restructuring and realignment costs.
- The AIA impairment reflected lower forecasted cash flows, slower conversion of pipeline opportunities to revenue and continued investment ahead of anticipated adoption. The AIA reporting unit retained $171 million of goodwill after the charge.
- Adjusted operating margin improved modestly due to procurement and productivity savings, restructuring savings, price realization and favorable volume. These benefits were partly offset by inflation, tariffs, unfavorable mix, strategic investment spending and higher quality costs.
- Operating cash flow improved substantially because of better inventory management, receivables collections, higher cash earnings and lower postretirement contributions. Capital expenditures were $226 million, compared with $237 million in 2018.
- Acquisition spending fell to $18 million from $433 million in 2018, which included the approximately $420 million acquisition of Pure Technologies.
- Dividends paid increased to $174 million from $152 million. Share repurchases totaled $40 million, and $338 million remained available under the share repurchase authorization at year-end.
- Adoption of the new lease accounting standard resulted in recognition of approximately $267 million of right-of-use assets and $265 million of lease liabilities at January 1, 2019, without a material impact on income or cash flow.
Fourth-quarter information
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Revenue | $1,371 million | $1,386 million |
| Gross profit | $537 million | $542 million |
| Operating income | $195 million | $194 million |
| Net income attributable to Xylem | $118 million | $225 million |
| Diluted EPS | $0.65 | $1.24 |
The sharp year-over-year decline in fourth-quarter net income and EPS was not accompanied by a comparable decline in operating income; the filing does not provide a separate Q4 reconciliation explaining the full difference.
Guidance, outlook and management commentary
- Management expected approximately 1% total revenue growth in 2020, including organic revenue growth of 1% to 3%.
- Utilities were expected to deliver low-single-digit organic growth, supported by U.S. water and wastewater spending, smart meters, infrastructure analytics and emerging-market investment.
- Industrial revenue was expected to remain relatively flat, with soft North American dewatering and oil and gas markets offsetting selected international opportunities.
- Commercial and residential markets were expected to grow at low-single-digit rates, supported by U.S. demand, Europe and selected emerging markets.
- Management expected to incur $35 million to $45 million of restructuring and realignment costs in 2020 and anticipated approximately $25 million of incremental net savings from prior actions in 2020 and beyond.
- The company expected 2020 pension and postretirement contributions of approximately $15 million to $25 million.
Risks, contingencies and unusual items
- Future impairment charges remain possible, particularly if the AIA business fails to meet forecasts. Goodwill and other indefinite-lived intangible assets totaled approximately $3 billion at year-end.
- Key operating risks include global economic conditions, geopolitical instability, tariffs, supply-chain disruption, commodity and labor cost inflation, foreign exchange volatility, cybersecurity incidents, product defects, regulatory compliance and changing customer spending.
- The company generated approximately 51% of revenue outside the United States and is exposed to currency translation and transaction risk. Reported 2019 revenue was reduced by 2.4% from unfavorable currency translation.
- Environmental, legal, product-liability, tax, intellectual-property and employment matters remain possible contingencies. Accrued liabilities included $3 million for environmental matters and $5 million for general legal matters.
- A Swedish tax assessment asserted approximately $80 million of tax, penalties and interest relating to a 2013 intercompany intellectual-property transfer. Management believes it is more likely than not to prevail and has not recorded a related tax benefit or liability for the assessment.
- Surety bonds, bank guarantees, standby letters of credit and insurance letters of credit totaled $340 million at year-end. Management stated that off-balance-sheet guarantees had no material current or reasonably likely future effect.
- The company had a $403 million unfunded postretirement benefit position at year-end and a $1.3 billion balance of foreign earnings that it did not currently intend to repatriate; the related deferred tax impact was not reasonably estimable.
Important facts for investors to verify
- Confirm the sustainability of 2020 organic revenue guidance of 1% to 3%, particularly given lower Measurement & Control Solutions orders and soft industrial markets.
- Assess whether AIA revenue conversion and profitability improve sufficiently to avoid additional goodwill or long-lived-asset impairments.
- Reconcile GAAP results with adjusted results, especially the $148 million goodwill impairment, $159 million of special charges and $82 million of restructuring and realignment costs used in adjusted operating income.
- Monitor debt maturities, commercial paper refinancing, interest costs and available liquidity, including the 2021 and 2023 senior-note maturities.
- Evaluate cash conversion, working-capital improvements and whether free cash flow remains adequate to fund capital expenditures, dividends, acquisitions and debt obligations.
- Track the Swedish tax litigation, environmental exposures, pension funding requirements and other contingencies excluded from headline earnings.
- Review the filing’s segment disclosures and non-GAAP reconciliations before comparing Xylem with peers.