Xylem Inc. 2014 Form 10-K Summary
Business context and reporting period
Xylem is a global water-technology equipment and services company serving water infrastructure and water-usage applications. Its two reportable segments are Water Infrastructure and Applied Water. The filing covers the fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter data. Xylem generated revenue in more than 150 countries, with 62% of 2014 revenue outside the United States and 21% from emerging markets.
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $3,916 million | $3,837 million | 2.1% |
| Gross profit | $1,513 million | $1,499 million | 0.9% |
| Gross margin | 38.6% | 39.1% | Down 50 bps |
| Operating income | $463 million | $363 million | 27.5% |
| Operating margin | 11.8% | 9.5% | Up 230 bps |
| Net income | $337 million | $228 million | 47.8% |
| Diluted EPS | $1.83 | $1.22 | 50.0% |
| Operating cash flow | $416 million | $324 million | 28.4% |
| Free cash flow | $297 million | $198 million | 50.0% |
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $663 million at year-end, compared with $533 million in 2013. Working capital was $882 million.
- Total debt was $1.288 billion, consisting primarily of $600 million of 3.55% senior notes due 2016 and $600 million of 4.875% senior notes due 2021. The $600 million revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- The European Investment Bank research and development facility had $84 million outstanding and was classified as short-term debt because management intended to repay it within one year.
- Capital expenditures were $119 million. Cash used in investing activities was $86 million, including $30 million of proceeds from the sale of a business.
- Xylem repurchased approximately $130 million of shares under its 2013 program and paid $94 million of dividends. Dividends declared per share increased to $0.5120 from $0.4656.
Material changes versus the prior comparable period
- Revenue increased 2.1% as reported and 3.3% on a constant-currency basis. Organic revenue growth was 3.5%; foreign-currency translation reduced revenue by $49 million.
- Water Infrastructure revenue rose 2.4% to $2.442 billion, while Applied Water revenue rose 1.4% to $1.474 billion.
- Segment operating income increased to $514 million from $438 million. Water Infrastructure margin rose to 13.1% from 11.0%, and Applied Water margin rose to 13.1% from 11.6%.
- Operating improvement reflected lean Six Sigma, global sourcing and restructuring savings, as well as the absence of $24 million of 2013 special charges. These benefits were partly offset by cost inflation, unfavorable product and geographic mix, and foreign-exchange pressure.
- Restructuring and realignment costs declined to $43 million from $64 million. The company realized approximately $13 million of net savings from 2014 actions and expects approximately $20 million of additional restructuring and realignment costs in 2015.
- The Wolverhampton valves business was divested for approximately $30 million, producing an $11 million gain. The divested business generated approximately $25 million of 2013 revenue.
- Backlog increased to $740 million from $707 million, with more than 85% expected to convert to revenue during 2015.
- Other comprehensive income declined sharply, primarily because of a $206 million foreign-currency translation loss and adverse postretirement-plan changes. Year-end accumulated other comprehensive income was negative $99 million.
Fourth-quarter 2014 information
For the quarter ended December 31, 2014, revenue was $1.042 billion, gross profit was $407 million, operating income was $141 million, net income was $96 million, and diluted EPS was $0.52. In the fourth quarter of 2013, revenue was $1.033 billion, operating income was $129 million, net income was $68 million, and diluted EPS was $0.37.
Guidance, outlook, risks and unusual items
- Management expected 2015 organic revenue growth in the low single digits, but anticipated a high-single-digit negative foreign-exchange translation impact, primarily from a weaker euro against the U.S. dollar.
- Management expected continued strength in U.S. industrial markets and emerging markets, partially offset by weakness in oil and gas, Europe, and residential markets.
- Management projected approximately $20 million of 2015 restructuring and realignment costs, with approximately $16 million of incremental savings from 2014 actions and $2 million from 2015 actions.
- Key risks include international and emerging-market exposure, currency volatility, economic and government spending conditions, commodity and supplier costs, competitive pricing, project delays or cancellations, weather, cybersecurity, product liability, goodwill impairment, pension funding, litigation, tax matters and debt refinancing.
- Xylem disclosed a Korea Fair Trade Commission bid-rigging finding involving its South Korean subsidiary, a $1.6 million fine, an appeal, and a related internal investigation expanded to potential Foreign Corrupt Practices Act issues. The company voluntarily contacted the SEC and Department of Justice in January 2015 and stated that potential liability could not yet be reasonably estimated.
- Environmental liabilities accrued at year-end were $5 million, with estimated annual environmental spending of approximately $1 million to $2 million. General legal matters had accrued liabilities of $9 million.
- Goodwill and other indefinite-lived intangible assets totaled approximately $2 billion. The 2014 impairment review found no impairment, but future impairment charges remain possible.
- The company reported an unfunded postretirement benefit position of $346 million and expected 2015 pension and postretirement contributions of approximately $24 million to $34 million.
Most important facts for investors to verify
- Whether low-single-digit organic growth can offset the projected high-single-digit foreign-exchange headwind in 2015.
- Execution of the regional commercial redesign and restructuring program, including the expected savings and remaining costs.
- Conversion of the $740 million backlog into 2015 revenue and the effect of project timing or cancellations.
- Refinancing or repayment of the $600 million senior notes due in September 2016 and renewal of the revolving credit facility.
- Developments, potential penalties and financial exposure from the Korea investigation and related SEC and DOJ matters.
- Progress in reducing the postretirement deficit, funding requirements, and foreign-currency effects on reported equity and earnings.
- Cash deployment among share repurchases, dividends, capital expenditures, debt reduction and potential acquisitions.