Xylem Inc. 2011 Form 10-K Summary
Business context and reporting period
Xylem designs, manufactures and services water and wastewater equipment and technologies, operating through Water Infrastructure and Applied Water. The filing covers the fiscal year ended December 31, 2011. Xylem completed its tax-free spin-off from ITT Corporation on October 31, 2011 and began regular-way NYSE trading on November 1, 2011.
The 2011 results combine ten months of carve-out WaterCo results under ITT with two months of stand-alone Xylem results. Prior-year results are entirely carve-out results and may not represent the costs of operating as an independent company.
- 2011 revenue was generated in more than 150 countries; approximately 64% was outside the United States.
- Water Infrastructure revenue was $2,416 million; Applied Water revenue was $1,444 million, before eliminations.
- The company had approximately 12,500 employees and more than 320 locations in over 40 countries.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $3,803 million | $3,202 million | 18.8% |
| Gross profit | $1,461 million | $1,214 million | 20.3% |
| Gross margin | 38.4% | 37.9% | +50 basis points |
| Operating income | $395 million | $388 million | 1.8% |
| Operating margin | 10.4% | 12.1% | -170 basis points |
| Net income | $279 million | $329 million | -15.2% |
| Diluted EPS | $1.50 | $1.78 | -15.7% |
| Net cash from operating activities | $449 million | $395 million | 13.7% |
| Free cash flow | $388 million | $301 million | 28.9% |
Reported operating income included $87 million of pre-tax separation costs. Excluding these costs, adjusted operating income was $482 million and adjusted operating margin was 12.7%, compared with 12.1% in 2010. Adjusted net income was $358 million, or $1.93 per diluted share, versus $286 million, or $1.55 per diluted share, in 2010.
- Organic revenue increased 7.1%; acquisitions contributed $264 million and foreign currency translation contributed $111 million.
- Water Infrastructure revenue increased 25.2% to $2,416 million, while Applied Water revenue increased 8.8% to $1,444 million.
- Orders increased 18.8% to $3,847 million; organic orders increased 6.7%.
- Backlog was $651 million at year-end versus $620 million at year-end 2010; management expected more than 80% to convert to revenue in 2012.
- Capital expenditures were $126 million, compared with $94 million in 2010.
- Cash and cash equivalents were $318 million, compared with $131 million at year-end 2010. Working capital was $860 million.
- Total debt was $1,206 million, consisting primarily of $600 million of 3.55% Senior Notes due 2016 and $600 million of 4.875% Senior Notes due 2021.
- The company had a $600 million revolving credit facility with no borrowings outstanding at December 31, 2011.
Fourth-quarter information
The unaudited fourth quarter of 2011 generated revenue of $1,003 million, gross profit of $380 million, operating income of $100 million and net income of $52 million. Diluted EPS was $0.28. Comparable fourth-quarter 2010 revenue was $935 million, operating income was $111 million and net income was $97 million.
Material changes versus the prior comparable period
- Revenue growth was broad-based but partly acquisition-driven, including the September 2011 acquisition of YSI for $309 million. YSI contributed approximately $35 million of 2011 revenue.
- Gross margin improved through productivity and pricing initiatives, but operating margin declined because of $87 million in separation costs and higher corporate expenses.
- Net income declined despite higher revenue and gross profit because of separation costs, increased interest expense from the new debt, and a higher effective tax rate of 27.4% versus 15.2%.
- Interest expense increased to $17 million following the September 2011 issuance of $1.2 billion of Senior Notes.
- Research and development spending increased to $100 million from $74 million, while restructuring and impairment charges declined to $2 million from $15 million.
- Operating cash flow increased to $449 million, although working capital absorbed additional cash to support higher sales volumes.
Outlook, management commentary, risks and unusual items
Management did not provide a specific 2012 revenue, earnings or margin guidance figure in the provided filing. Management described expected growth opportunities from water scarcity, aging infrastructure, regulation, energy efficiency, emerging markets, aftermarket services and strategic acquisitions. Market growth was estimated at mid-single digits for Supply Infrastructure and low- to mid-single digits for Usage Applications through 2015, based on management estimates.
- Separation costs totaled $87 million pre-tax and $72 million after tax; remaining separation cash costs were estimated at approximately $15 million to $20 million.
- The company reported a $299 million postretirement benefit deficit at year-end 2011 and expected 2012 pension contributions of approximately $30 million to $40 million.
- Environmental liabilities accrued were $15 million, with estimated environmental spending of $2 million to $4 million annually.
- Contractual commitments totaled $2,783 million, including $1,206 million of debt, $421 million of estimated interest payments, $685 million of operating leases and $356 million of postretirement benefits.
- Key risks include global economic conditions, international operations and foreign exchange, commodity and labor cost inflation, supply-chain disruptions, competition, acquisitions and integration, regulatory and environmental liabilities, cybersecurity and information-technology disruptions, pension volatility, and customer and distributor credit risk.
- The spin-off creates additional risks involving tax-free treatment, indemnification obligations, potential liabilities retained by ITT or Exelis, higher stand-alone corporate costs and the limited operating history of Xylem as an independent company.
- The company’s 2011 financial statements were audited, but management and the auditor did not provide an internal-control attestation because Xylem qualified for the new-public-company transition period.
Most important facts for investors to verify
- Reconcile reported versus adjusted earnings and operating income, particularly the treatment and remaining cash impact of separation costs.
- Assess whether organic growth, backlog conversion and pricing initiatives can offset acquisition-related comparisons, inflation and weaker regional markets.
- Review debt maturities, fixed-rate interest obligations, credit-facility covenants and the company’s ability to fund acquisitions and pension contributions from operating cash flow.
- Evaluate the sustainability of the 2011 effective tax rate, foreign cash concentration and the potential tax effects of repatriation.
- Review the Tax Matters Agreement and spin-off indemnities, including potential liabilities if the transaction loses tax-free status.
- Compare future stand-alone corporate costs with the historical ITT allocations used in the 2011 and prior-period financial statements.