Xylem Inc. 2022 Form 10-K Summary
Business Context and Reporting Period
Xylem is a global water technology company serving utility, industrial, commercial and residential customers across the water cycle. Its three reportable segments are Water Infrastructure, Applied Water, and Measurement & Control Solutions. The filing covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021.
- 2022 revenue was generated in approximately 150 countries; 47% came from the United States and 53% from outside the United States.
- The company had approximately 17,800 employees and reported backlog of $3.605 billion at year-end, up from $3.240 billion in 2021. Approximately 55% of year-end 2022 backlog was expected to convert to revenue in 2023.
Financial Performance and Key Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $5.522 billion | $5.195 billion | 6.3% increase |
| Gross profit | $2.084 billion | $1.975 billion | 5.5% increase |
| Gross margin | 37.7% | 38.0% | 30 basis-point decline |
| Operating income | $622 million | $585 million | 6.3% increase |
| Operating margin | 11.3% | 11.3% | Flat |
| Net income | $355 million | $427 million | 16.9% decrease |
| Diluted EPS | $1.96 | $2.35 | 16.6% decrease |
| Adjusted net income | $516 million | $452 million | 14.5% increase |
| Adjusted diluted EPS | $2.85 | $2.49 | 14.5% increase |
| Net cash from operations | $596 million | $538 million | 11% increase |
| Free cash flow | $388 million | $330 million | 18% increase |
| Orders | $6.257 billion | $6.300 billion | 0.7% decrease |
Reported revenue growth included a $259 million adverse foreign-currency translation effect. On a constant-currency basis, revenue increased 11.3%, including 11.5% organic growth. Adjusted operating income increased to $672 million, and adjusted operating margin expanded to 12.2% from 11.8%.
- Water Infrastructure revenue increased 5.2% to $2.364 billion; operating margin was 17.7%.
- Applied Water revenue increased 9.5% to $1.767 billion; operating margin was 14.6%.
- Measurement & Control Solutions revenue increased 4.2% to $1.391 billion, but operating income declined to $2 million and operating margin fell to 0.1%.
- Gross-margin pressure from inflation, strategic investment spending and inventory-management costs was substantially offset by pricing actions and productivity savings.
- Capital expenditures were $208 million, compared with $208 million in 2021.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $944 million at December 31, 2022, down from $1.349 billion at year-end 2021.
- Total debt was $1.880 billion, down from $2.440 billion, primarily because the company repaid its €500 million senior notes due 2023 for $527 million in December 2022.
- The company reported approximately $1.7 billion of available liquidity, consisting of $944 million of cash and $800 million of available revolving-credit capacity.
- The $800 million revolving credit facility was undrawn, and Xylem was in compliance with its debt covenants.
- Operating cash flow funded capital expenditures, dividends of $217 million and debt repayment. Share repurchases totaled $52 million in 2022, including $46 million under the authorized repurchase program.
- The board authorized up to $182 million of remaining repurchase capacity at year-end. The quarterly dividend declared in the first quarter of 2023 was $0.33 per share.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, with strong organic growth across major end markets and geographic regions, although foreign exchange materially reduced reported results.
- Net income and GAAP EPS declined despite higher operating income, primarily because 2022 included a $140 million U.K. pension settlement expense and higher restructuring and asset-impairment charges.
- Restructuring and asset-impairment charges increased to $29 million from $7 million. The company recorded a $14 million impairment charge, primarily involving software and customer relationships in Measurement & Control Solutions.
- The U.K. pension buyout was completed in September 2022. The settlement charge was non-cash and did not reduce cash, while post-retirement benefit obligations declined substantially.
- Orders declined on a reported basis but increased 4.0% organically. Measurement & Control Solutions orders declined organically 2.5%, partly reflecting the reversal of prior-year advance ordering related to electronic-component shortages.
- Backlog increased 11.3%, providing support for near-term revenue conversion, although customer rescheduling and cancellation remain possible.
Guidance, Outlook, Risks and Unusual Items
- For 2023, management expected total revenue growth of 3% to 5% and organic revenue growth of 4% to 6%.
- Management expected high-single-digit organic growth in utilities, low- to mid-single-digit growth in industrial markets, low-single-digit growth in commercial markets, and a low-single-digit organic decline in residential markets.
- Xylem expected to incur $25 million to $35 million of restructuring and realignment costs in 2023 and anticipated approximately $14 million of incremental annual savings from 2022 actions.
- Management cited pricing, productivity actions, backlog execution and improving chip availability as support for 2023 performance, while warning of persistent inflation and slower demand in cyclical markets.
- Supply-chain constraints, semiconductor availability, freight costs, labor shortages, inflation, energy costs, tariffs and foreign exchange remain significant risks.
- The company announced a proposed all-stock acquisition of Evoqua Water Technologies on January 23, 2023, with an implied enterprise value of approximately $7.5 billion and anticipated closing in mid-2023. Xylem shareholders were expected to own approximately 75% of the combined company. Completion remained subject to shareholder, regulatory and other customary approvals.
- Risks associated with the Evoqua transaction include failure to close, integration difficulties, failure to realize synergies, additional costs, shareholder dilution, potential litigation and a possible termination fee of up to $325 million under specified circumstances.
- Xylem reported an unresolved Swedish tax assessment of approximately $76 million, including penalties and interest, relating to a 2013 transaction. The company appealed and had not recorded an unrecognized tax benefit for the matter as of year-end.
- Environmental, legal and warranty accruals were $4 million, $5 million and $54 million, respectively, at year-end. The filing states that existing legal proceedings were not expected to have a material adverse effect, but outcomes remain uncertain.
- Goodwill was $2.719 billion at year-end, including $1.579 billion in Measurement & Control Solutions. No goodwill impairment was recorded in 2022, but future impairment charges remain possible.
Most Important Facts for Investors to Verify
- Whether the proposed Evoqua acquisition closed on the anticipated timetable, its final financing and share issuance, integration costs, synergies and effect on leverage and EPS.
- Whether 2023 revenue and organic-growth guidance was achieved, particularly in utilities, residential markets and Measurement & Control Solutions.
- Whether pricing and productivity actions continued to offset inflation, supply-chain costs and wage pressures without weakening demand.
- Actual cash conversion, working-capital requirements, capital expenditures, dividend funding and debt levels following the Evoqua transaction.
- The status and ultimate resolution of the Swedish tax dispute and any other material legal, environmental or regulatory contingencies.
- Potential impairment risk for the substantial goodwill and intangible-asset balances, especially within Measurement & Control Solutions.