Xylem Inc. Form 10-Q Summary
Business Context and Reporting Period
Xylem is a global water technology company serving water infrastructure, applied water, and measurement and control applications. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1,272 million | $1,256 million | Up 1.3%; up 3.9% on a constant-currency basis |
| Gross profit | $467 million | $490 million | Down 4.7% |
| Gross margin | 36.7% | 39.0% | Down 230 basis points |
| Operating income | $111 million | $133 million | Down 16.5% |
| Operating margin | 8.7% | 10.6% | Down 190 basis points |
| Net income | $82 million | $87 million | Down 5.7% |
| Diluted EPS | $0.45 | $0.48 | Down from reported GAAP diluted EPS |
| Adjusted operating income | $116 million | $143 million | Down 18.9% |
| Adjusted operating margin | 9.1% | 11.4% | Down 230 basis points |
| Operating cash flow | $(81) million | $(26) million | Cash use increased by $55 million |
| Free cash flow | $(130) million | $(65) million | Cash use increased by $65 million |
Adjusted EBITDA was $181 million, with a 14.2% margin, compared with $215 million and a 17.1% margin in the prior-year quarter. Orders increased 11.5% to $1,715 million, or 14.5% on an organic basis. Backlog was $3,552 million at March 31, 2022, up 47.8% year over year and 9.6% from December 31, 2021; approximately half was expected to convert to revenue during the remainder of 2022.
Segment Performance and Material Changes
- Water Infrastructure: Revenue increased 4.7% to $533 million, including 8.4% constant-currency organic growth. Operating income increased to $74 million, while adjusted operating margin declined to 14.1% from 14.9%.
- Applied Water: Revenue increased 8.1% to $425 million, including 10.2% constant-currency organic growth. Operating income decreased to $59 million, and adjusted operating margin declined to 14.1% from 17.3%.
- Measurement & Control Solutions: Revenue decreased 11.3% to $314 million, including a 9.6% constant-currency decline. Operating income fell to a $10 million loss from $9 million of income, primarily due to electronic component shortages affecting smart metering.
- Gross margin and adjusted operating margin deteriorated primarily because of inflation, logistics costs, unfavorable mix, and strategic investment spending. Price realization and productivity initiatives provided partial offsets.
- Restructuring and asset impairment charges were less than $1 million in Q1 2022 versus $6 million in Q1 2021. Management reported $4 million of restructuring and realignment costs and $1 million of special charges for adjusted-metric purposes in Q1 2022.
- Interest expense declined to $13 million from $21 million, primarily because a senior note was repaid in October 2021. The effective tax rate declined to 16.4% from 23.3%, reflecting favorable earnings mix and tax settlement benefits.
Balance Sheet, Debt and Liquidity
Cash and cash equivalents were $1,117 million at March 31, 2022, down from $1,349 million at year-end 2021. Total debt was $2,433 million, including $555 million classified as short-term borrowings and current maturities and $1,878 million of long-term debt. The next long-term debt maturity is the €500 million senior notes due March 2023.
The $800 million revolving credit facility was undrawn, and the commercial paper programs had no outstanding borrowings. Management reported approximately $1.9 billion of available liquidity, consisting of cash and available credit facilities, and stated that liquidity was sufficient to meet expected funding requirements and debt service during 2022. The company was in compliance with applicable debt covenants.
Working capital consumed cash, including a $106 million increase in inventories from December 31, 2021, as the company built safety stock and made advance supplier payments to mitigate supply-chain volatility. Capital expenditures were $49 million, dividends paid were $55 million, and share repurchases totaled $51 million.
Guidance, Outlook and Risks
For full-year 2022, management projected total revenue growth of 1% to 3% and organic revenue growth of 4% to 6%. Expected organic growth was low-single-digit for utilities, mid-single-digit for industrial markets, mid- to high-single-digit for commercial markets, and mid-single-digit for residential markets.
Management expected chip availability to improve in successive quarters during 2022 but continued to identify shortages of semiconductors, components, parts and raw materials, along with inflation, freight, logistics and labor-cost pressures. The company planned to use pricing, productivity actions, inventory investment and product redesigns to mitigate these pressures.
Xylem expected approximately $25 million to $30 million of restructuring and realignment costs during 2022; the filing also separately states expected restructuring costs of $10 million to $15 million, so the precise full-year amount and classification should be verified.
Principal risks include supply-chain disruption, inflation, logistics constraints, COVID-19 effects, the Russia-Ukraine war and related geopolitical impacts, foreign-exchange volatility, cybersecurity events, demand and pricing pressure, talent availability, product liability and warranty claims, impairment risk, regulatory and environmental matters, tax disputes, and access to refinancing or sufficient liquidity.
A Swedish subsidiary is contesting an approximately $80 million tax assessment, including tax, penalties and interest, related to a 2013 intercompany intellectual-property transfer. Management believes it is more likely than not to prevail and has recorded no unrecognized tax benefit for the matter.
Important Facts for Investors to Verify
- Whether supply-chain and semiconductor constraints improve as projected and whether the large backlog converts to revenue without material cancellations or delays.
- The sustainability of price realization and productivity savings relative to inflation, freight, logistics and strategic-investment costs.
- The recovery path for Measurement & Control Solutions, particularly smart-metering demand and component availability.
- The cash-conversion outlook after negative first-quarter operating and free cash flow and elevated inventory balances.
- Refinancing or repayment plans for the senior notes due March 2023.
- The final amount and accounting classification of 2022 restructuring and realignment costs.
- The outcome and potential financial exposure of the Swedish tax litigation and other environmental, legal and warranty contingencies.
- The filing presents a prior-year diluted GAAP EPS of $0.48 in the financial statements, while portions of the MD&A reference $0.47; the comparable EPS presentation should be reconciled.