Xylem Inc. 2012 Form 10-K Summary
Business context and reporting period
Xylem designs, manufactures and services engineered water and wastewater equipment, including pumps, treatment systems, analytical instruments, valves, heat exchangers and controls. It operates through Water Infrastructure and Applied Water segments, serves customers in more than 150 countries and employed approximately 12,700 people at December 31, 2012. The filing covers the fiscal year ended December 31, 2012; the fourth quarter is included but this is an annual Form 10-K, not a quarterly filing.
Comparability with 2011 is affected by the October 31, 2011 spin-off from ITT: 2011 includes ten months of carve-out WaterCo results and two months of stand-alone Xylem results, whereas 2012 is fully stand-alone.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $3,791 million | $3,803 million | (0.3)% reported; 2.5% constant currency |
| Gross profit | $1,502 million | $1,461 million | 2.8% |
| Gross margin | 39.6% | 38.4% | +120 basis points |
| Operating income | $443 million | $395 million | 12.2% |
| Operating margin | 11.7% | 10.4% | +130 basis points |
| Net income | $297 million | $279 million | 6.5% |
| Diluted EPS | $1.59 | $1.50 | 6.0% |
| Net cash from operations | $396 million | $449 million | $(53) million |
| Free cash flow | $312 million | $388 million | $(76) million |
- Water Infrastructure revenue was $2,425 million, up 0.4% reported and 3.7% in constant currency. Applied Water revenue was $1,424 million, down 1.4% reported and up 0.8% in constant currency.
- Orders were $3,782 million, down 1.7% reported but up 1.3% in constant currency. Year-end backlog was $647 million versus $651 million in 2011; approximately 90% was expected to convert to 2013 revenue.
- Cash and cash equivalents increased to $504 million from $318 million. Working capital was $859 million and total assets were $4,679 million.
- Total debt was $1,205 million, principally $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 and approximately $158 million European Investment Bank R&D facility were undrawn at year-end.
- Capital expenditures were $112 million, acquisitions cost $41 million, dividends paid were $75 million and share repurchases were $13 million.
- The company reported a $378 million unfunded postretirement benefit position and contributed $46 million to benefit plans during 2012.
Material changes versus the prior comparable period
- Reported revenue was essentially flat because $96 million of constant-currency growth, including $94 million from acquisitions, was more than offset by a $108 million foreign-currency translation headwind.
- Profitability improved from price realization, cost reductions and lower separation costs. Gross margin increased 120 basis points and operating margin increased 130 basis points.
- Operating expenses included $22 million of separation costs and $17 million of restructuring charges, compared with $87 million and $2 million, respectively, in 2011. Adjusted net income was $330 million, or $1.77 per diluted share, versus $358 million, or $1.93, in 2011.
- Operating cash flow declined primarily because of $53 million of interest payments, higher tax payments and increased postretirement contributions.
- 2012 acquisitions included Heartland Pump Rental & Sales for approximately $29 million and MJK Automation for approximately $12 million. On February 5, 2013, Xylem acquired U.K.-based PIMS Group for approximately $57 million.
- In the fourth quarter, Xylem retrospectively changed certain inventories from LIFO to FIFO. The filing states that the income-statement impact was immaterial; the 2011 balance sheet inventory increased by $7 million.
- Fourth-quarter 2012 revenue was $969 million, operating income was $104 million and net income was $73 million, compared with fourth-quarter 2011 revenue of $1,003 million, operating income of $100 million and net income of $52 million.
Guidance, outlook, commentary and risks
Management projected low-single-digit revenue growth in 2013, with stabilization in global markets, modest U.S. improvement and renewed emerging-market growth, while Europe was expected to remain challenging. The company planned approximately $40 million to $50 million of restructuring costs and $20 million of realignment costs, primarily in Europe, with expected 2013 net savings of approximately $13 million to $15 million. The filing also estimated $12 million to $13 million of annual savings from 2012 restructuring actions.
- Key operating risks include weak municipal and industrial capital spending, European economic weakness, weather-related volatility, foreign-exchange movements, commodity and labor-cost inflation, supplier interruptions and competitive pricing pressure.
- Approximately 63% of 2012 revenue was generated outside the United States, exposing results to currency, political, regulatory, tax and repatriation risks. Foreign subsidiaries held approximately $401 million of cash or marketable securities.
- Debt service and refinancing are material considerations. Contractual commitments totaled $1.873 billion, including $1.206 billion of debt principal, $348 million of estimated interest and $192 million of operating leases.
- Environmental accruals were $11 million. Management stated that existing legal proceedings, environmental matters and guarantees were not expected to have a material adverse effect, but outcomes remain uncertain.
- The company faces potential obligations under the ITT spin-off and Tax Matters Agreement, including indemnification for certain liabilities and taxes if transactions were to jeopardize the tax-free treatment of the spin-off.
- No goodwill or indefinite-lived intangible impairment was recorded in 2012. However, future impairment charges remain possible if operating performance or valuation assumptions deteriorate.
Most important facts for investors to verify
- Reconcile reported versus constant-currency and organic growth, particularly the effect of acquisitions and the $108 million foreign-exchange headwind.
- Assess whether the planned European restructuring delivers the projected $13 million to $15 million of 2013 savings and whether total restructuring costs remain within the stated range.
- Monitor cash conversion, pension and postretirement funding requirements, and the ability to service or refinance the 2016 and 2021 senior notes.
- Review the quality and timing of the $647 million backlog, including the expected conversion of approximately 90% into 2013 revenue.
- Evaluate exposure to Europe, municipal capital spending, weather-sensitive dewatering and irrigation demand, emerging markets and currency movements.
- Confirm the effects of the ITT separation, tax indemnities, environmental matters, Spanish competition proceedings and other contingencies in subsequent filings.
- Consider the limited comparability of 2011 results because of carve-out accounting and the spin-off, and distinguish GAAP results from management’s adjusted non-GAAP measures.