Xylem Inc. 2015 Form 10-K Summary
Business context and reporting period
Xylem designs, manufactures and services engineered water and wastewater equipment, serving the full water cycle. The company operates through two reportable segments: Water Infrastructure and Applied Water. It sells in approximately 150 countries, generated 59% of revenue outside the United States and employed approximately 12,700 people at December 31, 2015.
This filing covers the fiscal year ended December 31, 2015. It is an annual Form 10-K rather than a quarterly filing; fourth-quarter results are included in the annual financial statements and quarterly data.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $3,653 million | $3,916 million | Down 6.7% |
| Gross profit | $1,404 million | $1,513 million | Down 7.2% |
| Gross margin | 38.4% | 38.6% | Down 20 basis points |
| Operating income | $449 million | $463 million | Down 3.0% |
| Operating margin | 12.3% | 11.8% | Up 50 basis points |
| Net income | $340 million | $337 million | Up 0.9% |
| Diluted EPS | $1.87 | $1.83 | Up 2.2% |
| Net cash from operating activities | $464 million | $416 million | Up $48 million |
| Free cash flow | $347 million | $297 million | Up $50 million |
Reported revenue was reduced by an $้8.0% foreign-currency translation impact, partly offset by 1.5% organic growth and 1.3% constant-currency growth. Orders totaled $3,711 million, up 0.5% organically. Water Infrastructure revenue was $2,231 million and Applied Water revenue was $1,422 million.
Cash and cash equivalents were $680 million at year-end, compared with $663 million in 2014. Working capital was $810 million, compared with $882 million. Total debt was $1,274 million, including $600 million of 3.55% senior notes due September 2016, $600 million of 4.875% senior notes due October 2021 and $76 million outstanding under the European Investment Bank research and development facility. The $600 million revolving credit facility was undrawn, and the company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue declined primarily because of unfavorable currency translation; constant-currency revenue increased 1.3%.
- Organic growth was strongest in public utilities, commercial building services, residential markets and emerging markets, while oil and gas, mining and agriculture-related activity weakened.
- Gross margin declined modestly, but operating margin improved because of lower restructuring and realignment costs, procurement savings, lean initiatives and other cost reductions.
- Restructuring and realignment costs declined to $20 million from $43 million. The company realized approximately $2 million of net savings from 2015 actions.
- Net income increased despite lower revenue, aided by lower income tax expense and a reduced effective tax rate of 15.6%, compared with 19.8% in 2014.
- Operating cash flow and free cash flow improved as inventory declined and receivables collections strengthened.
- Capital deployment increased: the company repurchased $179 million of common stock and paid $102 million of dividends in 2015. Dividends declared per share rose to $0.5632 from $0.5120.
- Backlog was $716 million at December 31, 2015, compared with $740 million at December 31, 2014; approximately 81% was expected to convert to revenue in 2016.
Guidance, outlook, risks and unusual items
Management expected low-to-mid-single-digit organic revenue growth in 2016. The outlook called for mid-single-digit growth in public utilities and commercial markets, low-to-mid-single-digit growth in residential markets, flat to low-single-digit growth in industrial markets and low-single-digit recovery in agriculture. Management expected approximately $25 million of restructuring and realignment costs in 2016 and approximately $8 million of savings from 2016 actions.
The company acquired Hypack for approximately $18 million in October 2015 and acquired Tideland Signal for approximately $69 million on February 1, 2016, after year-end. Xylem divested two immaterial Water Infrastructure businesses in 2015 and recorded a $9 million gain.
Material risks include foreign-currency exposure, international operations and emerging-market conditions, competitive and pricing pressure, weakness in oil and gas and other industrial markets, raw-material and supplier risks, weather volatility, acquisition integration, restructuring execution, goodwill impairment, cybersecurity, product liability, litigation, environmental matters, pension funding and debt refinancing. The company had approximately $2 billion of goodwill and indefinite-lived intangible assets subject to impairment testing; no impairment was identified in 2015.
The $600 million senior notes due in 2016 represented a significant refinancing requirement. Management stated that it expected to refinance the notes and believed available cash, operating cash flow, commercial paper access, committed facilities and public debt-market access would provide sufficient liquidity for the next twelve months.
The company accrued $4 million for environmental matters, $6 million for general legal matters and $47 million for unrecognized tax benefits at year-end. It also had $161 million of standby letters of credit, bank guarantees and surety bonds. The SEC and Department of Justice declined enforcement or prosecution relating to the company's South Korea investigation, although related potential liability could not be reasonably estimated.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2015.
Most important facts for investors to verify
- Whether the 2016 refinancing of the $600 million senior notes was completed on acceptable terms and how it affected interest expense and leverage.
- Whether reported organic growth and the 2016 low-to-mid-single-digit outlook were achieved after excluding currency effects.
- Whether backlog converted as expected and whether orders recovered in industrial, oil and gas, mining and agriculture markets.
- Whether restructuring actions generated the projected savings without disrupting operations or customer relationships.
- The sustainability of the 15.6% effective tax rate, including foreign earnings, tax incentives and unrecognized tax benefits.
- Potential future cash requirements from pensions, environmental remediation, litigation, warranties, tax matters and spin-off indemnifications.
- Exposure to foreign-currency translation, given that 59% of 2015 revenue was generated outside the United States.
- The integration and financial contribution of Hypack and Tideland Signal, including the post-year-end Tideland acquisition.