Xylem Inc. 2013 Form 10-K Summary
Business context and reporting period
Xylem is a global water-technology equipment and services provider operating in two segments: Water Infrastructure and Applied Water. The filing covers the fiscal year ended December 31, 2013; fourth-quarter data are presented as unaudited supplemental information. Xylem generated revenue in more than 150 countries, with 62% of 2013 revenue outside the United States and more than 12,500 employees.
- Water Infrastructure revenue: $2.457 billion, or approximately 64% of consolidated revenue.
- Applied Water revenue: $1.444 billion, or approximately 38% of consolidated revenue, before eliminations.
- Geographic revenue: United States $1.434 billion; Europe $1.387 billion; Asia Pacific $467 million; other regions $549 million.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $3.837 billion | $3.791 billion | +1.2% |
| Gross profit | $1.499 billion | $1.502 billion | -0.2% |
| Gross margin | 39.1% | 39.6% | -50 bps |
| Operating income | $363 million | $443 million | -18.1% |
| Operating margin | 9.5% | 11.7% | -220 bps |
| Net income | $228 million | $297 million | -23.2% |
| Diluted EPS | $1.22 | $1.59 | -23.3% |
| Adjusted net income | $311 million | $330 million | -5.8% |
| Adjusted diluted EPS | $1.67 | $1.77 | -5.6% |
| Net cash from operating activities | $324 million | $396 million | -18.2% |
| Free cash flow | $198 million | $312 million | -36.5% |
Fourth-quarter 2013 revenue was $1.033 billion, operating income was $129 million, net income was $68 million, and diluted EPS was $0.37, compared with fourth-quarter 2012 revenue of $969 million, operating income of $104 million, net income of $73 million, and diluted EPS of $0.39.
- Orders increased 3.4% to $3.912 billion on a constant-currency basis, including $87 million of acquisition contribution and $43 million of organic order growth.
- Backlog increased to $707 million at year-end from $647 million; management expected more than 90% to convert to revenue during 2014.
- Cash and cash equivalents were $533 million, versus $504 million at year-end 2012.
- Working capital was $930 million, versus $859 million.
- Total debt was $1.241 billion, including $1.2 billion of senior notes and $38 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 debt covenants.
- Capital expenditures were $126 million, acquisitions used $81 million, dividends paid were $87 million, and share repurchases were $73 million.
Material changes versus the prior comparable period
- Revenue growth was modest and primarily acquisition-driven: acquisitions contributed $82 million, while organic revenue declined 1.0%.
- Water Infrastructure revenue increased 1.3% as reported, but organic revenue declined 1.9%, reflecting weakness in European treatment markets, lower Asia Pacific transport activity and project delays.
- Applied Water revenue increased 1.4% as reported and 0.4% in constant currency, supported by irrigation and industrial water demand but offset by weakness in European building services.
- Profitability declined because of unfavorable geographic and product mix, negative price realization, acquisition costs, higher selling, general and administrative expenses, restructuring and realignment costs, and special charges.
- Restructuring and asset impairment charges increased to $42 million from $17 million. Restructuring and realignment costs totaled $64 million versus $24 million.
- Special charges were $24 million, including costs associated with the Xylem Group LLC legal settlement, the 2013 chief executive officer change, tax indemnification obligations to ITT and a historical acquisition matter.
- Operating cash flow fell by $72 million, primarily because of higher receivables and inventories, longer collections in Europe, inventory requirements for higher backlog and restructuring payments.
- During the fourth quarter, Xylem recorded a $2 million impairment charge related to three Water Infrastructure trade names. Analytics goodwill of $439 million had an estimated fair value approximately 18% above carrying value, leaving sensitivity to future impairment.
- The company initiated an organizational redesign in the fourth quarter, moving from individually managed businesses to an integrated geographic-region model. Its measurement and accounting systems were expected to be completed by mid-2014.
Guidance, outlook, commentary and risks
Management expected a slow recovery in developed markets during 2014, modest improvement in European industrial markets, modest public-utility growth driven by operations and maintenance spending, continued weakness in mining, and modestly higher growth in emerging markets.
- Expected 2014 restructuring costs: approximately $30 million to $35 million.
- Expected 2014 realignment costs: approximately $10 million to $15 million.
- Expected incremental 2014 net savings: $25 million from 2013 actions plus $10 million from 2014 actions.
- Management expected pension and postretirement contributions of approximately $40 million to $50 million during 2014.
- The company planned continued investment in customer relationship management, growth platforms, new products, lean initiatives and global sourcing.
Principal risks include global economic weakness, heavy exposure to international markets and foreign currency, raw-material and supplier disruption, competitive and pricing pressure, unpredictable project timing, weather-sensitive demand, acquisition integration, restructuring execution, goodwill impairment, tax-rate changes, product liability, litigation, environmental obligations, cybersecurity and information-technology disruption, pension funding requirements, and debt-service constraints.
Environmental liabilities accrued at year-end were $8 million, and estimated reasonably possible losses in excess of accrued environmental and legal amounts were approximately $26 million. A Spanish competition-law fine remained under appeal. Xylem also disclosed potential obligations under its Tax Matters Agreement with ITT, including a $4 million net amount owed to ITT at year-end and possible liabilities if the 2011 spin-off were deemed taxable.
Most important facts for investors to verify
- Whether restructuring and organizational-redesign savings are realized without disrupting revenue or customer execution.
- Whether backlog conversion, order growth and public-utility spending support the 2014 outlook.
- Water Infrastructure profitability and the continued valuation of the Analytics reporting unit, which had only an approximately 18% fair-value cushion over carrying value.
- Working-capital conversion, European receivables collections and free-cash-flow recovery.
- Debt maturities, particularly the $600 million senior notes due in 2016, and the company’s ability to refinance or repay them.
- Potential tax indemnification, litigation, environmental and pension cash requirements.
- The effect of foreign exchange, commodity costs, pricing and geographic mix on margins.
- The filing’s audited financial statements and internal-control report, both of which received unqualified opinions from Deloitte & Touche LLP.