Xylem Inc. has reported second quarter 2020 net income of $31 million, or $0.17 per share. Excluding the impact of restructuring, realignment and special charges, the Company delivered adjusted net income of $73 million or $0.40 per share in the quarter.
Second quarter revenue was $1.2 billion, down 14% on a reported basis and 12% organically, declining less than previously expected primarily driven by the resilience of the wastewater utility business. Orders were down 11% on a reported basis and 9%, organically. Reported operating margin in the quarter was 4.7%, down 800 basis points versus the prior year. Adjusted operating margin was 9.3%, down 500 basis points compared to the prior year. Both were driven largely by the pandemic’s impact on volume in the quarter.
Xylem ended the quarter with $181 million of operating cash flow, and $137 million of free cash flow, more than doubling from the prior year, driven by strong working capital performance and reduced capital spending. The Company’s liquidity remains strong, at approximately $2.4 billion from healthy cash generation and issuance of a $1 billion green bond in June.
“The quick action from our teams in the first and second quarters allowed us to adapt swiftly, and positioned us well to mitigate the near-term impacts of the pandemic,” said Patrick Decker, Xylem’s president and CEO. “Our financial and supply chain strengths have enabled us to stand behind our customers and the essential services they have been delivering during the pandemic to the communities we all serve.”
“Clearly, there are still near-term market challenges and macro uncertainty. That said, we are optimistic on the basis of modestly improving trajectories in some of our key markets,” continued Decker. “We’ve delivered significant commercial momentum alongside very strong cash performance. And we are well positioned both to be resilient in a range of short-term scenarios, and to capitalise on the market’s recovery over the longer term.”
Outlook
Xylem withdrew 2020 guidance earlier this year due to the uncertainties caused by COVID-19. The Company is not reinstating full-year guidance, but is providing a framework for the third quarter which includes expectation that organic revenue will be down in the range of 8 to 12% – down 10 to 14% on a reported basis – and adjusted operating margin will be in the range of 11.0% to 11.5%. This represents sequential improvement in both organic revenue and adjusted operating margin from the second quarter to the third quarter.
Appointments to Board of Directors
Xylem also announced that Lila Tretikov and Uday Yadav have been elected to the Company’s Board of Directors.
Ms. Tretikov currently serves as corporate vice president of technology in the Office of the CTO at Microsoft Corporation. In that role, she applies a cross-disciplinary approach to the development and commercialisation of advanced-technology products that apply innovation to solve complex problems.
Mr. Yadav is the president and chief operating officer of Eaton’s Electrical Sector, which reported $13.3 billion in revenue for 2019. He brings over 20 years of international and industrial experience and global P&L leadership serving diverse sectors including heavy industry, aerospace, and automotive. He has deep experience in deploying new product and service solutions, and developing new business models.
“We are pleased to welcome Lila and Uday to the Board of Directors,” said Robert Friel, chair of Xylem’s Board. “Both have outstanding leadership experience and global perspectives that are complimentary to the Board. Lila’s background in technology and innovation will add insights to the Company’s focus on the digital transformation of the water sector. Uday combines operational discipline with expertise in industrial transformation across international markets. We look forward to working with both of them as we continue to grow the company and create value for our shareholders.”
Further commenting on the appointments, Decker added, “In addition to their outstanding qualifications, Lila and Uday’s appointments further deepen the diversity of our Board, which is important to the long-term sustainability of our business. All of Xylem’s stakeholders will benefit from Lila and Uday’s rich experience as we bring innovation to bear on solving the world’s toughest water challenges.”
Second Quarter Segment Results
Water Infrastructure
Xylem’s Water Infrastructure segment consists of its portfolio of businesses serving wastewater transport and treatment, clean water delivery, and dewatering.
- Second quarter 2020 revenue was $501 million, down 8% organically, and down 11% as reported, compared with second quarter 2019. Utilities spending in critical wastewater infrastructure remained relatively resilient in the quarter, offset by soft industrial and construction market rental activity in North America dewatering.
- Second quarter reported operating income for the segment was $73 million. Adjusted operating income for the segment, which excludes $8 million of restructuring and realignment costs, was $81 million. Reported operating margin for the segment was 14.6%, down 290 basis points versus prior year. Adjusted operating margins of 16.2% were down 290 basis points versus prior year from lower sales volume, unfavourable mix and higher inflation partially offset by productivity benefits.
Applied Water
Xylem’s Applied Water segment consists of its portfolio of businesses in industrial, commercial building, and residential applications.
- Second quarter 2020 revenue was $337 million, a 13% decline organically year-over-year, a 14% decline as reported, driven by volume weakness across industrial, commercial and residential end markets from COVID-19 related site restrictions and limited activity levels primarily in the United States.
- Second quarter reported operating income for the segment was $41 million and adjusted operating income, which excludes $4 million of restructuring and realignment costs, was $45 million. The segment’s reported operating margin was 12.2%, down 350 basis points versus prior year, and adjusted operating margin was 13.4%, down 340 basis points versus prior year. Volume declines and inflation were partially offset by productivity benefits and price realisation.
Measurement & Control Solutions
Xylem’s Measurement & Control Solutions segment consists of its portfolio of businesses in smart metering, network technologies, advanced infrastructure analytics and analytic instrumentation.
- Second quarter 2020 revenue was $322 million, down 17% organically and as reported versus the prior year driven by significant impacts from COVID-19 site restrictions delaying large project deployments and meter replacement activity.
- Reported operating income for the segment was negative $46 million, and adjusted operating income, which excludes $31 million of restructuring and realignment costs and $10 million of special charges, was negative 5 million. The segment reported operating margin was -14.3%, down 21% versus prior year. Adjusted operating margin contracted to -1.6%, down 10.3% from prior year primarily driven by volume declines which were partly offset by cost reductions.
