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Xylem (XYL) Posts In-Line Earnings & Sales in Q2, Lowers View

Zacks Equity Research

Xylem Inc. XYL reported in-line results for the second quarter of 2019, with earnings and sales meeting respective estimates. This came in after the company reported negative earnings and sales surprise of 10.34% and 0.99%, respectively, in first-quarter 2019.

Adjusted earnings in the quarter under review were 79 cents per share, in line with the Zacks Consensus Estimate. On a year-over-year basis, the bottom line grew 8.2% from the year-ago figure of 73 cents. Its bottom-line results included an adverse impact of one cent per share from unfavorable movements in foreign currencies.

Organic Growth Drives Revenues

Xylem’s revenues were $1,345 million in the quarter under review, reflecting growth of 2.1% from the year-ago quarter. Organic sales in the quarter expanded 5% on strengthening end markets, especially utilities. Businesses in China, India and the United States were healthy.

The company’s revenues were in line with the Zacks Consensus Estimate of $1,345 million.

Orders in the quarter under review were up 1% year over year at $1,392 million. Organically, orders reflect growth of 4%.

The company reports net sales under three segments — Water Infrastructure, Applied Water, and Measurement & Control Solutions. The segmental information is briefly discussed below:

Revenues in the Water Infrastructure segment were $561 million, up 2.7% year over year. Organic sales were up 6% year over year on improved utilities and industrial end-market demand. However, weakness in the Western Europe business played spoilsport.

The Applied Water segment generated revenues of $394 million in the second quarter, up 1.5% year over year. Organic sales improved 4% on growth in industrial and commercial end markets. Results in emerging nations and the United States were healthy.

Quarterly revenues of the Measurement & Control Solutions segment were $390 million, up 1.8% year over year. Organic sales improved 6% on growth in the water sector business in North America.

Operating Margin Improves Y/Y

In the quarter under review, Xylem’s cost of sales rose 2.6% year over year to $819 million while selling, general and administrative expenses expanded 0.3% to $294 million, and research and development expenses declined 6% to $47 million.

Adjusted operating income in the quarter under review grew 5.5% year over year to $192 million. Also, adjusted operating margin rose 50 basis points (bps) to 14.3%.

Balance Sheet and Cash Flow

Exiting the second quarter, Xylem had cash and cash equivalents of $383 million, up 39.3% from $275 million at the end of the last reported quarter. Long-term debt balance inched up 0.3% sequentially to $2,051 million.

In the first half of 2019, the company generated net cash of $206 million from operating activities, reflecting growth of 2.5% from the year-ago period. Capital expenditure was $129 million, above $111 million in the first half of 2018. Free cash flow in the period was $77 million.

In the first half of 2019, the company paid dividends amounting to $87 million and repurchased shares worth $39 million.

Outlook

In the quarter ahead, Xylem anticipates gaining from rising demand (spurred by water sector’s digitization) and investments in boosting technological capabilities. Sales growth and margin expansion are predicted for the second half of 2019.

For 2019, Xylem anticipates revenues of $5.29-$5.38 billion versus the previously stated $5.3-$5.4 billion. Organic sales are still predicted to rise 5-6% versus the earlier mentioned 4-6%.

Adjusted operating margin will likely be 14.3-14.5%, down from 14.5-14.9% stated previously. Adjusted earnings will likely be $3.12-$3.22 per share, down from $3.12-$3.32 mentioned earlier. The revised projection suggests year-over-year growth of 8-12%.

Xylem Inc. Price, Consensus and EPS Surprise

 

Xylem Inc. Price, Consensus and EPS Surprise

Xylem Inc. price-consensus-eps-surprise-chart | Xylem Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of roughly $14.5 billion, Xylem currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the industry are Roper Technologies, Inc. ROP, DXPE Enterprises, Inc. DXPE and Dover Corporation DOV. All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for the companies have improved for the current year. Further, average earnings surprise for the last four quarters was 6.92% for Roper, 48.47% for DXP Enterprises and 6.91% for Dover.

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