Xylem (XYL) Beats on Q2 Earnings, Improves 2022 Guidance

Xylem Inc.’s XYL second-quarter 2022 adjusted earnings (excluding 4 cents from non-recurring items) of 66 cents per share, surpassed the Zacks Consensus Estimate of 55 cents. The bottom line was flat year over year.

Xylem’s revenues of $1,364 million also outperformed the Zacks Consensus Estimate of $1,304.3 million and inched up approximately 1% year over year. Organic sales in the quarter rose 6%, driven by higher global demand across its end markets coupled with record order and backlog across the portfolio.

Orders in the reported quarter increased 1% year over year to $1,684 million. Organically, orders grew 6% owing to robust demand.

Xylem Inc. Price, Consensus and EPS Surprise

Xylem Inc. Price, Consensus and EPS Surprise

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

Segmental Details

Revenues in the Water Infrastructure segment were $589 million, up 4% year over year. Organic sales in the reported quarter grew 9% year over year, buoyed by effective price realization and healthy activity in wastewater utility business in the U.S. and Western Europe.

The Applied Water segment generated revenues of $429 million in the second quarter, up 4% year over year. Organic sales increased 7% on a year-over-year basis. Segmental performance benefited from strong price realization and backlog execution in industrial and residential end markets, partly hurt by persistent supply-chain constraints in commercial buildings in the United States.

Quarterly revenues at the Measurement & Control Solutions segment were $346 million, down 6% year over year. Organic sales were down 2% year over year due to supply-chain issues related to chips.

Margin Profile

In the reported quarter, Xylem’s adjusted EBITDA was $226 million, down 3.4% from the year-ago quarter’s level. Margin in the quarter improved 240 basis points (bps) year over year to 21.4%. Strong price realization, volume and productivity savings aided performance, despite cost inflation and high investments.

Operating income was $146 million in the quarter under review, down 8.8% year over year. The operating margin deteriorated to 10.7% in the second quarter of 2022 from 11.8% in the year-ago quarter. Interest expenses in the reported quarter totaled $12 million, down from $21 million in the year-ago quarter.

In the second quarter, Xylem’s cost of sales increased 1.6% year over year to $844 million. Selling, general and administrative expenses increased 3.3% to $314 million. Research and development expenses were flat year over year at $53 million.

Balance Sheet and Cash Flow

Exiting the second quarter, Xylem had cash and cash equivalents of $1,113 million compared with $1,349 million at the end of December 2021. Long-term debt was $1,879 million at the end of the second quarter of 2022 compared with $2,440 million at the end of December 2021.

In the first six months of 2022, Xylem generated net cash of $32 million compared with $206 million in the year-ago period. Capital expenditure was $95 million, up 18.8% year over year. Free cash flow was -$63 million in the first half of 2022 compared with +$126 million in the year-ago quarter.

Shareholder-Friendly Policies

In the first half of 2022, Xylem paid out dividends worth $110 million, reflecting an increase of 7.8% year over year. The company also bought back shares worth $52 million in the same period, down 23.5% year over year.

Outlook

Owing to strong demand, price realization and gradual easing of supply-chain constraints, Xylem raised its adjusted earnings per share guidance for the full year. It now expects the metric to be in the range of $2.50 to $2.70 compared with $2.40 to $2.70 anticipated earlier. The mid-point of the guided range — $2.60 — lies above the Zacks Consensus Estimate of $2.52.

Xylem now anticipates full-year revenues to increase 3-5% on a reported basis and 8-10% on an organic basis compared with organic revenue growth and reported revenue increase of 4-6% and 1-3% estimated earlier.

For 2022, adjusted EBITDA margin is now expected to be 16.5-17% compared with 16-17% anticipated earlier. However, the company expects its full-year performance to be hurt by cost inflation and foreign-currency headwinds.

Zacks Rank & Key Picks

Xylem carries a Zacks Rank #3 (Hold).

Some better-ranked stocks within the broader Industrial Products sector are as follows:

Greif, Inc. GEF presently sports a Zacks Rank #1 (Strong Buy). GEF delivered a trailing four-quarter earnings surprise of 22.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks.

Greif has an estimated earnings growth rate of 36.8% for the current year. Shares of the company have gained 22.2% in the past six months.

Titan International, Inc. TWI presently flaunts a Zacks Rank of 1. Its earnings surprise in the last four quarters was 47%, on average.

Titan International has an estimated earnings growth rate of 164.7% for the current year. Shares of the company have rallied 74.8% in the past six months.

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