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Xylem (XYL) Beats Q4 Earnings Estimates, Gives Impressive View

Xylem Inc. XYL reported better-than-expected results for fourth-quarter 2020, with earnings surpassing the Zacks Consensus Estimate by 17.4%. This is the third consecutive quarter of earnings beat for the company. Also, quarterly sales exceeded estimates by 6%.

Adjusted earnings in the quarter under review were 81 cents per share, surpassing the Zacks Consensus Estimate of 69 cents. However, the bottom line decreased 9% from the year-ago figure of 89 cents.

It is worth noting that movements in foreign currencies had a positive impact of 41 cents per share on earnings.

For 2020, the company’s adjusted earnings were $2.06, down 31.8% from the year-ago figure of $3.02. However, the bottom line surpassed the Zacks Consensus Estimate of $1.95.

Revenue Details

In the quarter under review, Xylem’s revenues were $1,373 million, reflecting a 0.1% increase from the year-ago quarter. Organic sales in the quarter declined 2% due mainly to weakness in the Measurement & Control Solutions segment.

Notably, the organic sales decline of 2% was better than the company’s expectation of a 6-8% fall in the quarter. The outperformance came on the back of strengthening business in end markets.

Also, the company’s revenues surpassed the Zacks Consensus Estimate of $1,295 million.

Orders in the reported quarter increased 1% year over year to $1,294 million. Organically, orders were down by $19 million.

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

Revenues in the Water Infrastructure segment were $616 million, up 2.2% year over year. Organic sales in the quarter were flat year over year. The impacts of weakness in the industrial end market were offset by gains in the wastewater utility business in Canada, Asia and Europe.

The Applied Water segment generated revenues of $395 million in the fourth quarter, up 0.8% year over year. Organic sales dipped 1% on a year-over-year basis. Business in industrial markets (especially in the Middle East and the United States) was soft in the quarter, partially offset by growth in the residential market (in China and the United States).

Quarterly revenues of the Measurement & Control Solutions segment were $362 million, down 3.7% year over year. Organic sales decreased 5% year over year.

For 2020, the company’s revenues were $4.9 billion, decreasing 7.1% year over year. However, the results surpassed the Zacks Consensus Estimate of $4.8 billion.

Margin Profile

In the quarter, the company’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $258 million, decreasing 8.2% from the year-ago quarter. Margin in the quarter fell 170 basis points (bps) year over year to 18.8%.

Adjusted operating income was $189 million in the quarter, down 8.3% year over year. Operating margin was down 120 bps to 13.8%. Interest expenses in the quarter totaled $21 million, up from $15 million in the year-ago quarter.

In 2020, the company’s cost of sales decreased 4.9% year over year to $3,046 million. As a percentage of revenues, it represented 62.5% versus 61% in 2019. Selling, general and administrative expenses dipped 1.3% to $1,143 million. Meanwhile, research and development expenses decreased 2.1% to $187 million.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Xylem had cash and cash equivalents of $1,875 million, increasing 33.7% from $1,402 million at the end of the last reported quarter. Long-term debt balance decreased 18.6% sequentially to $2,484 million.

In 2020, the company’s proceeds from the issuance of long-term debt instruments totaled $985 million.

In the year, it generated net cash of $824 million from operating activities, reflecting a decrease of 1.8% from the previous year. Capital expenditure was $183 million, down 19% from the year-ago figure of $226 million. Free cash flow in the year was $641 million, up 4.6% from the previous year.

Shareholder-Friendly Policies

In 2020, the company paid out dividends amounting to $188 million, reflecting an increase of 8% from the previous year. Share repurchased amounted to $61 million, up 52.5% year over year.

Concurrently, the company announced that its board of directors approved an 8% increase in its quarterly cash dividend rate. The current rate is 28 cents per share, higher than the previous rate of 26 cents.

The revised dividend will be paid out to shareholders of record as of Feb 18. The disbursement will be made on Mar 18.

Outlook

For 2021, Xylem anticipates revenues of $5.16-$5.26 billion. The projection suggests year-over-year growth of 6-8% or 3-5% organically.

Adjusted EBITDA margin will likely be 16.7-17.7%, while adjusted operating margin will be 11.5-12.5%.

Adjusted earnings per share are anticipated to be $2.35-$2.60, suggesting an increase of 14-26% from 2020.

Xylem Inc. Price, Consensus and EPS Surprise

 

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

Zacks Rank & Stocks to Consider

The company currently has a market capitalization of $17.5 billion and a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Altra Industrial Motion Corp. AIMC, EnPro Industries, Inc. NPO and Graco Inc. GGG. All these companies 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 both Altra Industrial and Graco improved for the current year, while have been unchanged for EnPro. Further, earnings surprise for the last reported quarter was 77.55% for Altra Industrial, 109.38% for EnPro and 19.61% for Graco.

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