Xylem (XYL) Q1 Earnings Top Estimates, Supply Woes Hurt

Xylem Inc. XYL reported better-than-expected results for first-quarter 2022. XYL’s earnings surpassed the Zacks Consensus Estimate by 11.9%, whereas sales beat the same by 3.7%.

Adjusted earnings in the quarter under review were 47 cents per share, surpassing the Zacks Consensus Estimate of 42 cents. However, the bottom line decreased 16.1% from the year-ago figure of 56 cents due to weakness in sales. Supply-chain woes were a spoilsport in the quarter.

Revenue Details

In the quarter under review, Xylem’s revenues were $1,272 million, reflecting an increase of 1% from the year-ago quarter’s figure. Organic sales in the quarter rose 4%, driven by higher global demand across its end markets coupled with record order and backlog across the portfolio.

Xylem’s revenues surpassed the Zacks Consensus Estimate of $1,227 million.

Orders in the reported quarter increased 12% year over year to $1,715 million. Organically, orders grew 14%.

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

Revenues for the Water Infrastructure segment were $533 million, up 5% year over year. Organic sales in the reported quarter grew 8% year over year. Businesses in the dewatering and emerging markets flourished, while utilities were soft.

The Applied Water segment generated revenues of $425 million in the first quarter, up 8% year over year. Organic sales increased 10% on a year-over-year basis. Price realization and backlog execution were solid across the end markets.

Quarterly revenues of the Measurement & Control Solutions segment were $314 million, down 11% year over year. Organic sales were down 9% year over year due to supply-chain issues related to chips. The smart metering business was weak in the quarter.

Xylem Inc. Price, Consensus and EPS Surprise

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

Margin Profile

In the reported quarter, Xylem’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $181 million, decreasing 15.8% from the year-ago quarter’s level. Margin in the quarter decreased 290 basis points (bps) year over year to 14.2%. Cost inflation and investments adversely impacted the results. This was partially offset by productivity gains and favorable pricing.

Adjusted operating income was $75 million in the quarter under review, almost flat year over year. The operating margin decreased 140 bps to 15.9%. Interest expenses in the reported quarter totaled $13 million, down from $21 million in the year-ago quarter.

In the first quarter, Xylem’s cost of sales increased 5.1% year over year to $805 million. As a percentage of revenues, the metric represented 63.3% compared with 61% in the previous year. Selling, general and administrative expenses increased 1% to $304 million. Research and development expenses grew 4% to $52 million.

Balance Sheet and Cash Flow

Exiting the first quarter of 2022, Xylem had cash and cash equivalents of $1,117 million, decreasing 17.2% from $1,349 million at the end of the last reported quarter. Long-term debt balance declined 23% sequentially to $1,878 million.

In the first quarter, XYL did not make the repayment of any long-term debt.

In the first three months, Xylem used net cash of $81 million from operating activities compared with $26 million used in the previous year’s quarter. Capital expenditure was $49 million, up 24.6% year over year. Free cash outflow was $130 million compared with $65 million free cash outflow reported in the year-ago quarter.

Shareholder-Friendly Policies

In the first quarter of 2022, Xylem paid out dividends worth $55 million, reflecting an increase from $51 million distributed in first-quarter 2021. Share repurchased amounted to $51 million, down 23.9% year over year

Outlook

For 2022, Xylem expects organic revenue growth of 4-6% from the year-ago reported figure. Total revenues are predicted to be $5.25-$5.35 billion, suggesting an increase of 1-3% from the year-ago reported figure. Adjusted earnings per share for the year are anticipated to be $2.40-$2.70.

The adjusted EBITDA margin is expected to be 16-17%.

Zacks Rank & Stocks to Consider

With a market capitalization of $13.8 billion, XYL currently carries a Zacks Rank #4 (Sell).

Some better-ranked companies from the industrial products sector are discussed below.

Applied Industrial Technologies, Inc. AIT presently sports a Zacks Rank #1. AIT delivered a trailing four-quarter earnings surprise of 25.4%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AIT’s earnings estimates have increased 5.4% for fiscal 2022 (ending June 2022) in the past 60 days. Its shares have rallied 12.7% in the past three months.

Roper Technologies, Inc. ROP presently has a Zacks Rank #2 (Buy). Its earnings surprise in the last four quarters was 2%, on average.

In the past 60 days, ROP’s earnings estimates have increased 1.1% for 2022. The stock has inched up 1.8% in the past three months.

Ferguson plc FERG is presently Zacks #2 Ranked. FERG’s earnings surprise in the last four quarters was 14.2%, on average.

In the past 60 days, the stock’s earnings estimates have increased 6.5% for fiscal 2022 (ending July 2022). The same has declined 17.8% in the past three months.

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