It has been about a month since the last earnings report for Xylem (XYL Quick QuoteXYL - Free Report) . Shares have added about 9.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Xylem due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Xylem Surpasses Q2 Earnings Estimates, Provides View

Xylem has reported better-than-expected results for second-quarter 2020. Its earnings surprise in the quarter was 2.6%.

Adjusted earnings in the quarter under review were 40 cents per share, surpassing the Zacks Consensus Estimate of 39 cents. However, the bottom line decreased 49.4% from the year-ago figure of 79 cents.

It is worth noting that unfavorable movements in foreign currencies had an adverse impact of 1 cent per share on earnings.

Revenue Details

Xylem’s revenues of $1,160 million in the quarter under review moved down 13.8% from the year-ago quarter. Organic sales in the quarter declined 12% due mainly to the adverse impacts of the coronavirus outbreak.

Also, the company’s revenues surpassed the Zacks Consensus Estimate of $1,136 million.

Geographically, organic sales fell 15% in the United States, 15% in emerging markets and 4% in Western Europe. Based on end-markets, organic sales in utilities fell 9%, while that in industrial declined 16%. Also, commercial and residential organic sales fell 10% and 15%, respectively.

Orders in the reported quarter fell 11% year over year to $1,232 million. Organically, orders declined 9%.

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 $501 million, down 10.7% year over year. Organic sales in the quarter decreased 8% year over year. Results suffered from the weakness in utilities and industrial end markets. Business in the U.S. and emerging markets were down 15% and 9%, respectively.
 
The Applied Water segment generated revenues of $337 million in the second quarter, down 14.5% year over year. Organic sales dipped 13% on a year-over-year basis. Business in commercial, residential and industrial markets was weak in the quarter. Geographically, businesses fell 14% in the United States as well as declined 14% in emerging markets and 12% in Western Europe.

Quarterly revenues of the Measurement & Control Solutions segment were $322 million, down 17.4% year over year. Organic sales decreased 17% year over year. Results suffered from weakness in water, test, energy and SaaS/other end markets. While businesses in the United States declined 16%, that in emerging markets was down 29% and it decreased 5% in Western Europe.

Margin Profile

In the quarter, the company’s cost of sales decreased 11.4% year over year to $726 million. As a percentage of revenues, it represented 62.6% versus 60.9% in the year-ago quarter. Gross profit decreased 17.5% year over year to $434 million, while margin dipped 170 basis points (bps) to 37.4%. Selling, general and administrative expenses dipped 2% to $288 million. Meanwhile, research and development expenses decreased 6.4% to $44 million.

Adjusted operating income in the quarter was $108 million, down 43.8% year over year. Operating margin was down 500 bps to 9.3% due mainly to lower volumes caused by the pandemic.

Balance Sheet and Cash Flow

Exiting the second quarter, Xylem had cash and cash equivalents of $1,577 million, surging 113.4% from $739 million at the end of the last reported quarter. Long-term debt balance increased 49.2% sequentially to $3,031 million.

In the first half of 2020, the company’s proceeds from issuance of long-term debt instruments totaled $987 million.

In the quarter, it generated net cash of $181 million from its operating activities, reflecting an increase of 47.2% from the year-ago comparable quarter. Capital expenditure was $44 million, down 26.7% from the year-ago figure of $60 million. Free cash flow in the quarter was $137 million, up 117.5% from the year-ago quarter.

Shareholder-Friendly Policies

In the first half of 2020, the company paid out dividends amounting to $95 million, reflecting an increase of 9.2% from the year-ago comparable period. Share repurchased amounted to $60 million, up 53.8% year over year.

 

Outlook

Due to the pandemic-related uncertainties, Xylem refrained from reinstating its projections for 2020. Notably, it withdrew its yearly forecast on Mar 31.

For the third quarter, it expects an organic sales decline of 8-12% year over year. Adjusted operating margin is expected to be 11-11.5%. The projections are better than the results recorded in the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Xylem has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Xylem has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.