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

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Xylem Inc. (XYL - Free Report) 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 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 - Free Report) 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 - Free Report) 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 - Free Report) 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.