Xylem Inc. (XYL - Free Report) reported weaker-than-expected results for the first quarter of 2019, with earnings lagging estimates by 10.3%. This came in after two consecutive quarters of reporting in-line results.
Adjusted earnings in the quarter under review were 52 cents per share, lagging the Zacks Consensus Estimate of 58 cents. However, on a year-over-year basis, the bottom line increased 2% from the year-ago figure of 51 cents.
Bottom-line results include adverse impact of 5 cents per share from unfavorable movements in foreign currencies.
Organic Growth Drives Revenues
Xylem’s revenues were $1,237 million in the quarter under review, reflecting growth of 1.6% from the year-ago quarter. Organic sales in the quarter expanded 6% on the back of strengthening end markets. Businesses in emerging markets and the United States were healthy.
This improvement was driven by 6% organic sales growth, partially offset by 4% adverse impact of foreign currency translations.
However, the top line lagged the Zacks Consensus Estimate of $1,249 million.
Orders in the quarter under review were flat year over year at $1,315 million. Organically, orders reflect growth of 4%.
On a geographical basis, organic sales in the reported quarter improved 11% in the United States and 12% in the emerging market while declined 2% in Western Europe. Alternatively, organic revenues grew 6% in public utility end market, 4% in industrial, 12% in commercial and 4% in residential.
The company reports net sales under three segments — Water Infrastructure, Applied Water, and Measurement & Control Solutions. The segmental information is briefly discussed below:
Revenues in the Water Infrastructure segment were $482 million, up 0.4% year over year. This upside stemmed from improved utilities as well as industrial end-market demand.
The Applied Water segment generated revenues of $379 million in the first quarter, up 3.6% year over year. This upswing primarily stemmed from the robust commercial end-market.
Quarterly revenues of the Measurement & Control Solutions segment were $376 million, up 1.3% year over year. This improvement stemmed from growth in the water sector business in North America.
Operating Margin Falls Y/Y
In the quarter under review, Xylem’s cost of sales increased 0.8% year over year to $763 million while selling, general and administrative expenses expanded 2.4% to $303 million, and research and development expenses grew 24.4% to $51 million.
Adjusted operating income in the quarter under review decreased 1.5% year over year to $133 million. Also, adjusted operating margin decreased 30 basis points (bps) to 10.8% due to adverse impacts of sales mix and cost-related issues.
Balance Sheet and Cash Flow
Exiting the first quarter, Xylem had cash and cash equivalents of $275 million, down 7.1% from $296 million at the end of the last reported quarter. Long-term debt balance decreased 0.3% sequentially to $2,044 million.
In the first quarter, the company generated net cash of $83 million from operating activities, reflecting growth of 31.7% from the year-ago quarter. Capital expenditure was $69 million, above $61 million in the first quarter of 2018. Free cash flow in the quarter was $14 million.
During the quarter, the company paid dividends amounting to $44 million and repurchased shares worth $39 million.
For 2019, Xylem maintained revenues guidance at $5.3-$5.4 billion, reflecting year-over-year growth of 2-4%. Organic sales are still predicted to increase 4-6%.
Adjusted operating margin will likely be 14.5-14.9%, down from 14.7-15.2% due to weak first-quarter results (4-cents impact) and continued prevalence of forex woes (4-cents impact). Adjusted earnings will likely be $3.12-$3.32, down from $3.20-$3.40 per share mentioned earlier. The revised projection reflects year-over-year growth of 8-15%.
Xylem Inc. Price, Consensus and EPS Surprise