Water solutions provider Xylem Inc. XYL reported mixed results for first-quarter 2015. Adjusted earnings came in at 33 cents per share, beating the Zacks Consensus Estimate of 31 cents by 6.5%. However, the bottom line fell short of the year-ago tally by a penny.
On GAAP basis, Xylem’s earnings in the reported quarter were 35 cents per share, significantly up from 27 cents in the year-ago quarter.
Revenues
Xylem generated revenues of $837 million, down roughly 7.6% year over year. It also missed the Zacks Consensus Estimate of $843 million. Nevertheless, organically, revenues were up 1% year over year, driven by improvement in the emerging and U.S. markets.
In the quarter, Xylem received total orders worth $915 million, reflecting a slip of 7.9% over the year-ago quarter figure of $993 million.
Margins/Costs
Xylem’s cost of revenue for first-quarter 2015 fell 7.4% to $522 million, representing 62.4% of total revenue versus 62.3% recorded in first-quarter 2014. Gross margin at the quarter-end stood at 37.6% versus 37.7% reported a year ago.
Selling, general and administrative expenses dropped 8% year over year to $206 million, accounting for 24.6% of total revenue. Research and development expenses represented 2.7% of total revenue at the end of the quarter.
Adjusted operating margin in first-quarter 2015 stood at 10.8%, increasing 40 basis points (bps) over the year-ago quarter.
Segment Details
The Water Infrastructure segment generated revenues of $500 million in the quarter, down from the year-ago tally of $552 million. The decline was primarily due to weak business in the Australian and Canadian markets. Moreover, unfavorable delivery timings in the last-year Australian project were a major reason behind the decline. Sales were almost flat year over year on organic grounds.
Adjusted operating margin rose 110 bps year over year to 9.4%, backed by the company’s cost-reduction strategies.
Revenues from the Applied Water segment were $337 million, down 4.8% from the year-ago value. Weak surplus from agricultural markets was mainly responsible for the decline. However, the segment’s organic sales climbed 2% year over year, backed by improved performance of U.S. commercial building service.
The segment’s adjusted operating margin rose 200 bps year over year to 13.6%, helped by the company’s cost-saving as well as productivity-enhancement strategies.
Balance Sheet and Cash Flow
Exiting first-quarter 2015, Xylem had cash and cash equivalents of $554 million versus $663 million on Dec 31, 2014. Long-term debt remained flat at $1,195 million.
Xylem generated cash of $39 million from its operating activities in the quarter, compared with $22 million in the year-ago comparable period. Capital expenditure stood at $37 million, up from $25 million expended in the year ago quarter. The company’s free cash flow was $2 million versus $3 million of cash outflow in the year ago quarter.
During the quarter, Xylem repurchased 1.4 million shares worth $50 million, while disbursing $26 million of dividends. The year-over-year improvement in dividend disbursement was 8.3%. The company had $50 million remaining under its authorization as on Mar 31.
Outlook
Supported by steadily growing business in the U.S. and emerging markets, Xylem aims to enhance its revenues and earnings in the future. After taking into account unfavorable currency fluctuations in the global market, Xylem anticipates adjusted earnings within $1.80–$1.90 per share for full-year 2015.
Predicting a yearly decline of 7–8%, the company expects to generate revenues worth $3.7 billion for 2015. Irrespective of currency headwinds, Xylem plans to expand its trade over the U.S. and emerging markets in the near future. The company also aims to improve its margins on the back of superior operational performance.
Stocks to Consider
With a market capitalization of $6.65 billion, Xylem currently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include RBC Bearings Inc. ROLL, AO Smith Corp. AOS and Astec Industries, Inc. ASTE. While both AO Smith Corp. and Astec Industries, Inc. carry a Zacks Rank #2 (Buy), RBC Bearings Inc. sports a Zacks Rank #1 (Strong Buy).
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