Water solutions provider, Xylem Inc. (XYL) reported relatively strong results for fourth-quarter 2014. Adjusted earnings came in at 62 cents per share, up 10.7% from 56 cents earned in the year-ago quarter, surpassing the Zacks Consensus Estimate by a couple of cents.
Adjusted earnings for full year 2014 were $1.97 per share, up 18% year over year. The significant improvement in earnings was achieved on the back of strong execution, renewed drive and strategic focus on the company’s innovation and research oriented activities.
On a GAAP basis, Xylem’s earnings in the reported quarter were 52 cents per share, significantly up from 37 cents in the year-ago quarter. GAAP earnings for 2014 were $1.83 per share versus $1.22 in 2013.
Revenues
Xylem generated revenues of $1,042 million, up roughly 1% year over year and above the Zacks Consensus Estimate of $1,024 million. Organically, revenues were up 6% year over year, driven by improvement in emerging markets, the U.S., and other end markets. Aggregate revenues at the end of 2014 stood at $3,916 million, up 2.1% from the prior year.
In the quarter, Xylem received total orders worth $970 million, reflecting a slip of 1.6% over the year-ago quarter figure of $986 million. For 2014, the company received orders worth $4,021 million compared to $3,912 million at the end of 2013.
Margins/Costs
Xylem’s cost of revenue for 2014 inched up 2.8% to $2403 million, representing 61.4% of total revenue versus 60.9% in 2013. Gross margin was 38.6%, down 40 basis points (bps) year over year. Selling, general and administrative expenses dropped 6.7% year over year to $920 million, accounting for 23.5% of total revenue. Research and development expenses represented 2.7% of total revenue at the end of 2014.
Adjusted operating income for the reported quarter improved 5.5% year over year with the respective margin coming in at 14.7%, up from 14.0% in the year-ago quarter. Full year adjusted operating margin of the company stood at 12.9% versus 11.8% accrued in 2013.
Segment Details
The Water Infrastructure segment generated revenues of $672 million in the quarter, slightly down from the year-ago tally of $673 million. However, organically, revenues were up 6% year over year driven by growth in the company’s different business units as well as geographical markets.The segment’s adjusted operating margin rose 30 bps year over year to 16.8%, backed by the company’s cost reduction strategies.
The Applied Water segment’s revenues stood at $370 million, up 2.8% from the year-ago value. Revenues were up 7% organically on the back of solid growth in the company’s U.S. as well as emerging economies’ trade. The segment’s adjusted operating margin rose 40 bps year over year to 13.5%.
Balance Sheet and Cash Flow
Exiting fourth-quarter 2014, Xylem had cash and cash equivalents of $663 million versus $533 million in the prior-year period. Long-term debt remained flat at $1,199 million.
In the twelve months ended Dec 31, 2014, Xylem generated cash of $416 million from its operating activities compared with $324 million in the year-ago comparable period. Capital expenditure totaled $119 million, down from $126 million expended in the twelve months ended Dec 31, 2013. The company’s free cash flow was $297 million, up 50% from the year-ago value.
During the twelve months ended Dec 31, 2014, Xylem repurchased stocks worth $134 million while disbursing dividends worth $94 million. The year-over-year improvement in dividend disbursement was 8%.
Outlook
In 2015, Xylem estimates adjusted earnings in the range of $1.85 to $1.95 per share. The earnings forecast comes on the expectation of an operating income within $480 to $505 million. The earnings growth projection of 5% to 10% is arrived at after considering the adverse impact of uncertain currency fluctuations in the current year. However, considering the same changes, the company has lowered its upcoming revenue guidance by 5–7% to $3.7 billion.
Shares prices of Xylem did not show any movement in the pre-market trading session.
Other Stocks to Consider
With a market capitalization of $6.35 billion, Xylem currently holds a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the industry include Kadant Inc. (KAI), Advanced Emissions Solutions, Inc. (ADES) and AO Smith Corp. (AOS). While both Kadant Inc. and Advanced Emissions Solutions, Inc. carry a Zacks Rank #2 (Buy), AO Smith Corp. sports a Zacks Rank #1 (Strong Buy).
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