Xylem Inc. XYL reported in-line results for the fourth quarter of 2018. This is the second consecutive quarter when the company’s bottom line met the Zacks Consensus Estimate.
Adjusted earnings in the reported quarter were 88 cents per share, meeting the Zacks Consensus Estimate. On a year-over-year basis, the bottom line increased 15.8%, driven by sales growth and margin improvement.
The bottom-line results include adverse impact of 2 cents per share from unfavorable movements in foreign currencies.
For 2018, Xylem’s adjusted earnings were $2.88 per share, down from the Zacks Consensus Estimate of $2.89. However, the bottom line increased 20% from $2.40 recorded in 2017. Currency translation had a positive 5 cents impact in the year.
Acquired Assets and Organic Growth Drive Revenues
Xylem’s revenues were $1,386 million in the quarter under review, reflecting growth of 8.5% from the year-ago quarter. The improvement was driven by 2% gain from acquired assets and 9% organic sales growth, partially offset by 3% adverse impact of foreign currency translations.
Also, the top line surpassed the Zacks Consensus Estimate of $1.36 billion.
Orders in the quarter under review totaled $1.4 billion, reflecting year-over-year organic growth of 9%.
On a geographical basis, organic sales in the reported quarter improved 10% in the United States, 13% in the emerging market and 6% in Western Europe. Alternatively, organic revenues grew 10% in public utility end market, 8% in industrial, 17% in commercial and flat 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 $1,386 million, up 8.5% year over year. This upside stemmed from improved utilities as well as industrial end-market demand.
The Applied Water segment generated revenues of $402 million in the fourth quarter, up 7.8% year over year. This upswing stemmed from robust commercial end-market business as well as strong industrial end-market business in the United States.
Quarterly revenues of the Measurement & Control Solutions segment were $375 million, up 16.8% year over year. This improvement stemmed from growth in the water sector business in emerging markets and North America.
For 2018, the company’s revenues were $5,207 million, up 10.6% year over year. The top line also surpassed the Zacks Consensus Estimate of $5.18 billion.
Operating Margin Improves Y/Y
Adjusted operating income in the quarter under review increased 8.9% year over year to $209 million. Moreover, adjusted operating margin increased 10 basis points (bps) to 15.1%.
For the year, cost of sales increased 11.2% year over year while selling, general and administrative expenses expanded 6.6%, and research and development expenses grew 4.4%. Adjusted operating margin improved 40 bps year over year to 13.7%.
Balance Sheet and Cash Flow
Exiting the fourth quarter, Xylem had cash and cash equivalents of $296 million, down 26.7% from $404 million at the end of the last reported quarter. Long-term debt balance decreased 6.3% sequentially to $2,051 million. Notably, the company repaid $120 million in long-term debts in 2018.
In the fourth quarter, the company generated net cash of $198 million from operating activities, reflecting decline of 35.5% from the year-ago quarter. Capital expenditure was $66 million, below $51 million in the fourth quarter of 2017. Free cash flow in the quarter was $132 million.
Shareholder-Friendly Policies
During 2018, the company paid dividends amounting to $152 million and repurchased shares worth $59 million.
Concurrent with the earnings release, the company announced that its board of directors approved the payment of a quarterly dividend of 24 cents per share. This dividend rate reflects roughly 14% increase over the previous rate of 21 cents. The annual dividend rate now stands at 96 cents versus 84 cents mentioned earlier.
The revised rate will be paid on Mar 14, 2019, to shareholders of record as of Feb 14, 2019.
Outlook
For 2019, Xylem anticipates revenues of $5.3-$5.4 billion, reflecting year-over-year growth of 2-4%. Organic sales are predicted to increase 4-6%.
Adjusted operating margin will likely be 14.7-15.2% and adjusted earnings will be $3.20-$3.40 per share. The bottom-line projection reflects growth of 11-18% from the previous year.
Xylem Inc. Price, Consensus and EPS Surprise
Xylem Inc. Price, Consensus and EPS Surprise | Xylem Inc. Quote
Zacks Rank & Stocks to Consider
With a market capitalization of roughly $12.7 billion, Xylem currently carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, Twin Disc, Incorporated TWIN and Colfax Corporation CFX. While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), Twin Disc and Colfax carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings estimates for DXP Enterprises and Colfax for 2019, and that for Twin Disc for fiscal 2019 (ending June 2019) have improved over the past 60 days. Positive earnings surprise for the last four quarters was 112.62% for DXP Enterprises, 220.64% for Twin Disc and 8.88% for Colfax.
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