Xylem(XYL) - 2024 Q2 - Quarterly Report

PART I Financial Statements This section presents the unaudited condensed consolidated financial statements for Q2 and H1 2024 and 2023, including key financial statements and detailed notes Condensed Consolidated Income Statement Highlights (Q2 2024 vs Q2 2023) | Metric (in millions, except per share) | Q2 2024 | Q2 2023 | Change | | :--- | :--- | :--- | :--- | | Revenue | $2,169 | $1,722 | +26.0% | | Gross Profit | $819 | $651 | +25.8% | | Operating Income | $253 | $119 | +112.6% | | Net Income | $194 | $92 | +110.9% | | Diluted EPS | $0.80 | $0.45 | +77.8% | Condensed Consolidated Balance Sheet Highlights (as of June 30, 2024) | Metric (in millions) | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $15,765 | $16,112 | | Total Liabilities | $5,417 | $5,936 | | Total Equity | $10,348 | $10,176 | | Goodwill | $7,509 | $7,587 | | Cash and cash equivalents | $815 | $1,019 | Condensed Consolidated Statement of Cash Flows Highlights (Six Months Ended June 30) | Metric (in millions) | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash – Operating activities | $377 | $9 | | Net Cash – Investing activities | $(128) | $(489) | | Net Cash – Financing activities | $(419) | $235 | Note 3: Acquisitions and Divestitures This note details the $6.9 billion acquisition of Evoqua Water Technologies Corp, finalizing purchase price allocation and recognizing significant goodwill and intangible assets - On May 24, 2023, Xylem acquired 100% of Evoqua Water Technologies Corp. The purchase price consisted of $6,121 million in Xylem common stock, $160 million in replacement equity awards, and $619 million to repay Evoqua's debt[212] Purchase Consideration for Evoqua Acquisition (in millions) | Component | Fair Value | | :--- | :--- | | Xylem Common Stock issued to Evoqua stockholders | $6,121 | | Estimated replacement equity awards | $160 | | Payment of certain Evoqua indebtedness | $619 | | Total | $6,900 | Fair Value of Acquired Intangible Assets (in millions) | Asset Type | Fair Value | | :--- | :--- | | Customer and distributor relationships | $1,395 | | Proprietary technology and patents | $120 | | Backlog | $120 | | Permits | $70 | | Trademarks | $50 | | Software | $14 | | Total | $1,769 | - The acquisition resulted in $4.8 billion of goodwill, which is not tax-deductible and is primarily attributed to expected synergies, economies of scale, and the assembled workforce of Evoqua[213] Note 5: Restructuring and Asset Impairment Charges This note details $23 million in Q2 2024 restructuring and asset impairment charges, primarily severance and asset impairments in the Water Solutions and Services segment Restructuring and Asset Impairment Charges (in millions) | Period | Severance & Other | Asset Impairment | Total | | :--- | :--- | :--- | :--- | | Q2 2024 | $8 | $15 | $23 | | H1 2024 | $17 | $16 | $33 | - In Q2 2024, the company recognized $15 million in impairment charges, primarily for customer relationships and trademarks, due to restructuring actions in the Water Solutions and Services segment[12] - Restructuring actions commenced in 2024 are expected to continue through the end of 2025 and consist mainly of severance and asset impairment charges[12] Note 9: Goodwill and Other Intangible Assets This note outlines goodwill of $7.51 billion and net intangible assets of $2.37 billion as of June 30, 2024, with increased amortization expense due to the Evoqua acquisition Goodwill and Intangible Assets (in millions) | Asset | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Goodwill | $7,509 | $7,587 | | Other Intangible Assets, net | $2,374 | $2,529 | - Amortization expense for finite-lived intangible assets increased to $83 million in Q2 2024 and $156 million in H1 2024, up from $51 million and $83 million in the respective prior-year periods[20] Note 12: Credit Facilities and Debt This note details total debt of $2.0 billion as of June 30, 2024, a decrease driven by term loan settlement, with a $1 billion undrawn revolving credit facility - On April 19, 2024, the company settled its €250 million ($268 million) Term Loan Facility with cash on hand[58] - The company has a $1 billion five-year revolving credit facility which was undrawn as of June 30, 2024[296] - The company's supplier financing programs had an outstanding balance of $250 million as of June 30, 2024, up from $176 million at December 31, 2023[55] Note 15: Share-Based Compensation Plans This note reports share-based compensation expense of $13 million in Q2 2024 and $31 million in H1 2024, with $77 million in unrecognized expense remaining Share-Based Compensation Expense (in millions) | Period | Q2 2024 | H1 2024 | Q2 2023 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Expense | $13 | $31 | $16 | $27 | Restricted Stock Unit Activity (H1 2024) | Activity | Share units (in thousands) | Weighted Avg. Grant Date Fair Value/Share | | :--- | :--- | :--- | | Outstanding at Jan 1, 2024 | 862 | $98.49 | | Granted | 271 | $128.80 | | Vested | (398) | $77.54 | | Forfeited | (52) | $100.84 | | Outstanding at June 30, 2024 | 683 | $110.32 | Note 19: Segment Information This note details the company's new segment structure effective January 1, 2024, providing recast financial breakdowns for revenue and operating income by segment - The company realigned its segments effective January 1, 2024, creating a new 'Water Solutions and Services' segment by combining the former Integrated Solutions and Services segment with the dewatering and assessment services businesses[208] Segment Revenue (Q2 2024 vs Q2 2023, in millions) | Segment | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Water Infrastructure | $631 | $519 | | Applied Water | $456 | $478 | | Measurement and Control Solutions | $482 | $384 | | Water Solutions and Services | $600 | $341 | | Total | $2,169 | $1,722 | Segment Operating Income (Q2 2024 vs Q2 2023, in millions) | Segment | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Water Infrastructure | $78 | $70 | | Applied Water | $71 | $84 | | Measurement and Control Solutions | $79 | $29 | | Water Solutions and Services | $47 | $26 | | Corporate and other | $(22) | $(90) | | Total | $253 | $119 | Management's Discussion and Analysis (MD&A) Management discusses Q2 and H1 2024 financial performance, highlighting 26.0% revenue growth, 20.8% adjusted EBITDA margin, strong segment results, and updated 2024 outlook Executive Summary Q2 2024 saw revenue increase 26.0% to $2.17 billion, driven by organic growth and the Evoqua acquisition, with adjusted EBITDA margin expanding to 20.8% Q2 2024 Financial Highlights | Metric | Q2 2024 | YoY Change | | :--- | :--- | :--- | | Revenue | $2,169 million | +26.0% | | Organic Revenue Growth | 9.2% | - | | Orders | $2,087 million | +12.4% | | EPS | $0.80 | +77.8% | | Adjusted EPS | $1.09 | +11.2% | | Adjusted EBITDA Margin | 20.8% | +170 bps | Results of Operations This section analyzes Q2 2024 operational performance, noting 26.0% revenue growth, flat gross margin, and a significant increase in operating income driven by revenue leverage Revenue Change by Driver (Q2 2024 vs Q2 2023) | Driver | Contribution to Growth | | :--- | :--- | | Organic Growth | +9.2% | | Acquisitions/(Divestitures) | +17.5% | | Foreign currency translation | -0.7% | | Total Change in Revenue | +26.0% | - Q2 2024 gross margin remained flat at 37.8%. Favorable impacts from operations, price realization, and volume were offset by inflation, unfavorable mix, and other costs[75] - SG&A expenses as a percentage of revenue decreased to 22.4% in Q2 2024 from 25.9% in Q2 2023, primarily due to revenue leverage and lower special charges related to the Evoqua integration[76][91] Adjusted EBITDA Reconciliation (Q2 2024 vs Q2 2023, in millions) | Metric | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Net Income | $194 | $92 | | EBITDA | $398 | $211 | | Adjusted EBITDA | $452 | $329 | | Adjusted EBITDA Margin | 20.8% | 19.1% | Segment Results This section details Q2 2024 segment performance, highlighting strong growth in Measurement and Control Solutions and Water Solutions and Services, while Applied Water declined - Water Infrastructure: Q2 operating income grew 11.4% to $78 million, but operating margin decreased 110 bps to 12.4% due to inflation and costs related to the Evoqua acquisition, which offset productivity savings[123] - Applied Water: Q2 operating income decreased 15.5% to $71 million, with operating margin contracting 200 bps to 15.6%, driven by inflation, unfavorable mix, and higher employee costs[85] - Measurement and Control Solutions: Q2 operating income increased 172.4% to $79 million. Operating margin expanded significantly by 880 bps to 16.4%, driven by higher volume, price realization, and productivity[102] - Water Solutions and Services: Q2 operating income grew 80.8% to $47 million. Operating margin expanded 20 bps to 7.8%, as strong volume growth and productivity offset unfavorable mix and inflation[103] Liquidity and Capital Resources The company maintains strong liquidity of approximately $1.8 billion as of June 30, 2024, with operating cash flow significantly improving to $377 million in H1 2024 Cash Flow Summary (Six Months Ended June 30, in millions) | Activity | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Operating Activities | $377 | $9 | +$368 | | Investing Activities | $(128) | $(489) | +$361 | | Financing Activities | $(419) | $235 | -$654 | - The increase in operating cash flow was primarily driven by higher cash earnings and the absence of 2023 payments for Evoqua's pre-closing transaction costs[133] - As of June 30, 2024, the company has available liquidity of approximately $1.8 billion, comprising $815 million of cash and $1 billion of available credit facilities[137] 2024 Outlook The company updated its full-year 2024 outlook, forecasting 16% total revenue growth and 5% to 6% organic revenue growth - The company updated its 2024 outlook, now forecasting total revenue growth of 16% and organic revenue growth of 5% to 6%[139] Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk disclosures compared to the 2023 Annual Report - There has been no material change in the information concerning market risk as stated in the 2023 Annual Report[139] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2024[140] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[140] PART II Legal Proceedings This section details Evoqua's non-prosecution agreement with the U.S. Attorney's Office, resolving a pre-acquisition investigation with an $8.5 million penalty - On May 13, 2024, Evoqua entered into a non-prosecution agreement with the U.S. Attorney's Office to resolve an investigation into pre-acquisition financial statements[142] - Evoqua paid a criminal monetary penalty of $8.5 million. The agreement does not include a compliance monitorship but requires ongoing compliance obligations for two years[142] Risk Factors There have been no material changes to the company's risk factors as previously disclosed in its 2023 Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the 2023 Annual Report[142] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock in Q2 2024, with $182 million remaining available under its share repurchase program Share Repurchases (Q2 2024) | Period | Total Shares Purchased (Public Plan) | Approx. Dollar Value Remaining Under Plan | | :--- | :--- | :--- | | April 2024 | 0 | $182 million | | May 2024 | 0 | $182 million | | June 2024 | 0 | $182 million | - The Board of Directors authorized a $500 million share repurchase program on August 24, 2015, with no expiration date. As of June 30, 2024, $182 million remains available under this plan[143]