Xylem Reports Fourth Quarter and Full-Year 2022 Earnings

• Fourth quarter revenue grew 14%, up 20% organically
• Fourth quarter earnings per share of $0.82, up 32%; adjusted earnings per share of $0.92, up 46%
• Full-year revenue grew 6%, up 11% organically
• Full-year earnings per share of $1.96, down 17%; adjusted earnings per share of $2.85, up 14%
• Provides 2023 organic revenue growth guidance range of 4% to 6% and adjusted earnings per share range of $3.00 to $3.25

Xylem Inc. (NYSE: XYL), a leading global water technology company dedicated to solving the world’s most challenging water issues, today reported fourth quarter revenue of $1.5 billion, and full-year 2022 revenue of $5.5 billion, surpassing prior guidance, with strong commercial and operational execution. While fourth quarter orders were down 9 percent on a reported basis and down 3 percent organically, the Company grew backlog 14 percent organically on resilient underlying demand. On January 23, Xylem announced it had agreed to acquire Evoqua in a $7.5 billion, all-stock transaction, creating a transformative platform to address intensifying water challenges, globally.

Fourth quarter earnings exceeded Xylem’s previous guidance. Net income was $149 million, or $0.82 per share. Net income margin increased 140 basis points to 9.9 percent. These results included increased restructuring and realignment costs and higher taxes during the quarter. Adjusted net income was $168 million, or $0.92 per share, which excludes the impacts of restructuring, realignment and special charges. Fourth quarter adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin was 18.7 percent, reflecting a year-over-year increase of 250 basis points. Strong price realization offset inflation and, coupled with productivity savings and higher volume, drove the margin expansion, exceeding the impact of strategic investments.

For the full year, net income was $355 million, or $1.96 per share. Net income margin decreased 180 basis points to 6.4 percent. These results were mainly driven by a previously announced, one-time non-cash pension plan settlement. Adjusted net income was $516 million, or $2.85 per share, which excludes the impacts of restructuring, realignment and special charges. Full-year adjusted EBITDA margin was 17.0 percent, reflecting a year-over-year decrease of 10 basis points. Inflation, strategic investments and the impact of chip shortages in the first half exceeded the benefits of price realization and productivity savings. The Company generated $596 million of operating cash flow, representing a 168 percent conversion, and $388 million of free cash flow, representing an 80 percent conversion of net income excluding the non-cash impairment charges and non-cash pension plan settlement.

“The team drove fourth quarter results well above expectations, with very strong performance across all business segments and regions,” said Patrick Decker, Xylem president and CEO. “Resilient demand and strong backlog execution delivered robust double-digit revenue growth with significant margin expansion. That out-performance in the fourth quarter and throughout 2022 has fueled healthy momentum coming into 2023.”

“Our customer focus and operational discipline are building on a foundation of resilient underlying demand for the value of Xylem’s offering in our largest end-markets,” continued Decker. “As trends driving water investment continue to intensify, we are confident about delivering full-year 2023 growth in the mid-single digits, with significant margin expansion, tracking solidly toward Xylem’s longer-term growth milestones. Of course, we’re very excited about the transformative agreement we have announced to acquire Evoqua. The combination will be positioned to have greater impact in addressing the world’s water challenges and create even more value for shareholders. Until the transaction closes, however, we remain focused on delivering our commitments to our stakeholders, as we plan for a smooth integration.”

Xylem announced that its Board of Directors declared a first quarter dividend in the amount of $0.33 per share, an increase of 10 percent. The dividend is payable on March 22, 2023, to shareholders of record as of February 22, 2023.

Full-year 2023 Outlook

Xylem’s full-year and first quarter 2023 guidance does not reflect the planned acquisition of Evoqua, which was announced on January 23, 2023, and is expected to close mid-year 2023. Additional information about the proposed transaction is available at www.xylem.com/investors.

Xylem forecasts full-year 2023 revenue in the range of $5.70 to $5.80 billion, up 3 to 5 percent on a reported basis and up 4 to 6 percent on an organic basis.

Full-year 2023 adjusted EBITDA margin is expected to be in the range of 17.5 to 18.0 percent, an increase of 50 to 100 basis points. This results in adjusted earnings per share of $3.00 to $3.25, which represents an increase of 5 to 14 percent from Xylem’s 2022 adjusted results. Full-year free cash flow conversion to net income is expected to be 100 percent.

Further 2023 planning assumptions are included in Xylem’s fourth quarter 2022 earnings materials posted at www.xylem.com/investors. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort.

Fourth Quarter Segment Results

Water Infrastructure

Xylem’s Water Infrastructure segment consists of its portfolio of businesses serving clean water delivery, wastewater transport and treatment, and dewatering.

• Fourth quarter 2022 revenue was $668 million, a 7 percent increase, 15 percent organically, compared with fourth quarter 2021. This strong growth was driven by price realization, robust utilities and industrials demand in the US and Western Europe, and dewatering demand in Emerging Markets.

• Fourth quarter reported operating income for the segment was $132 million, an 8 percent increase versus the comparable period last year. Adjusted operating income for the segment, which excludes $4 million of restructuring and realignment costs, was $136 million, a 10 percent increase versus the comparable period last year. Reported operating margin for the segment was 19.8 percent, up 20 basis points versus the prior year, and adjusted operating margin was 20.4 percent, up 50 basis points versus the prior year. Adjusted EBITDA margin was 22.5 percent, up 80 basis points from the prior year. Favorable price realization net of inflation and higher volume more than offset strategic investments.

Applied Water

Xylem’s Applied Water segment consists of its portfolio of businesses in industrial, commercial building, and residential applications.

• Fourth quarter 2022 revenue was $455 million, a 12 percent increase, 17 percent organically, year-over-year. The robust growth was driven by strong price realization across all end-markets and regions.

• Fourth quarter reported operating income for the segment was $61 million, a 22 percent increase versus comparable period last year, and adjusted operating income, which excludes $9 million of restructuring and realignment costs, was $70 million, a 35 percent increase versus the comparable period last year. The segment reported operating margin was 13.4 percent, up 110 basis points versus the prior year period. Adjusted operating margin increased 260 basis points over the prior year period to 15.4 percent. Adjusted EBITDA margin was 16.5 percent, up 270 basis points from the prior year. Margin expansion was driven by strong price realization, more than offsetting inflation, coupled with productivity savings.

Measurement & Control Solutions

Xylem’s Measurement & Control Solutions segment consists of its portfolio of businesses in smart metering, network technologies, advanced infrastructure analytics, and analytic instrumentation.

• Fourth quarter 2022 revenue was $383 million, up 30 percent, 35 percent organically, versus the prior year. The robust growth is driven by improved chip supply compared to prior year, as well as strength in our water quality test and pipeline assessment applications.

• Fourth quarter reported operating income for the segment was $19 million, compared to $17 million loss in the comparable period last year, and adjusted operating income, which excludes $3 million of restructuring and realignment costs and $1 million of special charges, was $23 million, compared to $15 million loss in comparable period last year. The segment reported operating margin was 5.0 percent, up 1080 basis points versus the prior year period. Adjusted operating margin of 6.0 percent increased 1110 basis points over the prior year period. Adjusted EBITDA margin was 15.1 percent, up 800 basis points from the prior year. Strong price realization offset inflation and, coupled with productivity savings and higher volume, drove the margin expansion, exceeding the impact of strategic investments.

Supplemental information on Xylem’s fourth quarter 2022 earnings and reconciliations for certain non-GAAP items is posted at www.xylem.com/investors.

About Xylem

Xylem (XYL) is a leading global water technology company committed to solving critical water and infrastructure challenges with innovation. Our more than 17,000 diverse employees delivered revenue of $5.5 billion in 2022. We are creating a more sustainable world by enabling our customers to optimize water and resource management, and helping communities in more than 150 countries become water-secure. Join us at www.xylem.com.

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Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by impacts from the global economic and geopolitical climate, including as a result of the war between Russia and Ukraine, the coronavirus (“COVID-19”) pandemic, and macroeconomic conditions, including inflation. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector spending, inflation, interest rates and related monetary policy by governments in response to inflation, and the strength of the residential and commercial real estate markets, on economic activity and our operations; geopolitical events, including the war between Russia and Ukraine, and regulatory, economic, foreign exchange and other risks associated with our global sales, supply chain and operations, including with respect to domestic content requirements applicable to projects with governmental funding; continued uncertainty around the ongoing impacts of the COVID-19 pandemic on the macroeconomy and our business, operations, growth, and financial condition; actual or potential outbreaks of other epidemics, pandemics or global health crises; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, tight labor markets, prevailing price levels, exchange rates, tariffs and trade protection measures, energy supply, supply chain shortages, logistics challenges, and other factors; demand for our products; competition, including disruption, failure to commercialize innovative technologies, or pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; availability, shortage or delays in receiving products, parts, including electronic components (in particular, semiconductors), raw materials and energy from our supply chain; disruptions in operations at our facilities or that of third parties upon which we rely; ability to retain and attract senior management and other diverse and key talent, as well as competition for overall talent and labor; defects, security, warranty and liability claims, and recalls with respect to products; uncertainty related to restructuring and realignment actions and related costs and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute, consummate and integrate acquisitions; availability, regulation or interference with radio spectrum used by certain of our products; volatility in served markets or impacts on business and operations due to weather conditions, including the effects of climate change and related mitigation efforts by governmental or regulatory authorities; our ability to achieve our sustainability-related commitments; fluctuations in foreign currency exchange rates; difficulty predicting our financial results; risk of future impairments to goodwill and other intangible assets; changes in our effective tax rates or tax expenses; risks related to our pension and other defined benefit plans; our ability to borrow or refinance our existing indebtedness, and uncertainty around the availability of liquidity sufficient to meet our needs; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, trade, data privacy and security, our products, competition, and the environment and climate change; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; infringement or expiration of our intellectual property rights or claims that we have infringed the rights of others; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 ("2021 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).

Additionally, risks and uncertainties relating to our plans to acquire Evoqua could cause our actual results to differ, perhaps materially, from those indicated by these forward-looking statements, including: the risk that the conditions to the closing of the transaction are not satisfied, including the risk that required approvals of the transaction from the shareholders of Xylem or stockholders of Evoqua or from regulators are not obtained; litigation relating to the transaction; uncertainties as to the timing of the consummation of the transaction and the ability of each party to consummate the transaction; risks that the proposed transaction disrupts the current plans or operations of Xylem or Evoqua; the ability of Xylem and Evoqua to retain and hire key personnel; competitive responses to the proposed transaction; unexpected costs, charges or expenses resulting from the transaction; potential adverse reactions or changes to relationships with customers, suppliers, distributors and other business partners resulting from the announcement or completion of the transaction; the combined company’s ability to achieve the synergies expected from the transaction, as well as delays, challenges and expenses associated with integrating the combined company’s existing businesses.

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