Xylem reports seven percent organic revenue increase and strong double-digit growth in 4th quarter 2017 earnings

February 1, 2018

Company completes acquisition of Pure Technologies

Fourth quarter 2017 reported net income was $71 million or $0.40
per share; Adjusted net income for the quarter was $137 million or
$0.76 per share, up 15 percent versus the prior year period
Full-year 2017 reported net income was $331 million or $1.83 per
share; Adjusted net income was $433 million or $2.40 per share, up
18-percent year-over-year
Xylem delivered $4.7 billion in revenue for the full year,
representing pro forma organic growth of four percent
Full-year free cash flow grew 41 percent to $544 million,
representing a 147-percent conversion
Company increases quarterly cash dividend by 17 percent
Xylem projects full-year 2018 organic revenue growth of four to six
percent, adjusted earnings per share of $2.82 to $2.97

RYE BROOK, N.Y.–(BUSINESS WIRE)–Xylem Inc. (NYSE:XYL), a leading global water technology company
dedicated to solving the world’s most challenging water issues, today
reported fourth quarter 2017 net income of $71 million, or $0.40 per
share. Excluding the impact of restructuring, realignment,
acquisition-related charges and other special items, the Company
delivered adjusted net income of $137 million or $0.76 per share in the
quarter, a 15-percent increase over the prior year period. Fourth
quarter revenue was $1.3 billion, up 17 percent including the full
quarter contribution from the Sensus business versus the prior year
period which included only two months of Sensus results. Revenue for the
quarter increased seven percent on a pro forma organic basis, driven by
a strong performance in the public utility end market in nearly every
geography and continued growth in industrial, commercial and residential
end markets. Adjusted earnings before interest, tax, depreciation and
amortization (EBITDA) improved by 40 basis points year-over-year to 20.2
percent driven by net productivity gains and volume leverage. Reported
operating margin in the quarter was 14 percent and adjusted operating
margin decreased 10 basis points year-over-year to 15.2 percent,
including a 20-basis-point impact due to purchase accounting
amortization.

For the full year 2017, Xylem generated $4.7 billion in revenue, up 25
percent on a reported basis and four percent on a pro forma organic
basis. Full-year reported net income was $331 million, or $1.83 per
share, with an operating margin of 11.8 percent. Adjusted net income,
which excludes the impact of restructuring, realignment,
acquisition-related charges and other special items, was $433 million,
or $2.40 per share, an 18-percent increase over the prior year. Adjusted
EBITDA improved by 80 basis points to 18.7 percent year-over-year. Xylem
delivered a full-year 2017 adjusted operating margin of 13.4 percent,
down 20 basis points versus the prior year including a 50-basis-point
impact due to purchase accounting amortization. The Company generated
$544 million in free cash flow, an increase of 41 percent versus last
year, representing a 147-percent conversion.

“Our teams delivered a strong performance throughout 2017 and I’m very
pleased with our full-year results,” said Patrick Decker, President and
Chief Executive Officer of Xylem. “Our relentless focus on the customer
and continuing to enhance our execution in the field translated into
improved results in revenue, orders and backlog growth, with the
momentum we built in the second half of the year carrying into 2018. We
capitalized on improving end market conditions, particularly in public
utilities where we continue to gain share. Our productivity for growth
initiatives continue to generate significant savings and fund critical
R&D investments for our long-term growth. The successful integration of
the new capabilities and capacity we gained with the addition of Sensus
and Visenti are opening up new growth opportunities for us. And we’re
building upon this as we continue to execute our strategy of disciplined
capital deployment.”

Xylem also confirmed the completion of its previously announced
acquisition of Pure Technologies, a leader in smart infrastructure
assessment and management. Pure’s diagnostic and analytics solutions and
services address key water and wastewater infrastructure challenges,
including non-revenue water and asset management, a critical issue as
infrastructure ages.

Decker continued, “Pure’s solutions are highly complementary to the
broader Xylem portfolio. This business brings a unique set of
proprietary technologies as well as data analytics expertise that
further augment our ability to identify and address some of our
customers’ most urgent needs. As we bring these and other advanced
infrastructure analytics capabilities together, we will create a
portfolio of solutions that is holistic, disruptive and scalable to
significantly improve the economics of our customers’ operations.”

Xylem announced that its Board of Directors declared a dividend in the
amount of $0.21 per share, an increase of 17 percent. The dividend is
payable on March 15, 2018 to shareholders of record as of February 15,
2018.

Full-year 2018 Outlook

Xylem forecasts full-year 2018 revenue in the range of $5.1 to $5.2
billion, up eight to 10 percent, including growth from previously
announced acquisitions. On an organic basis, Xylem’s revenue growth is
anticipated to be in the range of four to six percent.

Full-year 2018 adjusted operating margin is expected to be in the range
of 14.0 to 14.4 percent, resulting in adjusted earnings per share of
$2.82 to $2.97. This represents an increase of 18 to 24 percent from
Xylem’s 2017 adjusted results. The Company’s adjusted earnings outlook
excludes projected integration, restructuring and realignment costs of
approximately $35 million for the year. 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 2017 revenue was $583 million, up six percent
organically compared with fourth quarter 2016. This increase was
driven by strong results in the public utility end market across most
regions globally from wastewater transport applications and treatment
project deliveries. The industrial end market also continued to show
solid growth, reflecting improved market conditions in North America
for dewatering applications.
Fourth quarter reported operating income for the segment was $103
million. Adjusted operating income for the segment, which excludes $4
million of restructuring and realignment costs, was $107 million, a
six-percent increase over the same period a year ago. Reported
operating margin for the Water Infrastructure segment was 17.7
percent, down 100 basis points versus the prior year, and adjusted
operating margin was down 70 basis points to 18.4 percent. This
reflects inflation and higher investments in strategic initiatives,
which more than offset strong productivity gains and volume leverage
achieved in the quarter.

Applied Water

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

Fourth quarter 2017 Applied Water revenue was $373 million, a
five-percent increase organically year-over-year. This performance
reflects continued growth in the U.S. and Europe industrial end
markets. Demand for clean water supply helped drive growth in the
residential end market in Asia Pacific, and the Company also captured
share gains in Europe. Commercial building applications showed solid
growth from demand for projects and restocking due to cold weather
conditions.
Fourth quarter reported operating income for the segment was $61
million and adjusted operating income, which excludes $3 million of
restructuring and realignment costs, was $64 million, a 16-percent
increase over the comparable period last year. Applied Water segment
reported operating margin was 16.4 percent, up 270 basis points over
the prior year period. Adjusted operating margin increased 150 basis
points to 17.2 percent as cost reductions and volume leverage more
than offset inflation and the funding of investments.

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 2017 Measurement & Control Solutions revenue was $321
million, up 12 percent organically versus the prior year. This growth
was driven by a strong performance in the Sensus business, which
increased 15 percent on a pro forma organic basis in the quarter,
reflecting double-digit growth in water, gas and software services
sectors partially offset by modest declines in the electric business.
Revenue from Xylem’s legacy analytics business increased one percent
organically in the quarter.
Fourth quarter reported operating income for the segment was $30
million, and adjusted operating income, which excludes $4 million of
restructuring and realignment costs and acquisition-related costs, was
$34 million. Measurement & Control Solutions segment reported
operating margin was 9.3 percent. Adjusted operating margin increased
130 basis points to 10.6 percent as volume leverage and mix combined
with cost reductions more than offset inflation and the funding of
strategic R&D investments.

Supplemental information on Xylem’s fourth quarter and full-year 2017
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
developing innovative technology solutions to the world’s water
challenges. The Company’s products and services move, treat, analyze,
monitor and return water to the environment in public utility,
industrial, residential and commercial building services settings. Xylem
also provides a leading portfolio of smart metering, network
technologies and advanced infrastructure analytics solutions for water,
electric and gas utilities. The Company’s more than 16,000 employees
bring broad applications expertise with a strong focus on identifying
comprehensive, sustainable solutions. Headquartered in Rye Brook, New
York with 2017 revenue of $4.7 billion, Xylem does business in more than
150 countries through a number of market-leading product brands.

The name Xylem is derived from classical Greek and is the tissue that
transports water in plants, highlighting the engineering efficiency of
our water-centric business by linking it with the best water
transportation of all – that which occurs in nature. For more
information, please visit us at www.xylem.com.

Forward-Looking Statements

This press release contains information that may constitute
“forward-looking statements.” Forward-looking statements by their nature
address matters that are, to different degrees, uncertain. Generally,
the words “anticipate,” “estimate,” “expect,” “project,” “intend,”
“plan,” “forecast,” “believe,” “target,” “will,” “could,” “would,”
“should” and similar expressions identify forward-looking statements,
which generally are not historical in nature. However, the absence of
these words or similar expressions does not mean that a statement is not
forward-looking.

These forward-looking statements include statements about the
capitalization of Xylem Inc. (the “Company”), the Company’s
restructuring and realignment, future strategic plans and other
statements that describe the Company’s business strategy, outlook,
objectives, plans, intentions or goals. All statements that address
operating or financial performance, events or developments that we
expect or anticipate will occur in the future – including statements
relating to orders, revenues, operating margins and earnings per share
growth, and statements expressing general views about future operating
results – are forward-looking statements. Forward-looking statements
involve known and unknown risks, uncertainties and other important
factors that could cause actual results to differ materially from those
expressed or implied in, or reasonably inferred from, such
forward-looking statements. Factors that could cause results to differ
materially from those anticipated include: economic, political and other
risks associated with our international operations, including military
actions, economic sanctions or trade embargoes that could affect
customer markets, and non-compliance with laws, including foreign
corrupt practice laws, export and import laws and competition laws;
potential for unexpected cancellations or delays of customer orders in
our reported backlog; our exposure to fluctuations in foreign currency
exchange rates; competition and pricing pressures in the markets we
serve; the strength of housing and related markets; ability to retain
and attract key members of management; our relationship with and the
performance of our channel partners; our ability to successfully
identify, complete and integrate acquisitions; our ability to borrow or
to refinance our existing indebtedness and availability of liquidity
sufficient to meet our needs; changes in the value of goodwill or
intangible assets; risks relating to product defects, product liability
and recalls; governmental investigations; security breaches or other
disruptions of our information technology systems; litigation and
contingent liabilities; and other factors set forth in Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2016, and
those described from time to time in subsequent reports filed with the
Securities and Exchange Commission. Forward-looking statements made
herein are based on information currently available to the Company. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.

XYLEM INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (Unaudited) (In Millions, except per share data)
Year Ended December 31,	2017	2016	2015
Revenue	$	4,707	$	3,771	$	3,653
Cost of revenue	2,856	2,310	2,249
Gross profit	1,851	1,461	1,404
Selling, general and administrative expenses	1,090	915	854
Research and development expenses	180	110	95
Restructuring and impairment charges	25	30	6
Operating income	556	406	449
Interest expense	82	70	55
Other non-operating income, net	2	4	—
(Loss)/gain on sale of businesses	(10	)	—	9
Income before taxes	466	340	403
Income tax expense	136	80	63
Net income	330	260	340
Less: Net loss attributable to non-controlling interests	(1	)	—	—
Net income attributable to Xylem	$	331	$	260	$	340
Earnings per share:
Basic	$	1.84	$	1.45	$	1.88
Diluted	$	1.83	$	1.45	$	1.87
Weighted average number of shares:
Basic	179.6	179.1	180.9
Diluted	180.9	180.0	181.7
Dividends declared per share	$	0.7200	$	0.6196	$	0.5632

XYLEM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In Millions, except per share amounts)
December 31,	2017	2016
ASSETS
Current assets:
Cash and cash equivalents	$	414	$	308
Receivables, less allowances for discounts, returns and doubtful accounts of $35 and $30 in 2017 and 2016, respectively	956	843
Inventories	524	522
Prepaid and other current assets	177	166
Total current assets	2,071	1,839
Property, plant and equipment, net	643	616
Goodwill	2,768	2,632
Other intangible assets, net	1,168	1,201
Other non-current assets	210	186
Total assets	$	6,860	$	6,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	549	$	457
Accrued and other current liabilities	551	521
Short-term borrowings and current maturities of long-term debt	—	260
Total current liabilities	1,100	1,238
Long-term debt, net	2,200	2,108
Accrued postretirement benefits	442	408
Deferred income tax liabilities	252	352
Other non-current accrued liabilities	347	161
Total liabilities	4,341	4,267
Stockholders’ equity:
Common stock — par value $0.01 per share:
Authorized 750.0 shares, issued 192.3 and 191.4 shares in 2017 and 2016, respectively	2	2
Capital in excess of par value	1,912	1,876
Retained earnings	1,227	1,033
Treasury stock – at cost 12.4 shares and 11.9 shares in 2017 and 2016, respectively	(428	)	(403	)
Accumulated other comprehensive loss	(210	)	(318	)
Total stockholders’ equity	2,503	2,190
Non-controlling interest	16	17
Total equity	2,519	2,207
Total liabilities and stockholders’ equity	$	6,860	$	6,474

XYLEM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions) (Unaudited)
Year Ended December 31,	2017	2016	2015
Operating Activities
Net income	$	330	$	260	$	340
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	109	87	88
Amortization	125	64	45
Deferred income taxes	(33	)	14	(9	)
Share-based compensation	21	18	15
Restructuring and impairment charges	25	30	6
Gain from sale of businesses	10	—	(9	)
Other, net	19	6	12
Payments for restructuring	(28	)	(16	)	(14	)
Contributions to postretirement benefit plans	(33	)	(27	)	(25	)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	(79	)	(6	)	(24	)
Changes in inventories	27	(15	)	23
Changes in accounts payable	50	61	20
Changes in accrued liabilities	28	13	(11	)
Changes in accrued taxes	104	(13	)	(3	)
Net changes in other assets and liabilities	11	21	10
Net Cash — Operating activities	686	497	464
Investing Activities
Capital expenditures	(170	)	(124	)	(117	)
Proceeds from the sale of property, plant and equipment	1	1	—
Acquisitions of businesses and assets, net of cash acquired	(33	)	(1,782	)	(18	)
Proceeds from sale of businesses	16	—	1
Cash received from investments	10	—	—
Cash paid for investments	(11	)	—	—
Other, net	6	19	2
Net Cash — Investing activities	(181	)	(1,886	)	(132	)
Financing Activities
Short-term debt issued	—	274	—
Short-term debt repaid, net	(282)	(80	)	(3	)
Long-term debt issued, net	—	1,540	—
Long-term debt repaid	—	(608	)	—
Repurchase of common stock	(25	)	(4	)	(179	)
Proceeds from exercise of employee stock options	16	24	21
Excess tax benefit from share based compensation	—	—	2
Dividends paid	(130	)	(112	)	(102	)
Other, net	—	—	(1	)
Net Cash — Financing activities	(421	)	1,034	(262	)
Effect of exchange rate changes on cash	22	(17	)	(53	)
Net change in cash and cash equivalents	106	(372	)	17
Cash and cash equivalents at beginning of year	308	680	663
Cash and cash equivalents at end of year	$	414	$	308	$	680
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	78	$	49	$	52
Income taxes (net of refunds received)	$	57	$	78	$	75

Xylem Inc. Non-GAAP Measures

Management reviews key performance indicators including revenue,
gross margins, segment operating income and margins, orders growth,
working capital and backlog, among others. In addition, we consider
certain non-GAAP (or "adjusted") measures to be useful to management
and investors evaluating our operating performance for the periods
presented, and to provide a tool for evaluating our ongoing
operations, liquidity and management of assets. This information can
assist investors in assessing our financial performance and measures
our ability to generate capital for deployment among competing
strategic alternatives and initiatives, including but not limited
to, dividends, acquisitions, share repurchases and debt repayment.
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. These adjusted metrics are consistent
with how management views our business and are used to make
financial, operating and planning decisions. These metrics, however,
are not measures of financial performance under GAAP and should not
be considered a substitute for revenue, operating income, net
income, earnings per share (basic and diluted) or net cash from
operating activities as determined in accordance with GAAP. We
consider the following non-GAAP measures, which may not be
comparable to similarly titled measures reported by other companies,
to be key performance indicators:

“Organic revenue" and "Organic orders” defined as
revenue and orders, respectively, excluding the impact of
fluctuations in foreign currency translation and contributions from
acquisitions and divestitures. Divestitures include sales of
insignificant portions of our business that did not meet the
criteria for classification as a discontinued operation. The
period-over-period change resulting from foreign currency
translation impacts is determined by translating current period and
prior period activity using the same currency conversion rate.

“Constant currency” defined as financial results adjusted for
foreign currency translation impacts by translating current period
and prior period activity using the same currency conversion rate.
This approach is used for countries whose functional currency is not
the U.S. dollar.

“EBITDA” defined as earnings before interest, taxes,
depreciation and amortization expense. “Adjusted EBITDA”
reflects the adjustment to EBITDA to exclude share-based
compensation charges, restructuring and realignment costs, Sensus
acquisition related costs, gain or loss from sale of businesses and
special charges. For Sensus historical adjustments, see Sensus
Historical – Adjusted EBITDA table.

"Adjusted Operating Income", "Adjusted Segment Operating Income",
"Adjusted Net Income" and “Adjusted EPS” defined as
operating income, segment operating income, adjusted net income and
earnings per share, adjusted to exclude restructuring and
realignment costs, Sensus acquisition related costs, gain or loss
from sale of businesses, special charges and tax-related special
items, as applicable. For Sensus historical adjustments, see Sensus
Historical – Adjusted Operating Income table.

“Free Cash Flow” defined as net cash from operating
activities, as reported in the Statement of Cash Flow, less capital
expenditures as well as adjustments for other significant items that
impact current results which management believes are not related to
our ongoing operations and performance. Our definition of free cash
flow does not consider certain non-discretionary cash payments, such
as debt.

“Realignment costs” defined as costs not included in
restructuring costs that are incurred as part of actions taken to
reposition our business, including items such as professional fees,
severance, relocation, travel, facility set-up and other costs.

“Sensus Acquisition Related Costs" defined as costs
incurred by the Company associated with the acquisition of Sensus
that are being reported within operating income. These costs include
integration costs, acquisition costs, costs related to the
recognition of the backlog intangible asset amortization and
inventory step-up recorded in purchase accounting.

“Special charges" defined as costs incurred by the
Company, such as non-cash impairment charges, due diligence costs,
initial acquisition and integration costs not related to Sensus and
other special non-operating items, as well as interest expense
related to the early extinguishment of debt and financing costs on
the bridge loan entered into for the Sensus acquisition during 2016.

“Tax-related special items" defined as tax items, such
as tax return versus tax provision adjustments, tax exam impacts,
tax law change impacts, significant reserves for cash repatriation,
excess tax benefits/losses and other discrete tax adjustments.

"Pro forma" defined as including the results of
Sensus for the calendar period prior to the acquisition of Sensus by
Xylem Inc. on October 31, 2016.

Contacts

Xylem Inc.
Media
Kelly McAndrew, +1 914-323-5969
[email protected]
or
Investors
Matt
Latino, +1 914-323-5821
[email protected]

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