Xylem Inc. XYL reported impressive results for third-quarter 2020, with earnings surpassing estimates by 19.2%. This is the second consecutive quarter of better-than-expected results. Also, the quarterly sales exceeded estimates by 4.5%.
Adjusted earnings in the quarter under review were 62 cents per share, surpassing the Zacks Consensus Estimate of 52 cents. However, the bottom line decreased 24.4% from the year-ago figure of 82 cents.
It is worth noting that movements in foreign currencies had a positive impact of 1 cent per share on earnings.
Xylem’s revenues of $1,220 million in the quarter under review moved down 5.9% from the year-ago quarter. Organic sales in the quarter declined 7% due mainly to weak segmental performances.
However, the company’s revenues surpassed the Zacks Consensus Estimate of $1,168 million.
Orders in the reported quarter fell 7% year over year to $1,246 million. Organically, orders declined 8%.
The company reports net sales under three segments, which are Water Infrastructure, Applied Water, and Measurement & Control Solutions.
The segmental information is briefly discussed below:
Revenues in the Water Infrastructure segment were $524 million, down 1.3% year over year. Organic sales in the quarter decreased 2% year over year. Results suffered from the weakness in the industrial end market, partially offset by gains in the utilities market.
The Applied Water segment generated revenues of $364 million in the third quarter, down 3.2% year over year. Organic sales dipped 4% on a year-over-year basis. Business in commercial and industrial markets was soft in the quarter, partially offset by growth in the residential market.
Quarterly revenues of the Measurement & Control Solutions segment were $332 million, down 14.7% year over year. Organic sales decreased 15% year over year. Results suffered from weakness in pipeline assessment services and metrology businesses.
In the quarter, the company’s cost of sales decreased 3.6% year over year to $759 million. As a percentage of revenues, it represented 62.2% versus 60.7% in the year-ago quarter. Gross profit decreased 9.4% year over year to $461 million, while margin dipped 150 basis points (bps) to 37.8%. Selling, general and administrative expenses dipped 2.6% to $266 million. Meanwhile, research and development expenses increased 2.3% to $45 million.
Adjusted operating income in the quarter was $158 million, down 19.4% year over year. Operating margin was down 210 bps to 13% due mainly to lower volumes caused by the pandemic. Interest expenses in the quarter totaled $22 million, up from $16 million in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the third quarter, Xylem had cash and cash equivalents of $1,402 million, decreasing 11.1% from $1,577 million at the end of the last reported quarter. Long-term debt balance inched up 0.7% sequentially to $3,053 million.
In the first nine months of 2020, the company’s proceeds from the issuance of long-term debt instruments totaled $985 million.
In the quarter, it generated net cash of $275 million from its operating activities, reflecting an increase of 12.2% from the year-ago comparable quarter. Capital expenditure was $41 million, down 10.9% from the year-ago figure of $46 million. Free cash flow in the quarter was $234 million, up 17.6% from the year-ago quarter.
In the first nine months of 2020, the company paid out dividends amounting to $142 million, reflecting an increase of 8.4% from the year-ago comparable period. Share repurchased amounted to $61 million, up 56.4% year over year.
For the fourth quarter, Xylem expects an organic sales decline of 6-8% year over year. Adjusted operating margin is expected to be 13-13.5%. In addition, free cash flow conversion is expected to exceed 100% in 2020.
Xylem Inc. Price, Consensus and EPS Surprise
Xylem Inc. price-consensus-eps-surprise-chart | Xylem Inc. Quote
Zacks Rank & Stocks to Consider
The company currently has a market capitalization of $15.7 billion and a Zacks Rank #3 (Hold).
Some better-ranked stocks in the industry are Altra Industrial Motion Corp. AIMC, EnPro Industries, Inc. NPO and Graco Inc. GGG. All these companies currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for Altra Industrial and Graco improved for the current year, while the same remained stable for EnPro. Further, earnings surprise for the last reported quarter was 77.55% for Altra Industrial, 980.00% for EnPro and 40.48% for Graco.
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