Xylem Inc. (XYL Quick QuoteXYL - Free Report) 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.

Revenue Details

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.

Margin Profile

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.

Shareholder-Friendly Policies

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.

Outlook

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.