Executive Summary / Key Takeaways

• Transformative Growth and Margin Expansion: Xylem Inc. is executing a strategic transformation, leveraging operational excellence through 80/20 initiatives and an optimized operating model to drive significant margin expansion and above-market growth. The company reported record Q3 2025 adjusted EBITDA margin of 23.2%, up 200 basis points year-over-year, and raised its full-year 2025 adjusted EPS guidance to $5.03-$5.08.
• Technological Leadership in Critical Markets: Xylem's differentiated technology, including its FCC-licensed FlexNet AMI network in North America and advanced digital platforms like Xylem Vue, provides a competitive moat, enabling intelligent water management and addressing complex challenges like zero liquid discharge and advanced nutrient removal.
• Resilient Demand and Strategic Portfolio Optimization: Despite macro uncertainties and tariff headwinds, demand for Xylem's mission-critical water solutions remains robust, particularly in municipal and industrial sectors. The company is actively optimizing its portfolio through targeted acquisitions in advanced treatment and divestitures of non-core assets, such as the international metering business, to sharpen focus on high-growth, high-margin opportunities.
• Strong Financial Position for Future Investment: With a net debt to adjusted EBITDA of 0.4x and approximately $2.2 billion in available liquidity, Xylem possesses substantial financial flexibility to invest in its core business, pursue accretive M&A, and return capital to shareholders, underpinning its long-term financial framework targeting mid-teens EPS growth.
• Addressing Global Water Challenges: Xylem is uniquely positioned to capitalize on secular trends like water scarcity, aging infrastructure, and the increasing water demands from new technologies like AI and data centers, offering solutions that enhance water security and operational efficiency for customers worldwide.

The Imperative of Water and Xylem's Core Mission

Xylem Inc. stands at the forefront of the global water technology sector, a critical industry addressing one of humanity's most pressing challenges: water security. The company designs, manufactures, and services highly engineered products and solutions that span the entire water cycle, from collection, distribution, and use to treatment and the safe return of water to the environment. This comprehensive approach positions Xylem as an indispensable partner for utilities, industrial operators, and residential and commercial building services worldwide.

The industry landscape is shaped by powerful, enduring trends. Aging infrastructure in developed nations necessitates continuous investment in upgrades and maintenance, while rapid urbanization and industrialization in emerging markets drive demand for new water and wastewater systems. Water scarcity, exacerbated by climate change, underscores the urgent need for efficient water management, reuse, and advanced treatment solutions. Moreover, the burgeoning artificial intelligence (AI) sector, with its massive data centers, is emerging as a significant new driver of water demand, consuming an estimated 5 million gallons of water per day for a data center equivalent to a city of 50,000 people. This creates a compelling opportunity for Xylem's water management and reuse technologies.

In this dynamic environment, Xylem's core strategy is to simplify its operations, enhance its portfolio through targeted capital deployment, and leverage technological differentiation to deliver profitable, above-market growth. The company operates through four distinct segments: Water Infrastructure, Applied Water, Measurement and Control Solutions, and Water Solutions and Services, each contributing to its integrated market positioning.

Technological Edge: The Digital and Advanced Treatment Advantage

Xylem's competitive strength is deeply rooted in its differentiated technology, which provides tangible benefits and underpins its strategic initiatives. A cornerstone of this advantage lies in its Measurement and Control Solutions (MCS) segment, particularly its Advanced Metering Infrastructure (AMI) offerings. In North America, Xylem possesses the only FCC-licensed proprietary bandwidth on its FlexNet fixed network, serving water, gas, and electric utility customers. This unique technological capability offers superior reliability and security for critical infrastructure communications, enabling utilities to more effectively monitor and control resources. The market for AMI adoption remains robust, with less than 50% penetration, indicating a significant long-term growth runway for Xylem.

Beyond hardware, Xylem's digital water solutions are a key differentiator. The company's Xylem Vue advanced analytics platform leverages connected sensors and smart meters to deliver live insights and optimize water management. A notable example is its partnership with Amazon (AMZN) in Mexico City and Monterrey, where Xylem Vue is helping these cities save over 1 billion liters of water annually. This platform's ability to provide data-driven solutions for efficiency and conservation is crucial as AI infrastructure expands, driving water demand across power generation, chip fabrication, and mining. Xylem's focus on these digital solutions enhances its competitive moat by offering integrated, intelligent systems that go beyond traditional hardware.

In advanced treatment, Xylem has strategically expanded its capabilities through recent acquisitions. The acquisition of Vacom Systems, LLC for $42 million brought proprietary non-fouling, non-scaling evaporator and crystallizer systems for zero liquid discharge (ZLD) wastewater treatment. This technology offers compelling value propositions in industrial verticals such as microelectronics and energy, where water reuse and stringent discharge regulations are paramount. Similarly, the acquisition of EnviroMix for $106 million enhanced Xylem's advanced treatment portfolio with non-mechanical mixing and biological process solutions, crucial for advanced nutrient removal in municipal and industrial wastewater. These technological advancements directly contribute to Xylem's ability to address complex water challenges, reduce operational costs for customers, and secure market share in high-value applications.

The "so what" for investors is clear: Xylem's proprietary technologies and strategic investments in digital and advanced treatment solutions translate into a stronger competitive moat, enabling higher-quality earnings through recurring service revenues and better margins. These technological advantages are foundational to Xylem's market positioning and its long-term growth strategy in a world increasingly grappling with water scarcity.

A History of Strategic Evolution and Operational Excellence

Xylem's journey as an independent entity began in May 2011, spinning off from ITT WCO, Inc. This foundational step set the stage for its evolution into a global water technology leader. A pivotal moment in its recent history was the acquisition of Evoqua Water Technologies, which served as a catalyst for a broader strategic transformation. This integration, completed ahead of schedule in terms of cost synergies, also spurred a fundamental shift in Xylem's operating model.

The company has transitioned from a matrix structure to a segment-focused approach with 16 distinct division General Managers, fostering clearer accountability, faster decision-making, and enhanced customer focus. This operating model transformation, coupled with the implementation of 80/20 principles, is driving significant margin improvement by focusing resources on high-value opportunities and streamlining operations. Management notes that the restructuring component of this transformation is progressing faster than anticipated, with the majority of workforce reductions expected to conclude in 2025.

Xylem's commitment to portfolio optimization is evident in its disciplined capital deployment strategy. In December 2024, Xylem increased its ownership in Idrica, a digital transformation company for the water industry, to a majority stake of 61%. This move aims to deepen integration, rationalize R&D investments, and leverage Idrica's platform as a standard for Xylem Vue. Other targeted acquisitions in 2025, such as Simply Clean Air and Water, Inc. for high-purity water systems, and Heusser Water Solutions AG for advanced pumping systems, further enhance Xylem's specialized offerings. Concurrently, Xylem has strategically divested non-core assets, including the Evoqua Magneto business in February 2025 and its international metering business in Q3 2025, the latter aiming to concentrate on AMI technologies in markets with the strongest differentiation. These actions, while sometimes involving "walking away from revenue," are designed to yield higher-quality earnings and simplify the business to build a long-term growth engine. Even in challenging regions like China, Xylem is rightsizing its operations, including significant workforce reductions, to align with the demand environment and intense market competition.

Financial Momentum: A Story of Disciplined Execution

Xylem's strategic transformation and operational discipline are clearly reflected in its robust financial performance. For the third quarter of 2025, Xylem reported total revenue of $2.268 billion, an increase of 7.8% year-over-year, with organic revenue growing 6.9% across all segments. This strong top-line growth translated into impressive profitability, with gross profit rising to $883 million, representing a gross margin of 38.9%, up 160 basis points from the prior year. This margin expansion was primarily driven by 430 basis points of favorable operational impacts, including 230 basis points from productivity savings and 140 basis points from price realization, partially offset by inflationary pressures.

Operating income for Q3 2025 increased by 19.3% to $334 million, yielding an operating margin of 14.7%, a 140 basis point improvement. Adjusted EBITDA margin reached a record 23.2%, expanding 200 basis points year-over-year. Net income attributable to Xylem grew to $227 million, resulting in diluted earnings per share of $0.93. On an adjusted basis, EPS surged 23.4% to $1.37.

Year-to-date through September 30, 2025, Xylem's performance further underscores its momentum. Revenue reached $6.638 billion, up 5.3% organically. Adjusted EBITDA margin expanded 140 basis points to 21.9%, and adjusted EPS increased 18.1% to $3.66.

Segment-wise, Water Infrastructure demonstrated strong operational leverage, with Q3 2025 revenue up 5.3% to $656 million and an Adjusted EBITDA margin expanding 400 basis points to 24.4%. This was driven by productivity, price, and mix, despite some volume and investment headwinds. Applied Water continued its turnaround, with Q3 revenue up 2% to $456 million and Adjusted EBITDA margin expanding an impressive 310 basis points to 21.7%, benefiting significantly from 80/20 initiatives. Water Solutions and Services delivered robust Q3 revenue growth of 10.1% to $634 million, with Adjusted EBITDA margin expanding 160 basis points to 26.3%, reflecting strong execution on price, volume, and productivity. Even Measurement and Control Solutions (MCS), which faced mix and inflation challenges, saw its Q3 Adjusted EBITDA margin increase 60 basis points to 21.8% on 14% revenue growth, driven by productivity, price, and higher volumes. The planned divestiture of the international metering business is expected to further boost MCS's run-rate margin by 100 basis points.

Capital Allocation and Liquidity: Fueling Future Growth

Xylem maintains a robust financial position, providing ample flexibility for strategic investments and shareholder returns. As of September 30, 2025, the company reported a net debt to adjusted EBITDA ratio of a healthy 0.4x, coupled with approximately $2.2 billion in available liquidity, comprising $1.2 billion in cash and $1 billion in available credit facilities. This strong balance sheet is a critical enabler of Xylem's growth strategy.

The company's capital deployment priorities are clear: first, investing in the core business; second, pursuing accretive mergers and acquisitions (M&A); third, maintaining consistent dividend payments; and finally, opportunistic share buybacks. Xylem aims to deploy approximately $1 billion of capital annually towards M&A, focusing on small to medium-sized bolt-ons that align with its strategic fit and financial hurdles, though it remains open to strategic and transformational opportunities. This disciplined approach ensures that capital is allocated to initiatives that enhance its technological leadership and market position.

While year-to-date free cash flow was modestly impacted by outsourced water projects and restructuring payments, Xylem's long-term free cash flow margin expectation remains at 9% to 10%. Cash generated from operating activities for the nine months ended September 30, 2025, was $698 million, driven by higher cash earnings and improved working capital management. This consistent cash generation provides the necessary fuel for Xylem's growth ambitions.

Outlook and Risks: Charting a Course Through Uncertainty

Xylem's management has expressed confidence in its ability to deliver on its commitments, raising its full-year 2025 guidance. The company now anticipates total revenue of approximately $9 billion, representing 5% to 6% total growth and 4% to 5% organic growth. Adjusted EBITDA margin is projected to be between 22% and 22.3%, reflecting a significant expansion of 140 to 170 basis points year-over-year, primarily due to accelerated restructuring and simplification efforts. The adjusted EPS guidance has been raised to $5.03 to $5.08. For the fourth quarter of 2025, Xylem expects revenue of approximately $2.4 billion with 2% to 3% organic growth, an Adjusted EBITDA margin of roughly 23%, and EPS between $1.37 and $1.42. These figures underscore management's belief in continued momentum and the benefits derived from its strategic initiatives.

Despite this positive outlook, Xylem acknowledges several risks and uncertainties. Macroeconomic volatility, including geopolitical events, inflation, supply chain shortages, and tight labor markets, remains a concern. Tariffs present a fluid situation; while Xylem is confident that pricing actions and supply chain levers will substantially offset current impacts, a slight margin dilutive effect is anticipated, and decision-making has taken longer due to this uncertainty. Geographically, softness in China has been a notable headwind, contributing a 2% negative impact on Xylem's Q3 2025 revenue and orders growth. The company is addressing this by rightsizing its China operations, including significant workforce reductions. Additionally, delays in large capital projects, while not leading to cancellations, are being monitored as they can impact the timing of order conversion. However, Xylem's high exposure to stable OpEx demand (approximately 75% of its business) and the mission-critical nature of its solutions provide a degree of resilience against these headwinds.

Competitive Positioning: Differentiated in a Critical Market

Xylem operates in a highly competitive global water market, facing both specialized and diversified industrial players. Its competitive standing is bolstered by its integrated, water-specific innovations and strong operational execution. Compared to peers like Pentair plc (PNR), Xylem's engineered solutions for wastewater handling and its comprehensive digital water management capabilities, such as Xylem Vue, offer greater efficiency and a more integrated approach, particularly in large-scale municipal and industrial projects. While Pentair may excel in cost-effective residential solutions, Xylem's focus on advanced systems for harsh environments provides a performance edge.

Against diversified conglomerates like Danaher Corporation (DHR) and Emerson Electric Co. (EMR), Xylem positions itself as a specialized water expert. While Danaher leverages cross-segment synergies for innovation in life sciences and diagnostics, and Emerson leads in broader industrial automation and IIoT, Xylem's strength lies in its water-focused analytics and proprietary technologies. For instance, Xylem's FCC-licensed FlexNet network in North America provides a unique advantage in smart metering, offering superior reliability compared to more generalized communication systems. This specialization allows Xylem to develop deeper customer loyalty and potentially capture higher recurring revenue from its services and analytics platforms. Xylem's core water business within smart metering demonstrates profitability at or above its peer set, indicating a strong competitive position in this critical area.

In comparison to Flowserve Corporation (FLS), which specializes in flow control products for industrial and oil & gas applications, Xylem's market positioning as a full-service water provider, offering integrated solutions from pumps and valves to mobile dewatering and digital monitoring, provides a broader and more resilient revenue base. While Flowserve may have a cost advantage in certain specialized industrial pumps, Xylem's emphasis on sustainable and smart water technologies allows it to differentiate and gain market share in environmental and efficiency-driven projects.

Xylem's competitive advantages, or moats, include its strong brand recognition, proprietary digital platforms, and extensive distribution channels. These assets foster customer loyalty and contribute to recurring revenue streams, potentially allowing for superior margins through pricing power in specialized markets. However, Xylem faces vulnerabilities, including potential dependencies on global supply chains, which could impact costs, and a narrower focus compared to highly diversified competitors. The company's strategic response involves continuous portfolio optimization, targeted M&A to acquire cutting-edge technologies, and rigorous 80/20 initiatives to enhance efficiency and focus, thereby mitigating these vulnerabilities and strengthening its overall competitive stance.

Conclusion

Xylem Inc. is undergoing a profound and successful transformation, repositioning itself as a more agile, focused, and technologically advanced leader in the global water sector. The company's disciplined execution of its operating model transformation and 80/20 initiatives is demonstrably driving significant margin expansion and operational efficiencies, as evidenced by record Q3 2025 adjusted EBITDA margins and consistently raised full-year guidance. This internal strength, coupled with strategic portfolio optimization through targeted acquisitions in advanced treatment and the divestiture of non-core assets, is sharpening Xylem's focus on high-value, high-growth opportunities.

The core investment thesis for Xylem is compelling: the company is uniquely positioned to capitalize on the secular growth drivers of water scarcity, aging infrastructure, and the increasing demands from new technological frontiers like AI and data centers. Its proprietary technologies, particularly the FCC-licensed FlexNet AMI network and the Xylem Vue digital analytics platform, provide a strong competitive moat, enabling superior performance and integrated solutions for critical water management challenges. With a robust balance sheet and a clear capital allocation strategy, Xylem is well-equipped to continue investing in its core, pursuing accretive M&A, and delivering on its long-term financial framework, promising sustainable growth and enhanced shareholder value in a water-stressed world.