Executive Summary / Key Takeaways

• Xylem is executing a strategic transformation, leveraging its diversified portfolio and recent integration of Evoqua to drive profitable growth and margin expansion in the essential water technology sector.
• First quarter 2025 results demonstrated resilience, with organic revenue growth of 3.3% and adjusted EBITDA margin expansion of 120 basis points, exceeding expectations despite macro volatility.
• Key strategic initiatives, including simplifying the operating model (80/20 implementation) and integrating digital solutions like the Idrica-powered Xylem Vue platform, are enhancing productivity, improving customer focus, and building a competitive moat.
• While facing potential headwinds from tariffs, project timing delays, and regional softness (e.g., China), management has reaffirmed full-year 2025 guidance, citing mitigation plans, strong backlog ($5.1 billion), and momentum in high-growth industrial verticals.
• The company's strong balance sheet (0.5x net debt to adjusted EBITDA) and active M&A pipeline position it for disciplined capital deployment focused on core capabilities and intelligent solutions, supporting its long-term EPS growth targets.

The Flow of Value: Xylem's Strategic Transformation in the Global Water Sector

Xylem Inc. stands as a leading global provider of essential water and wastewater solutions, operating at the heart of a sector critical to public health, industrial processes, and environmental sustainability. Its business spans the full water cycle, from collection and distribution to treatment and return to the environment, serving diverse end markets including utilities, industrial, residential, and commercial building services. This inherent exposure to mission-critical applications provides a degree of resilience, particularly within the stable utility OpEx spending environment.

The company's journey has been marked by strategic evolution. A pivotal moment arrived with the acquisition of Evoqua Water Technologies (AQUA), a combination that has significantly expanded Xylem's capabilities, particularly in advanced treatment and industrial water solutions. This integration, which has progressed ahead of schedule in realizing cost synergies and is building momentum on the revenue synergy front, has been a key driver in reshaping Xylem's operational footprint and market positioning. The company has since re-segmented its operations into four key areas: Water Infrastructure, Applied Water, Measurement and Control Solutions, and Water Solutions and Services, aligning its structure more closely with the critical market applications it serves.

Beyond integration, Xylem is actively engaged in a broader transformation aimed at simplifying its operating model, enhancing efficiency, and sharpening its customer focus. This includes moving from a matrix structure to a more streamlined, segment-focused organization and implementing the 80/20 principle across the business. These initiatives are designed to reduce complexity, accelerate decision-making, and drive systematic margin improvement, positioning the company for sustained long-term growth.

Central to Xylem's strategic differentiation is its commitment to technological innovation, particularly in digital solutions and advanced treatment. The acquisition of a majority stake in Idrica, a leader in digital transformation for the water industry, underscores the importance of the Xylem Vue platform. This platform provides utilities with critical data management and analytics capabilities, enabling intelligent use and conservation of resources. Despite lacking proprietary, quantifiable technology differentiators, Xylem's smart metering solutions, for instance, are noted for enabling 25% greater accuracy in leak detection due due to advanced sensors compared to some alternatives. In the Water Infrastructure segment, Xylem's pumps are recognized for their energy efficiency, achieving up to 20% greater efficiency in wastewater applications due to advanced motor designs, although this can come at a 10-15% higher upfront cost compared to more cost-optimized models from competitors like KSB Inc. The company's R&D efforts, which historically represent a meaningful portion of revenue (around 3-4% in recent years), are focused on developing solutions that address pressing water challenges, such as improving water recovery in treatment systems (targeting 30% better recovery in some designs) and enhancing the efficiency of water management in high-growth areas like data centers. This technological edge, particularly the integration of hardware with digital services, provides Xylem with a competitive moat, allowing it to capture value in markets increasingly demanding data-driven and sustainable solutions.

The competitive landscape is dynamic, featuring both large diversified industrial companies and specialized water technology providers. Key direct competitors include KSB Inc. (KSB) and Sulzer Ltd. (SUN), particularly in pumps and water infrastructure. KSB is a major player known for its engineering expertise and cost-optimized pump solutions, holding an estimated 5-7% share in global pump markets. Sulzer competes in pumps and rotating equipment, with a strong European presence and focus on aftermarket services. While Xylem's estimated aggregate market share across its primary segments is around 0.82%, its strategic focus on integrated solutions, technological innovation, and sustainability differentiates it. Xylem's ability to offer end-to-end solutions, combining its hardware strength with digital platforms like Xylem Vue, positions it favorably against competitors who may focus more narrowly on hardware (like KSB) or traditional services (like Sulzer). However, Xylem's higher upfront costs in some product lines and potential supply chain vulnerabilities represent competitive disadvantages that require ongoing management through strategic pricing and operational efficiencies derived from initiatives like 80/20.

Performance Reflecting Strategy and Resilience

Xylem's recent financial performance underscores the impact of its strategic initiatives and the resilience of its core markets. The first quarter of 2025 saw revenue reach $2.069 billion, an increase of 1.8% reported and a robust 3.3% on an organic basis compared to the prior year. This growth was broad-based, with contributions across all segments, notably driven by strong volume in Measurement and Control Solutions and organic expansion in Water Infrastructure, particularly in the U.S. and Canada.

Profitability also saw meaningful improvement. Gross profit increased to $768 million, resulting in a gross margin of 37.1%, up 10 basis points year-over-year. This expansion was primarily fueled by productivity savings and price realization, which more than offset inflationary pressures and unfavorable mix. Operating income rose 10.5% to $231 million, yielding an operating margin of 11.2%, a 90 basis point increase. Adjusted operating income reached $325 million, with an adjusted operating margin of 15.7%, up 120 basis points. This margin expansion was a direct result of favorable operational impacts, including significant productivity savings and price realization, alongside benefits from simplification efforts, which outweighed the impact of inflation, unfavorable mix, and increased restructuring costs. Adjusted EBITDA also saw a healthy increase, reaching $423 million, with the adjusted EBITDA margin expanding by 120 basis points to 20.4%.

Segment-level performance in Q1 2025 highlighted varying dynamics. Water Infrastructure delivered strong operating margin expansion (+330 bps adjusted) driven by productivity and price, despite some unfavorable mix and inflation. Applied Water also saw significant margin improvement (+330 bps adjusted), benefiting from productivity, price, and favorable mix, partially offsetting inflation and strategic investment spending. Measurement and Control Solutions experienced a decline in adjusted operating margin (-190 bps), primarily due to unfavorable mix (higher energy meter sales relative to water meters), increased intangible amortization, and special charges, although positive operational impacts from productivity, price, and volume provided some offset. Water Solutions and Services also saw a modest decline in adjusted operating margin (-90 bps), impacted by inflation, unfavorable mix, and strategic investment spending, partially mitigated by productivity and price.

From a liquidity standpoint, Xylem maintains a strong position. As of March 31, 2025, the company held $1.059 billion in cash and cash equivalents and had $1.0 billion available under its revolving credit facility, totaling approximately $2.1 billion in available liquidity. The company's net debt to adjusted EBITDA ratio stands at a healthy 0.5x. While cash flow from operating activities decreased in Q1 2025 compared to the prior year ($33 million vs $89 million), primarily due to changes in working capital related to strategic initiatives, increased volume, and large projects, the company remains committed to its target free cash flow margin of 9%-10% for the full year, acknowledging that restructuring costs will impact this in 2025.

Outlook and Strategic Trajectory

Looking ahead, Xylem's management has reaffirmed its full-year 2025 guidance, signaling confidence in its ability to execute despite ongoing market volatility. The company expects reported revenue between $8.7 billion and $8.8 billion, representing 1% to 2% growth, with organic revenue growth projected at 3% to 4%. Adjusted EBITDA margin is anticipated to be between 21.3% and 21.8%, reflecting 70 to 120 basis points of expansion year-over-year. Full-year adjusted EPS is guided to be in the range of $4.50 to $4.70.

This outlook is underpinned by several key assumptions and strategic drivers. Management anticipates continued healthy demand across most end markets, supported by the critical nature of water infrastructure and the secular trends of aging infrastructure, climate change, and digitalization. The benefits from the ongoing simplification efforts and 80/20 implementation are expected to contribute to margin expansion through enhanced productivity and operational efficiency. The integration of Evoqua continues to yield synergies, further supporting profitability.

Segment-specific outlooks reflect these dynamics. Measurement and Control Solutions is expected to deliver high single-digit growth, driven primarily by energy meters in the near term, with water meters growing low single digits. Water Infrastructure is projected for mid-single digit growth, benefiting from resilient utility demand and Evoqua synergies, though facing headwinds from 80/20 actions and weakness in the China utility market. Applied Water is expected to see modest low single-digit growth, supported by developed markets and project wins, but offset by 80/20 portfolio optimization. Water Solutions and Services is forecasted for mid-single digit growth, driven by outsourced water projects and dewatering demand, supported by a strong backlog ($1 billion).

While the outlook is positive, Xylem acknowledges potential headwinds. Geopolitical tensions, macroeconomic uncertainty, and fluctuations in currency and interest rates remain factors to monitor. Specifically, the impact of tariffs, particularly those related to China and potentially Mexico, introduces uncertainty. Xylem estimates a net increased cost of $30 million at current tariff levels but has implemented pricing and supply chain programs designed to offset the majority of this impact. Management anticipates some potential softening in demand in the second half of 2025 as a result of these trade dynamics, but believes its strong start to the year and FX tailwinds provide a buffer. Project timing pushouts, as experienced in Q3 2024 in MCS and WSS, could continue to introduce lumpiness in quarterly results. Weakness in the China market, driven by tight liquidity and real estate issues impacting building services, is also a factor. Regulatory risks, such as potential litigation challenging the EPA's PFAS rule following the Chevron doctrine ruling, could push out timelines for federal mandates, although state-level actions continue to provide some tailwind.

Xylem's strategic response to these challenges involves leveraging its diversified portfolio, accelerating operational discipline through simplification and 80/20, actively managing pricing and supply chain to mitigate tariff impacts, and focusing on high-growth industrial verticals like pharma, life sciences, microelectronics, power (including green hydrogen), and data centers, where demand for advanced water solutions remains robust. The company's strong balance sheet and active M&A pipeline, focused on complementary capabilities in advanced treatment, intelligent solutions, and services, position it to capitalize on opportunities for disciplined growth.

Conclusion

Xylem is navigating a complex global landscape from a position of strength, underpinned by its essential role in the water sector, a strategically enhanced portfolio following the Evoqua integration, and a clear focus on operational excellence and technological differentiation. The company's recent performance, marked by resilient organic growth and significant margin expansion, demonstrates the tangible benefits of its transformation initiatives. While external uncertainties, including tariffs and regional market softness, present potential headwinds, Xylem's management has articulated clear strategies and mitigation plans, reaffirming a positive outlook for 2025. The company's commitment to innovation, particularly in digital water solutions and advanced treatment technologies, alongside its disciplined approach to capital deployment, positions it to capitalize on long-term secular growth drivers. For investors, Xylem represents an opportunity to participate in the critical and growing water technology market, backed by a company actively reshaping itself for improved efficiency, profitability, and impact. The successful execution of its simplification agenda and the continued realization of synergies from strategic acquisitions will be key factors to watch as Xylem seeks to deliver on its long-term financial framework and enhance shareholder value.