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XI

Xylem Inc. (XYL)·Q2 2025 Earnings Summary

Executive Summary

  • XYL delivered $2.30B in revenue (+6% YoY) and diluted EPS of $0.93; adjusted EPS was $1.26 (+16% YoY). Adjusted EBITDA margin hit a record 21.8% (+100 bps YoY), driven by price realization and productivity .
  • Management raised FY25 guidance: revenue to $8.9–$9.0B (from $8.7–$8.8B) and adjusted EPS to $4.70–$4.85 (from $4.50–$4.70); adjusted EBITDA margin maintained at 21.3–21.8% .
  • Segment performance was broad-based: MCS led growth (+12% YoY revenue) with 23.1% adjusted EBITDA margin; AW (+6% revenue, +420 bps margin expansion), WI (+3% revenue, +200 bps margin expansion), and WSS (+5% revenue, +60 bps margin expansion) all expanded margins .
  • Wall Street consensus was exceeded: Q2 revenue ($2.30B vs $2.21B*) and EPS ($1.26 vs $1.15*), with EBITDA modestly above consensus ($475M vs $469M*) .*
  • Tariff headwinds were substantially offset by pricing and supply chain actions; backlog remains strong (> $5B), net debt/adjusted EBITDA at ~0.4x, supporting continued investment and execution .

What Went Well and What Went Wrong

  • What Went Well

    • Record adjusted EBITDA margin of 21.8% on disciplined execution and pricing; “our simplification efforts have already yielded measurable gains in speed, accountability, and customer responsiveness” (CEO) .
    • Broad-based organic growth, notably in MCS (orders +12%, energy metering demand strong) and AW (orders +4%, commercial buildings strength) .
    • Guidance raised for FY25 revenue and EPS; Q3 guide provided with confident narrative: “we remain confident in our ability to deliver our full-year commitments” (CFO) .

  • What Went Wrong

    • WI orders declined ~2% due to funding delays in the UK (AMP cycle transition) and Canada; China remained soft with ongoing economic challenges .
    • MCS margin faced pressure from legacy energy projects and mix; CFO noted 50–100 bps sequential margin drag into Q3 before improving in Q4 .
    • Free cash flow YTD down versus prior year due to outsourced water projects and tax timing, despite better net income and working capital; FCF margin still targeted at 9–10% for FY25 .

Financial Results

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD Billions)$2.256 $2.069 $2.301
Diluted EPS ($)$1.34 GAAP; $1.18 Adj $0.69 GAAP; $1.03 Adj $0.93 GAAP; $1.26 Adj
Operating Margin (%)11.8 GAAP; 16.7 Adj 11.2 GAAP; 15.7 Adj 13.3 GAAP; 17.4 Adj
Adjusted EBITDA Margin (%)21.0 20.4 21.8
Net Income Margin (%)14.5 8.2 9.8
YoY vs Prior YearQ4 2024Q1 2025Q2 2025
Revenue YoY+7% +2% +6%
Diluted EPS YoYGAAP: up 22%; Adj: up 19% GAAP: +10%; Adj: +14% GAAP: +16%; Adj: +16%
Consensus vs Actual (Estimates)*Q4 2024Q1 2025Q2 2025
Revenue ($USD Billions)Est: $2.181; Act: $2.256 Est: $2.042; Act: $2.069 Est: $2.208; Act: $2.301
Primary EPS ($)Est: $1.125; Act: $1.18 Est: $0.954; Act: $1.03 Est: $1.147; Act: $1.26
EBITDA ($USD Millions)Est: $456; Act: ~$486 (Q4 Adj EBITDA 473; EBITDA 515; net of adjustments) Est: $404; Act: ~$396 (EBITDA 364; Adj EBITDA 423) Est: $469; Act: ~$475 (Adj EBITDA 502; EBITDA 449)

*Values retrieved from S&P Global.

Segment revenue breakdown

Segment ($USD Millions)Q4 2024Q1 2025Q2 2025
Water Infrastructure727 581 650
Applied Water454 435 483
Measurement & Control Solutions469 490 540
Water Solutions & Services606 563 628
Total2,256 2,069 2,301

KPIs and operating metrics

KPIQ4 2024Q1 2025Q2 2025
Backlog ($USD Billions)~$5.1 ~$5.1 >$5.0
Book-to-Bill~1 (Q4) >1 (Q1) ~1 YTD
MCS Backlog ($USD Billions)~1.9 ~1.8 ~1.7
Net Debt / Adj EBITDA~0.5x ~0.5x ~0.4x
On-time Delivery (YoY bps)+500 bps (FY24) —+600 bps in June; +300 bps YTD (CEO)
Net Cash from Ops ($USD Millions, YTD)—$33 $338
Capex ($USD Millions, YTD)—$71 $169

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2025$8.7–$8.8B $8.9–$9.0B Raised
Adjusted EPSFY 2025$4.50–$4.70 $4.70–$4.85 Raised
Adjusted EBITDA MarginFY 202521.3–21.8% 21.3–21.8% Maintained
Free Cash Flow MarginFY 20259–10% 9–10% Maintained
RevenueQ3 2025—~$2.2B; 4–5% organic growth New
Adjusted EBITDA MarginQ3 2025—21.7–22.2% New
Adjusted EPSQ3 2025—$1.20–$1.25 New
Corporate ExpenseFY 2025—+$10–$15M (FX, variable comp) Increased
DividendQ2 2025—$0.40/share (payable Jun 26) Declared

Earnings Call Themes & Trends

TopicQ4 2024 (Prior-2)Q1 2025 (Prior-1)Q2 2025 (Current)Trend
Simplification / 80/20Program announced; ~$95–$115M pretax charges, $130M net benefits over 2 years; ~10% workforce, mostly SG&A Ahead of plan; margin expansion; Applied Water and WI seeing largest impacts Record margin; tangible gains in speed, accountability, customer metrics; on-time performance highs Strengthening execution
Tariffs & PricingReady to offset with pricing/cost actions; minimal expected FY25 impact Mix of surcharges/price increases; back-half loaded impacts Substantially offset; modest margin dilution (10–25 bps); Q3 guide incorporates tariffs Managed headwind
MCS Energy vs Water MixEnergy drove larger portion in Q4, compressing margins First-half margin pressure from mix; sequential improvement 2H Orders +12%; energy demand strong; legacy project drag to ease; 23.1% adj EBITDA margin Improving into 2H
Municipal Funding (US)Healthy demand; strong Q4 orders Resilient OpEx exposure; pricing offsets tariffs CEO not overly concerned; SRF ~5% of muni budgets, expected appropriations Stable
China WeaknessDouble-digit declines in WI orders Continued pressure Orders down ~18% YoY; small portion of business now low single digits Persistent headwind
Data Centers & WaterNot highlighted—Emerging small tailwind: filtration needs where municipal water is constrained; ~5M gallons/day usage Watchlist (multi-year)
Portfolio/M&AMajority stake in Idrica; tuck-ins; noncore divestiture (~1% revenue) Active pipeline; underlevered balance sheet Two targeted acquisitions (Vacom, EnviroMix) in advanced treatment Strategic focus areas

Management Commentary

  • CEO: “Our team delivered another strong quarter, exceeding expectations with robust organic revenue growth across all segments, a record-high adjusted EBITDA margin, and double-digit EPS growth… we are raising our full-year guidance.”
  • CEO: “Simplification efforts have already yielded measurable gains in speed, accountability, and customer responsiveness.”
  • CFO: “Pricing and supply chain actions more than offset inflation and tariff-related costs… backlog remains above $5 billion… net debt to adjusted EBITDA stands at 0.4x.”
  • CEO on Evoqua integration and operating model: “We delivered the cost synergies ahead of schedule… changes… enabled faster decisions, clearer accountability, and better service.”
  • CFO on tariffs: “Slightly dilutive impact on margin… 10–25 bps of pressure in the back half.”

Q&A Highlights

  • MCS outlook: Backlog normalization toward book-to-bill >1 by year-end; sequential margin improvement from Q3 to Q4 as legacy energy projects burn off .
  • Applied Water: Strong price execution and 80/20 benefits; minor pull-ahead to get ahead of tariffs; continued margin robustness though sequential dip in Q3 due to underabsorption .
  • Municipal funding and SRF: Management expects appropriations to normalize; SRF ~5% of budgets; infrastructure necessity supports resilience .
  • Tariff mitigation: Mix of price increases and surcharges; actions in market; contingencies for Q4 volatility .
  • Data centers: Emerging demand in WSS and AW for filtration and cooling solutions; multi-year potential rather than near-term driver .

Estimates Context

  • Q2 2025 actual vs consensus: Revenue $2.301B vs $2.208B*; EPS $1.26 vs $1.147*; EBITDA ~$475M vs $469M* .*
  • Prior quarters show similar beats: Q1 2025 revenue $2.069B vs $2.042B*; EPS $1.03 vs $0.954* .*
  • With FY25 EPS guidance raised to $4.70–$4.85, consensus estimates are likely to trend higher, particularly for 2H as tariff dilution is managed and mix normalizes in MCS .

*Values retrieved from S&P Global.

Key Takeaways for Investors

  • Quality beat: Broad-based revenue growth (+6% YoY) and a record 21.8% adjusted EBITDA margin signal execution momentum and durability .
  • Guidance raise is the catalyst: FY25 revenue and EPS ranges were raised; Q3 guide supports continued margin strength despite tariff noise .
  • MCS mix headwinds abating: Expect sequential margin improvement in 2H as legacy energy projects and mix effects fade; orders strong and backlog normalizing .
  • Tariff risk contained: Pricing/supply chain levers largely offset impacts; margin dilution modest (10–25 bps), with contingency in back-half plans .
  • Balance sheet capacity: Net debt/adj EBITDA ~0.4x and >$5B backlog underpin continued investment, tuck-in M&A, and execution of simplification/80–20 .
  • End-market resilience: High OpEx exposure and essential infrastructure demand support stability; watch China softness and UK/Canada funding timing .
  • Dividend continuity: $0.40/share declared for Q2; cash generation expected to improve as restructuring cash impacts roll off and outsourced project timing normalizes .