Xylem’s China Struggles Overshadow Record Earnings

Date of Call: Feb 10, 2026

Financials Results

• Revenue: Full year revenue growth of 5% (solid). Q4 revenue up 4% but down 3% YOY due to tough comparison.
• EPS: Record quarterly EPS of $1.42, up 20% YOY. Full year EPS not explicitly stated.
• Operating Margin: EBITDA margin expanded 160 bps to 22.2% for full year. Q4 EBITDA margin 23.2%, up 220 bps YOY.

Guidance:

• 2026 full year organic revenue growth of 2% to 4% (on low end of long-term framework).
• Revenue expected at $9.1B to $9.2B, representing 1% to 3% reported growth.
• EBITDA margin expected 22.9% to 23.3% (70 to 110 bps expansion YOY).
• EPS range of $5.35 to $5.60, up 8% at midpoint over prior year.
• Q1 revenue growth 1% to 2% reported, flat organically.
• Q1 EBITDA margin 20.5% to 21%, up 25 bps at midpoint.
• Q1 EPS $1.06 to $1.11.

Business Commentary:

Strong Financial Performance and Record Results:

• Xylem Inc. reported record revenue for Q4 2025, with revenue growing 4% in the quarter and 5% for the full year.
• The company also achieved a record quarterly EPS of $1.42, a 20% increase over the prior year.
• This strong performance was driven by operational discipline, productivity improvements, and successful execution of their operating model transformation.

Measurement & Control Solutions (MCS) Growth:

• MCS segment orders were up 22% in Q4, driven by smart metering demand across water and energy.
• Revenue for this segment increased by 10%, with a notable contribution from energy metering demand.
• The growth was supported by high single-digit gains in water, despite some softness in analytics due to timing effects from the government shutdown.

Challenges and Market Conditions in China:

• Xylem experienced a significant decline in China, with orders down 70% and sales down 30% in Q4.
• The softness was attributed to economic headwinds affecting utility, commercial building, and industrial end markets, along with intense local competition.
• The company is applying an 80/20 lens to focus on higher quality, more profitable opportunities in China.

Outlook and Strategic Focus for 2026:

• Xylem expects 2026 full-year revenue to be between $9.1 billion and $9.2 billion, representing a 1% to 3% growth.
• The company is accelerating its 80/20 efforts, which will result in an estimated 2% headwind to top line growth.
• This strategic focus aims to enhance earnings quality and simplify the business to outperform markets in the long term.

Backlog and Project Timing:

• The company ended with a backlog of $4.6 billion, with a book-to-bill ratio near 1.
• Some projects were delayed, pushing out into 2026, which impacted the backlog and revenue expectations.
• The backlog finish was influenced by several large projects in MCS and softness in treatment, primarily in China.

Sentiment Analysis:

Overall Tone: Positive

• CEO: 'The team delivered an outstanding fourth quarter to close a record year for Xylem.' CFO: 'We are very pleased with the strong finish to 2025... delivering record revenue, EBITDA and earnings per share.' Outlook reflects 'strong commercial positioning, the durability of our portfolio' and expectations for 'continued traction from our transformation efforts.'

Q&A:

• Question from Deane Dray (RBC Capital Markets): Matthew, as we do the calendar flip and as you start Phase 2, maybe you can give us a 2-year progress report, if you could, just kind of reflect on the initiatives regarding margin improvement, portfolio optimization and how you are also trying to keep your eye on growth opportunities, too. Response: CEO highlighted successful integration of Evoqua, early synergy delivery, and significant progress in operational model transformation, evidenced by high employee engagement ratings and 500 bps improvement in on-time performance. Transitioning to Phase 2 focused on building a growth engine via sales force effectiveness and product innovation.

• Question from Deane Dray (RBC Capital Markets): And then as a follow-up for Bill, maybe you can expand on the point of increasing the 80/20 walkaway revenues in the second year. Maybe it's a surprise to me, I think, because I would have thought in the first year, there'd be more opportunities for less -- identifying less profitable businesses, not having it accelerate into the second year. Response: CFO explained that the 2% revenue headwind in 2026 is due to the evaluation and bleed-down of lower-quality revenue, involving portfolio and geography assessment, customer coordination, and organizational changes, which takes time and extends into the year.

• Question from Scott Davis (Melius Research): I wanted to follow up on that question because there's a certain point where 80/20 goes from being a headwind to a tailwind, meaning that you're doing better with the customers that matter the most and perhaps gaining share... When is that point? Response: CEO stated that 2026 is the inflection point, with focus on building sales force effectiveness and customer focus, aiming for 75-80% of sales time facing customers, and exiting the year with momentum towards growth.

• Question from Scott Davis (Melius Research): And I have to ask, your balance sheet is starting to look a little bit too good... what are you guys thinking as far as buyback and -- or do we want to keep the dry powder for M&A? Response: CEO reiterated priorities: invest in core business, then M&A (~$1B/year), dividends, then share buybacks. At low leverage, will be more active in buybacks but opportunistic.

• Question from Michael Halloran (Robert W. Baird): So the backlog exiting the year in context, what it means for this year and the phasing for the year is where the backlog exit rate was? Is that part of the 1Q softness?... Response: CFO attributed lower backlog to project timing shifts, weak China orders, and 80/20 walkaways, impacting Q1 and Q2 revenue. Expects healthy funnels and improved progression through the year.

• Question from Michael Halloran (Robert W. Baird): And then maybe some thoughts on China... given the softness? And how do you see that shaking out over the next couple of years... Response: CFO noted China remains challenging with intense price competition and economic headwinds, accelerating decline in H2. Teams are applying 80/20 to focus on higher-quality opportunities; expects no material improvement in next 1-2 years but long-term growth potential at higher margins.

• Question from Andrew Kaplowitz (Citigroup): ...just maybe a little more color on what's going on in smart meters... Is your mid-single-digit revenue growth forecast for '26 contingent on converting some of these delayed projects to backlog in the first half? Response: CEO stated confidence in MCS long-term, with near-term outlook reflecting project timing and backlog normalization. Walkaways in analytics and selective metering installation impact growth; expects more quarterly variability. Digital business (Xylem Vue) to grow >30% in 2026.

• Question from Andrew Kaplowitz (Citigroup): ...does availability of memory chips impact the outlook at all? Response: CFO said memory chip availability and inflation are not material impacts.

• Question from Andrew Kaplowitz (Citigroup): You're guiding to 70 to 110 basis points of margin improvement in '26... where do you go from here?... Response: CEO announced an Investor Day for Spring 2027 to update strategy and targets, noting current guidance exceeds the prior long-term framework (23% by end of 2027), with likely upside.

• Question from Nathan Jones (Stifel): I'll start with a follow-up on the MCS orders and the smart meter projects that have pushed out... degree of confidence that those things kind of come through in the first half... Response: CFO indicated 5-10 projects pushed out for various reasons (scope, inflation) but has reasonable visibility and confidence in working with customers to deliver revenue this year, supporting the guide.

• Question from Nathan Jones (Stifel): ...on divestitures. You guys have talked about up to 10% of revenue being a potential candidate... Anything we should expect action on that in 2026? Response: CFO stated that portfolio evaluation is ongoing but expects only the international metrology divestiture (~1% of revenue) in 2026, not reaching the 10% target. EPS impact is small ($0.02-$0.03).

• Question from Unknown Analyst (TD Cowen): ...on the last call, you mentioned there was a path to higher margins for the energy meter side... can you just unpack that glide path higher? Response: CFO explained structural engineering changes and value-added projects will lift energy meter margins, with legacy backlog pressure persisting into H1 2026, leading to sequential margin improvement exiting H2.

• Question from William Grippin (Barclays): Just first one here. I did want to ask about the 4Q operating margin step down across Applied Water, MCS and WSS. Is there seasonality inherent in this business? Response: CFO attributed Q4 margin steps to mix and project timing in WSS and Applied Water; expects Applied Water margins back to ~20% in Q1 and to improve through 2026 with volume and productivity.

• Question from William Grippin (Barclays): ...about the recent report you folks published in partnership with GWI on water demand management for data centers... where you think the biggest opportunities for Xylem are... Response: CEO highlighted the report's finding that AI/data center ecosystem will need 30 trillion liters of water/year by 2050, with 96% demand from power and chip fabrication. Xylem's opportunities lie in water reuse, leak mitigation, and public-private partnerships, primarily in WSS segment.