Xylem's Q3 2025: Contradictions Emerge on M.C.S. Orders, Tariff Pricing, and Margin Projections

Date of Call: October 28, 2025

Financials Results

• Revenue: Revenue grew 7% in Q3 2025 (organic), ahead of expectations
• EPS: Q3 EPS of $1.37, up 23% YOY
• Operating Margin: EBITDA margin north of 23% in Q3 2025, expanded 200 basis points YOY; full-year EBITDA margin guidance 22.0%–22.3%

Guidance:

• Full-year 2025 revenue ~ $9.0B (5%–6% total growth; 4%–5% organic)
• Full-year EBITDA margin 22.0%–22.3% (140–170 bps expansion vs prior year)
• Full-year EPS $5.03–$5.08 (raised from $4.70–$4.85)
• Free cash flow margin 9%–10%
• Q4 revenue ~ $2.4B (2%–3% organic); Q4 EBITDA margin ~23%; Q4 EPS $1.37–$1.42
• Updated annualized tariff impact roughly $180M; pricing and supply actions expected to substantially offset with slight margin dilution

Business Commentary:

* Revenue and Profitability Growth: - Xylem Inc. reported revenue growth in all segments, with Measurement and Control Solutions (MCS) and Water Solutions and Services (WSS) seeing double-digit growth. - The company achieved record quarterly EBITDA margin of 23%, expanding 200 basis points year-over-year, and delivered 23% EPS growth. - This growth was driven by healthy demand, operational discipline, and benefits from simplification efforts.

• Segment Performance and 80/20 Initiatives:
• The Measurement and Control Solutions segment saw 11% organic order growth, driven by robust demand for AMI solutions, with backlog remaining healthy at $1.5 billion.
• The Water Infrastructure segment grew 5% in revenue, led by strong demand in transport and treatment, with an EBITDA margin expansion of 400 basis points.

• These results reflect the impact of 80/20 implementations and ongoing operational improvements.

• Divestiture and Margin Enhancement:

• Xylem announced the divestiture of its international metering business, expecting a 100 basis point margin improvement in the MCS segment.

• This move aligns with the company's strategy to focus resources on markets where it has competitive differentiation, enhancing profitability.

• Guidance and Outlook:

• Xylem raised its full-year guidance, expecting 5% to 6% total growth and 4% to 5% organic growth, with an EBITDA margin of 22% to 22.3%.
• This reflects confidence in market resiliency and the success of ongoing simplification and operational efforts.

Sentiment Analysis:

Overall Tone: Positive

• Management raised full-year revenue, margin and EPS guidance; reported a record quarterly EBITDA margin north of 23% (up 200 bps YOY) and Q3 EPS of $1.37 (+23% YOY). CEO and CFO repeatedly cited strong demand, backlog execution and accelerating simplification benefits as drivers of momentum.

Q&A:

• Question from Andrew Kaplowitz (Citigroup Inc., Research Division): How much margin improvement remains and could targets for 2026/2027 be raised given current progress?
  Response: Management: There's further margin upside; focus is on delivering 2025 and calibrating 2026, with more detail in February — simplification (Phase 1) creates runway to drive growth (Phase 2) and long-term competitiveness (Phase 3).

• Question from Andrew Kaplowitz (Citigroup Inc., Research Division): Q3 MCS orders grew 11% despite tough comps—was the strength broad-based and does it provide visibility for 2026?
  Response: Management: MCS demand is healthy across water and energy meters; backlog $1.5B and a strong funnel support a book-to-bill rebound in Q4 and a high-single-digit growth outlook for 2026.

• Question from Deane Dray (RBC Capital Markets, Research Division): Any ripple effects from the government shutdown on federal/state/local funding and projects into 2026?
  Response: Management: No meaningful impact observed; potential short pause in EPA grant reviews but no material effect expected for Q4 or full-year 2026.

• Question from Deane Dray (RBC Capital Markets, Research Division): Status of 80/20 implementation and should we expect further divestitures in the next quarters?
  Response: Management: ~80% of the business is in some phase of 80/20; 80/20 is becoming cultural; targeting $400–$600M of portfolio pruning overall with modest divestitures (just under ~1% this year, slightly over 1% next year) and larger walk-aways more likely in 2026.

• Question from Scott Davis (Melius Research LLC): What specifically do you mean by 'structure' in the transformation?
  Response: Management: Shifted from a highly matrixed model to discrete divisions/segment P&Ls (fewer sign-offs), increasing accountability and speeding decisions.

• Question from Scott Davis (Melius Research LLC): With net debt/EBITDA ~0.4x, what are capital allocation priorities and M&A plans vs buybacks?
  Response: Management: Priorities are invest in the core via disciplined M&A (targeting ~$1B/year in small/medium bolt-ons), dividends next, then opportunistic buybacks; process focused on strategic, high-return deals.

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): Given current book-to-bill (~0.83) and backlog, how does MCS get to high-single-digit growth in 2026?
  Response: Management: Backlog at $1.5B remains elevated versus historical levels; burning backlog while shifting to positive book-to-bill and new energy projects layering in supports the high-single-digit 2026 target.

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): What offset MCS margin expansion to only +60 bps and longer-term margin expectations?
  Response: Management: Energy vs water mix (lower-margin energy pushouts) masked margin gains; expect margins to expand as mix normalizes and Phase 2 80/20 benefits flow through.

• Question from William Grippin (Barclays Bank PLC, Research Division): What drove the M&A spending in the quarter?
  Response: Management: Q3 M&A cash primarily related to costs associated with the international metering divestiture.

• Question from William Grippin (Barclays Bank PLC, Research Division): How accretive will the international metering divestiture be to MCS margin?
  Response: Management: Expect a run-rate MCS margin improvement of about 100 basis points from the divestiture.

• Question from Andrew Buscaglia (BNP Paribas Exane, Research Division): Does the divestment and other actions move MCS margins in line with or above peers long term?
  Response: Management: Core water smart-metering margins are at or above peers; the international metrology business was dilutive and energy-facing products are lower margin but improving over time.

• Question from Andrew Buscaglia (BNP Paribas Exane, Research Division): Can you parse demand pickup vs internal improvements across end markets this quarter?
  Response: Management: Strength was broad — MCS resilient, Water Infrastructure strong (transport/treatment), Applied Water turnaround in the West, WSS and dewatering up double-digits; China was a notable weakness (~2% revenue headwind) and large project conversion timing is slightly slower.

• Question from Michael Halloran (Robert W. Baird & Co. Incorporated, Research Division): Do underlying market dynamics support 'normal-ish' growth into 2026 despite China weakness?
  Response: Management: Yes — fundamentals across segments remain strong; expect slight revenue headwind from simplification/divestitures (~<1 point this year, slightly over 1 point next year) but demand is resilient.

• Question from Michael Halloran (Robert W. Baird & Co. Incorporated, Research Division): What is the long-term approach to managing China given current softness?
  Response: Management: Rightsizing the China footprint to current demand (reductions including ~40% workforce reduction), while maintaining a long-term view on the market and monitoring progress through H1 2026.

Contradiction Point 1

MCS Order Strength and Backlog

It involves differing perspectives on the strength of MCS orders and backlog, which impacts expectations for future revenue and growth.

11% MCS order growth despite challenging Q3 comparisons. How does this position Xylem for 2026 in that segment? Does it indicate growth visibility in smart energy and water meters by 2026? - Andrew Alec Kaplowitz (Citigroup Inc., Research Division)

2025Q3: In MCS, demand is healthy with strong book-to-bill ratios and a long-term growth driver for AMI adoption. Fundamentals remain solid with strong order strength in both water and energy meters. - William Grogan(CFO)

What is the update on the MCS order outlook, customer expectations, and when will the book-to-bill ratio return to 1? - Michael Patrick Halloran (Robert W. Baird & Co. Incorporated)

2025Q2: MCS is expected to return to book-to-bill positive as the year closes. - William Grogan(CFO)

Contradiction Point 2

Tariff Impact and Pricing Strategy

It involves the company's approach to mitigating tariff impacts and how it has influenced their pricing strategy.

Can you maintain a 100-basis-point improvement on a higher base into 2026 and beyond? Should we anticipate a higher 2027 adjusted EBITDA margin than the Investor Day target? - Andrew Kaplowitz(Citigroup Inc., Research Division)

2025Q3: We've raised prices extensively across the portfolio to offset tariffs. - Matthew Pine(CEO)

How are you managing pricing with surcharges and price increases amid evolving tariffs? - Mike Halloran(Robert W. Baird & Co. Incorporated, Research Division)

2025Q1: We're implementing a mix of surcharges and price increases, with the majority being price increases. The actions we've taken are already in the market, and we have parts of our backlog we can reprice. - Matthew Pine(CEO)

Contradiction Point 3

MCS Margin Improvement and Mix Impact

It involves expectations for margin improvement in the MCS segment and the impact of product mix on margins.

How does the 11% MCS order growth in Q3 despite tough comparisons position Xylem for 2026 growth in that segment? Does this indicate positive visibility for smart energy and water meter growth in 2026? - Andrew Kaplowitz(Citigroup Inc., Research Division)

2025Q3: Our core water business has leading margin profiles, but the international metrology business was dilutive. Our energy portfolio has lower margins, but we're working to increase profitability. - William Grogan(CFO)

How do you view MCS orders and margin expectations considering recent performance? - Saree Boroditsky(Jefferies)

2025Q1: MCS orders are expected to improve in the back half. The margin impact from mix is significant in the first half but will improve sequentially afterwards, with full-year margin expansion anticipated. - William Grogan(CFO)

Contradiction Point 4

Margins and Growth Projections

It involves changes in financial forecasts, specifically regarding margin expectations and growth projections, which are critical for investor understanding of the company's performance and strategy.

Can you sustain 100 bps of EBITDA margin improvement on a higher base into '26 and beyond? Should we consider a higher '27 adjusted EBITDA margin than the Investor Day target? - Andrew Kaplowitz (Citigroup Inc., Research Division)

2025Q3: Just as a reminder, we finished 2024 at 20.6%. We're guiding 22% plus for this year ahead of schedule. There's likely some upside to our long-term targets. - Matthew Pine(CEO)

How do restructuring benefits impact margin expansion expectations? - Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division)

2024Q4: Restructuring and Evoqua synergies contribute about 175 basis points of margin favorability. The biggest headwind is the negative mix in MCS, netting out to 100 basis points. - Matthew Pine(CEO)