Core Insights - An analyst downgrade from buy to hold has led to a nearly 5% decline in Xylem's stock, raising concerns about earnings momentum and valuation [1] - Despite the downgrade, the water technology sector has performed well this year, with companies like Badger Meter and Xylem benefiting from increased spending by water utilities on technology solutions [2][3] Company Performance - Xylem is currently trading at 30 times its expected earnings, prompting questions about future stock performance [4] - The current valuation, while high, is not unusual for Xylem, and a lower interest rate environment could positively impact utility and residential spending [4] Market Outlook - The unexpected strength in water utility spending indicates significant growth potential in smart meters and technology aimed at reducing leakage and improving water infrastructure [3] - The recent stock dip may present a buying opportunity for investors [5]

Core Viewpoint - Xylem's recent earnings report shows strong performance with adjusted earnings and revenues exceeding expectations, leading to an optimistic outlook for 2024 [2][9]. Financial Performance - Adjusted earnings for Q2 2024 were $1.09 per share, surpassing the Zacks Consensus Estimate of $1.06, and increased by 11% year over year [2]. - Revenues reached $2.17 billion, beating the consensus estimate of $2.16 billion, and reflecting a 26% year-over-year increase driven by strong demand and operational execution [2]. - Orders totaled $2.09 billion, marking a 12% increase year over year, although organic orders decreased by 1% [3]. Segment Performance - Water Infrastructure segment revenues were $631 million, up 22% year over year, with organic sales increasing by 7% [4]. - Applied Water segment revenues were $456 million, down 5% year over year, with organic sales falling by 4% due to market softness [4]. - Measurement & Control Solutions segment revenues reached $482 million, up 26% year over year, driven by smart metering demand [5]. - Water Solutions and Services segment revenues were $600 million, up 76% year over year, with organic sales increasing by 12% [5]. Margin and Cash Flow - Adjusted EBITDA was $452 million, a 37.3% increase from the previous year, with a margin improvement to 20.8% [6]. - Adjusted operating income was $352 million, up 35.9% year over year, with an operating margin increase to 16.2% [6]. - Cash and cash equivalents at the end of Q2 were $815 million, down from $1.02 billion at the end of December 2023, while long-term debt decreased to $1.98 billion [7]. Capital Expenditure and Shareholder Returns - Capital expenditure was $147 million, a 42.7% increase from the previous year, with free cash flow of $230 million compared to a cash outflow of $61 million in the prior year [8]. - Dividends paid in the first half of 2024 totaled $175 million, up 25.9% year over year, and share buybacks amounted to $18 million [8]. 2024 Guidance - Xylem expects revenues of approximately $8.55 billion for 2024, indicating a 16% increase from the prior year [9]. - Adjusted EBITDA margin is projected to be around 20.5%, reflecting a 160 basis point expansion from the previous year [9]. - Adjusted earnings are forecasted to be in the range of $4.18-$4.28 per share, an increase from $3.78 per share in 2023 [10].

Xylem Inc. (XYL) is witnessing growth across most of its businesses. The Measurement & Control Solutions (M&CS) segment is benefiting from the robust demand for advanced technology solutions like smart metering and other applications, primarily in the United States. The segment's organic sales were up 26% year over year, driven by smart metering demand and execution. Growth in the transport application business, driven by a strong pipeline of capital projects in Western Europe and increased infrastructure p ...

Investment Rating - The report initiates coverage of Xylem Inc with a Buy rating and a price target of $165, indicating a favorable outlook for the company [1][5][9]. Core Viewpoints - Xylem Inc is positioned as the leading pure-play water company, expected to achieve a mid-single-digit (MSD+) growth profile, which is less cyclical compared to peers. The company has a margin expansion opportunity of approximately 100 basis points per year [1][5][9]. - The growth outlook is supported by several secular trends, including aging water infrastructure, government funding for upgrades, stricter regulations on water quality, and global urbanization [3][5][25]. - The company generated approximately $7.4 billion in sales for FY23, with a diverse product suite that includes water flow, test and measurement, and treatment/filtration equipment [7][9]. Summary by Sections Investment Thesis - Xylem is expected to benefit from substantial demand for replacement and new equipment due to aging infrastructure in developed economies, supported by government funding and regulations addressing water contamination [3][5][25]. - The company is projected to achieve a sales compound annual growth rate (CAGR) of around 6% through 2028, which is above the market's expectations [3][5][27]. Financial Projections - Revenue projections for Xylem are as follows: $8.6 billion in 2024, $9.0 billion in 2025, and $9.6 billion in 2026, with net earnings expected to reach $1.0 billion in 2024 and $1.2 billion in 2025 [1][12]. - The report anticipates an EBITDA margin improvement from 16% in 2024 to 20% by 2028, reflecting the company's operational efficiency and strategic pricing actions [4][12]. Market Drivers - Key market drivers include the estimated $625 billion funding need for national drinking water infrastructure over the next 20 years, with over $50 billion allocated by the Bipartisan Infrastructure Law for improvements [6][26]. - Urbanization trends indicate that approximately 68% of the global population will live in urban areas by 2050, increasing the demand for water infrastructure and treatment solutions [6][26]. Competitive Positioning - Xylem's balance sheet is strong, with a net debt to EBITDA ratio of 0.7x, positioning the company favorably against its peers [5][11]. - The company is currently trading at a premium compared to its peers, reflecting its higher growth potential and lower cyclicality [14][18].

Xylem beat second-quarter estimates, but investors were not impressed. As a result, the stock finished the day down 5.7% on Tuesday. Revenue in the quarter jumped 26% or 9% organically, reaching $2.17 billion and topping estimates of $2.14 billion. The organic results exclude the impact of its acquisition of Evoqua Water Technologies. What's next for Xylem Xylem might have gained on today's news, but the stock was already up roughly 20% year to date and trades at a forward price-to-earnings ratio of more th ...

Core Insights - Xylem Inc. reported revenues of $2.17 billion, exceeding the consensus estimate of $2.16 billion, with a year-over-year increase of 26% driven by strong demand and operational execution [1] - Adjusted earnings per share for the second quarter of 2024 were $1.09, surpassing the Zacks Consensus Estimate of $1.06, reflecting an 11% increase year over year [11] - The company expects revenues of approximately $8.55 billion for 2024, indicating a 16% increase from the previous year [19] Segment Performance - The Applied Water segment generated revenues of $456 million, down 5% year over year, impacted by softness in developed markets [2] - Water Solutions and Services segment revenues totaled $600 million, up 76% year over year, driven by large long-term outsourced water contracts [3] - Water Infrastructure segment revenues reached $631 million, up 22% year over year, supported by price realization and growth across regions [13] - Measurement & Control Solutions segment revenues were $482 million, up 26% year over year, driven by smart metering demand [14] Financial Metrics - Adjusted EBITDA was $452 million, a 37.3% increase from the previous year, with an adjusted EBITDA margin improvement to 20.8% [4] - Net cash generated from operating activities in the first half of 2024 was $377 million, compared to $9 million in the same period last year [5] - Adjusted operating income was $352 million, up 35.9% year over year, with an adjusted operating margin of 16.2% [15] Shareholder Returns - In the first half of 2024, Xylem paid dividends of $175 million, a 25.9% increase year over year, and repurchased shares worth $18 million [18] - Capital expenditure was $147 million, up 42.7% from the previous year, while free cash flow was $230 million compared to a cash outflow of $61 million in the prior year [17] Future Guidance - The company forecasts adjusted earnings in the range of $4.18-$4.28 per share for 2024, an increase from $3.78 per share in 2023 [20] - Adjusted EBITDA margin is expected to be approximately 20.5%, indicating an expansion of 160 basis points from the previous year [7]

PART I [Financial Statements](index=4&type=section&id=Item%201%20-%20Financial%20Statements%3A) This section presents the unaudited condensed consolidated financial statements for Q2 and H1 2024 and 2023, including key financial statements and detailed notes Condensed Consolidated Income Statement Highlights (Q2 2024 vs Q2 2023) | Metric (in millions, except per share) | Q2 2024 | Q2 2023 | Change | | :--- | :--- | :--- | :--- | | **Revenue** | $2,169 | $1,722 | +26.0% | | **Gross Profit** | $819 | $651 | +25.8% | | **Operating Income** | $253 | $119 | +112.6% | | **Net Income** | $194 | $92 | +110.9% | | **Diluted EPS** | $0.80 | $0.45 | +77.8% | Condensed Consolidated Balance Sheet Highlights (as of June 30, 2024) | Metric (in millions) | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | **Total Assets** | $15,765 | $16,112 | | **Total Liabilities** | $5,417 | $5,936 | | **Total Equity** | $10,348 | $10,176 | | **Goodwill** | $7,509 | $7,587 | | **Cash and cash equivalents** | $815 | $1,019 | Condensed Consolidated Statement of Cash Flows Highlights (Six Months Ended June 30) | Metric (in millions) | 2024 | 2023 | | :--- | :--- | :--- | | **Net Cash – Operating activities** | $377 | $9 | | **Net Cash – Investing activities** | $(128) | $(489) | | **Net Cash – Financing activities** | $(419) | $235 | [Note 3: Acquisitions and Divestitures](index=9&type=section&id=Note%203.%20Acquisitions%20and%20Divestitures) This note details the **$6.9 billion** acquisition of Evoqua Water Technologies Corp, finalizing purchase price allocation and recognizing significant goodwill and intangible assets - On May 24, 2023, Xylem acquired 100% of Evoqua Water Technologies Corp. The purchase price consisted of **$6,121 million** in Xylem common stock, **$160 million** in replacement equity awards, and **$619 million** to repay Evoqua's debt[212](index=212&type=chunk) Purchase Consideration for Evoqua Acquisition (in millions) | Component | Fair Value | | :--- | :--- | | Xylem Common Stock issued to Evoqua stockholders | $6,121 | | Estimated replacement equity awards | $160 | | Payment of certain Evoqua indebtedness | $619 | | **Total** | **$6,900** | Fair Value of Acquired Intangible Assets (in millions) | Asset Type | Fair Value | | :--- | :--- | | Customer and distributor relationships | $1,395 | | Proprietary technology and patents | $120 | | Backlog | $120 | | Permits | $70 | | Trademarks | $50 | | Software | $14 | | **Total** | **$1,769** | - The acquisition resulted in **$4.8 billion** of goodwill, which is not tax-deductible and is primarily attributed to expected synergies, economies of scale, and the assembled workforce of Evoqua[213](index=213&type=chunk) [Note 5: Restructuring and Asset Impairment Charges](index=16&type=section&id=Note%205.%20Restructuring%20and%20Asset%20Impairment%20Charges) This note details **$23 million** in Q2 2024 restructuring and asset impairment charges, primarily severance and asset impairments in the Water Solutions and Services segment Restructuring and Asset Impairment Charges (in millions) | Period | Severance & Other | Asset Impairment | Total | | :--- | :--- | :--- | :--- | | **Q2 2024** | $8 | $15 | $23 | | **H1 2024** | $17 | $16 | $33 | - In Q2 2024, the company recognized **$15 million** in impairment charges, primarily for customer relationships and trademarks, due to restructuring actions in the Water Solutions and Services segment[12](index=12&type=chunk) - Restructuring actions commenced in 2024 are expected to continue through the end of 2025 and consist mainly of severance and asset impairment charges[12](index=12&type=chunk) [Note 9: Goodwill and Other Intangible Assets](index=19&type=section&id=Note%209.%20Goodwill%20and%20Other%20Intangible%20Assets) This note outlines goodwill of **$7.51 billion** and net intangible assets of **$2.37 billion** as of June 30, 2024, with increased amortization expense due to the Evoqua acquisition Goodwill and Intangible Assets (in millions) | Asset | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | **Goodwill** | $7,509 | $7,587 | | **Other Intangible Assets, net** | $2,374 | $2,529 | - Amortization expense for finite-lived intangible assets increased to **$83 million** in Q2 2024 and **$156 million** in H1 2024, up from **$51 million** and **$83 million** in the respective prior-year periods[20](index=20&type=chunk) [Note 12: Credit Facilities and Debt](index=23&type=section&id=Note%2012.%20Credit%20Facilities%20and%20Debt) This note details total debt of **$2.0 billion** as of June 30, 2024, a decrease driven by term loan settlement, with a **$1 billion** undrawn revolving credit facility - On April 19, 2024, the company settled its **€250 million ($268 million)** Term Loan Facility with cash on hand[58](index=58&type=chunk) - The company has a **$1 billion** five-year revolving credit facility which was undrawn as of June 30, 2024[296](index=296&type=chunk) - The company's supplier financing programs had an outstanding balance of **$250 million** as of June 30, 2024, up from **$176 million** at December 31, 2023[55](index=55&type=chunk) [Note 15: Share-Based Compensation Plans](index=28&type=section&id=Note%2015.%20Share-Based%20Compensation%20Plans) This note reports share-based compensation expense of **$13 million** in Q2 2024 and **$31 million** in H1 2024, with **$77 million** in unrecognized expense remaining Share-Based Compensation Expense (in millions) | Period | Q2 2024 | H1 2024 | Q2 2023 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | **Expense** | $13 | $31 | $16 | $27 | Restricted Stock Unit Activity (H1 2024) | Activity | Share units (in thousands) | Weighted Avg. Grant Date Fair Value/Share | | :--- | :--- | :--- | | **Outstanding at Jan 1, 2024** | 862 | $98.49 | | **Granted** | 271 | $128.80 | | **Vested** | (398) | $77.54 | | **Forfeited** | (52) | $100.84 | | **Outstanding at June 30, 2024** | 683 | $110.32 | [Note 19: Segment Information](index=34&type=section&id=Note%2019.%20Segment%20Information) This note details the company's new segment structure effective January 1, 2024, providing recast financial breakdowns for revenue and operating income by segment - The company realigned its segments effective January 1, 2024, creating a new 'Water Solutions and Services' segment by combining the former Integrated Solutions and Services segment with the dewatering and assessment services businesses[208](index=208&type=chunk) Segment Revenue (Q2 2024 vs Q2 2023, in millions) | Segment | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Water Infrastructure | $631 | $519 | | Applied Water | $456 | $478 | | Measurement and Control Solutions | $482 | $384 | | Water Solutions and Services | $600 | $341 | | **Total** | **$2,169** | **$1,722** | Segment Operating Income (Q2 2024 vs Q2 2023, in millions) | Segment | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Water Infrastructure | $78 | $70 | | Applied Water | $71 | $84 | | Measurement and Control Solutions | $79 | $29 | | Water Solutions and Services | $47 | $26 | | Corporate and other | $(22) | $(90) | | **Total** | **$253** | **$119** | [Management's Discussion and Analysis (MD&A)](index=36&type=section&id=Item%202%20-%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 and H1 2024 financial performance, highlighting 26.0% revenue growth, 20.8% adjusted EBITDA margin, strong segment results, and updated 2024 outlook [Executive Summary](index=38&type=section&id=Executive%20Summary) Q2 2024 saw revenue increase 26.0% to **$2.17 billion**, driven by organic growth and the Evoqua acquisition, with adjusted EBITDA margin expanding to **20.8%** Q2 2024 Financial Highlights | Metric | Q2 2024 | YoY Change | | :--- | :--- | :--- | | **Revenue** | $2,169 million | +26.0% | | **Organic Revenue Growth** | 9.2% | - | | **Orders** | $2,087 million | +12.4% | | **EPS** | $0.80 | +77.8% | | **Adjusted EPS** | $1.09 | +11.2% | | **Adjusted EBITDA Margin** | 20.8% | +170 bps | [Results of Operations](index=42&type=section&id=Results%20of%20Operations) This section analyzes Q2 2024 operational performance, noting 26.0% revenue growth, flat gross margin, and a significant increase in operating income driven by revenue leverage Revenue Change by Driver (Q2 2024 vs Q2 2023) | Driver | Contribution to Growth | | :--- | :--- | | Organic Growth | +9.2% | | Acquisitions/(Divestitures) | +17.5% | | Foreign currency translation | -0.7% | | **Total Change in Revenue** | **+26.0%** | - Q2 2024 gross margin remained flat at **37.8%**. Favorable impacts from operations, price realization, and volume were offset by inflation, unfavorable mix, and other costs[75](index=75&type=chunk) - SG&A expenses as a percentage of revenue decreased to **22.4%** in Q2 2024 from **25.9%** in Q2 2023, primarily due to revenue leverage and lower special charges related to the Evoqua integration[76](index=76&type=chunk)[91](index=91&type=chunk) Adjusted EBITDA Reconciliation (Q2 2024 vs Q2 2023, in millions) | Metric | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | **Net Income** | $194 | $92 | | EBITDA | $398 | $211 | | **Adjusted EBITDA** | **$452** | **$329** | | **Adjusted EBITDA Margin** | **20.8%** | **19.1%** | [Segment Results](index=49&type=section&id=Segment%20Results) This section details Q2 2024 segment performance, highlighting strong growth in Measurement and Control Solutions and Water Solutions and Services, while Applied Water declined - **Water Infrastructure:** Q2 operating income grew **11.4%** to **$78 million**, but operating margin decreased **110 bps** to **12.4%** due to inflation and costs related to the Evoqua acquisition, which offset productivity savings[123](index=123&type=chunk) - **Applied Water:** Q2 operating income decreased **15.5%** to **$71 million**, with operating margin contracting **200 bps** to **15.6%**, driven by inflation, unfavorable mix, and higher employee costs[85](index=85&type=chunk) - **Measurement and Control Solutions:** Q2 operating income increased **172.4%** to **$79 million**. Operating margin expanded significantly by **880 bps** to **16.4%**, driven by higher volume, price realization, and productivity[102](index=102&type=chunk) - **Water Solutions and Services:** Q2 operating income grew **80.8%** to **$47 million**. Operating margin expanded **20 bps** to **7.8%**, as strong volume growth and productivity offset unfavorable mix and inflation[103](index=103&type=chunk) [Liquidity and Capital Resources](index=57&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity of approximately **$1.8 billion** as of June 30, 2024, with operating cash flow significantly improving to **$377 million** in H1 2024 Cash Flow Summary (Six Months Ended June 30, in millions) | Activity | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | **Operating Activities** | $377 | $9 | +$368 | | **Investing Activities** | $(128) | $(489) | +$361 | | **Financing Activities** | $(419) | $235 | -$654 | - The increase in operating cash flow was primarily driven by higher cash earnings and the absence of 2023 payments for Evoqua's pre-closing transaction costs[133](index=133&type=chunk) - As of June 30, 2024, the company has available liquidity of approximately **$1.8 billion**, comprising **$815 million** of cash and **$1 billion** of available credit facilities[137](index=137&type=chunk) [2024 Outlook](index=58&type=section&id=2024%20Outlook) The company updated its full-year 2024 outlook, forecasting **16%** total revenue growth and **5% to 6%** organic revenue growth - The company updated its 2024 outlook, now forecasting total revenue growth of **16%** and organic revenue growth of **5% to 6%**[139](index=139&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=58&type=section&id=Item%203%20-%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) There have been no material changes in market risk disclosures compared to the 2023 Annual Report - There has been no material change in the information concerning market risk as stated in the 2023 Annual Report[139](index=139&type=chunk) [Controls and Procedures](index=59&type=section&id=Item%204%20-%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2024[140](index=140&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[140](index=140&type=chunk) PART II [Legal Proceedings](index=60&type=section&id=Item%201%20-%20Legal%20Proceedings) This section details Evoqua's non-prosecution agreement with the U.S. Attorney's Office, resolving a pre-acquisition investigation with an **$8.5 million** penalty - On May 13, 2024, Evoqua entered into a non-prosecution agreement with the U.S. Attorney's Office to resolve an investigation into pre-acquisition financial statements[142](index=142&type=chunk) - Evoqua paid a criminal monetary penalty of **$8.5 million**. The agreement does not include a compliance monitorship but requires ongoing compliance obligations for two years[142](index=142&type=chunk) [Risk Factors](index=60&type=section&id=Item%201A%20-%20Risk%20Factors) There have been no material changes to the company's risk factors as previously disclosed in its 2023 Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the 2023 Annual Report[142](index=142&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=60&type=section&id=Item%202%20-%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase common stock in Q2 2024, with **$182 million** remaining available under its share repurchase program Share Repurchases (Q2 2024) | Period | Total Shares Purchased (Public Plan) | Approx. Dollar Value Remaining Under Plan | | :--- | :--- | :--- | | April 2024 | 0 | $182 million | | May 2024 | 0 | $182 million | | June 2024 | 0 | $182 million | - The Board of Directors authorized a **$500 million** share repurchase program on August 24, 2015, with no expiration date. As of June 30, 2024, **$182 million** remains available under this plan[143](index=143&type=chunk)

Xylem Inc. (NYSE:XYL) Q2 2024 Earnings Conference Call July 30, 2024 9:00 AM ET Company Participants Andrea van der Berg - Vice President, Investor Relations Matthew Pine - Chief Executive Officer Bill Grogan - Chief Financial Officer Conference Call Participants Deane Dray - RBC Capital Markets Mike Halloran - Robert W. Baird Scott Davis - Melius Research Nathan Jones - Stifel Nicolaus Joseph Giordano - TD Cowen Andrew Kaplowitz - Citigroup Bryan Blair - Oppenheimer Operator Good day, everyone, and welcome ...

Xylem (XYL) came out with quarterly earnings of $1.09 per share, beating the Zacks Consensus Estimate of $1.06 per share. This compares to earnings of $0.98 per share a year ago. These figures are adjusted for nonrecurring items. Over the last four quarters, the company has surpassed consensus EPS estimates four times. The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earning ...

Xylem Reports Second Quarter 2024 Results and Raises Full-Year Guidance • Revenue of $2.2 billion, up 26% on a reported basis and 9% organically • Earnings per share of $0.80, up 78%; $1.09 on an adjusted basis, up 11% • Raising full-year revenue guidance to $8.55 billion, up approximately 16%, with organic revenue growth of 5% to 6%, up from 4% to 6% • Increasing full-year adjusted EPS guidance to $4.18 to $4.28, from $4.10 to $4.25 WASHINGTON, D.C., (July 30, 2024) – Xylem Inc. (NYSE: XYL), a leading glob ...