XYL Financial Analysis

Analysis Date: 2/5/2025

Business Model

Xylem operates through four segments: Water Infrastructure, Applied Water, Measurement and Control Solutions, and Water Solutions and Services. Revenue is generated from product sales and services across these segments, catering to utilities, industrial, and building solution markets.

Revenue Sources

• Product Revenue: Primarily from sales of equipment like pumps, filtration systems, smart meters, valves, and heat exchangers across all segments.
• Service Revenue: Generated from treatment, transport, and assessment services, particularly strong in the Water Solutions and Services segment. Includes recurring revenue from services and outsourced water projects.

Revenue Distribution by Channel

• Water Infrastructure: Primarily direct sales.
• Applied Water: Primarily indirect channels.
• Measurement and Control Solutions: Primarily indirect, with some direct for larger projects.
• Water Solutions and Services: Primarily direct sales.

Income Statement Analysis

• Revenue increased by 6.5% in Q4 2024 compared to Q4 2023, indicating solid growth.
• Gross Profit increased by 8.5%, outpacing revenue growth and suggesting improved profitability in core operations.
• Operating Income saw a significant increase of 26.5%, reflecting better operational efficiency and cost management.
• Net Income increased by 22.6%, showing a healthy bottom-line growth.
• SG&A expenses increased by 10.8%, growing faster than revenue which could be a concern if this trend continues, but needs further investigation for context (investments for future growth, one-time expenses etc.).
• R&D expenses increased by 11.1%, indicating continued investment in innovation and future product development, which is a positive sign.

Balance Sheet Analysis

• Cash and Cash Equivalents increased by 10%, strengthening the company's liquidity position.
• Inventories decreased slightly by 2.2%, which could indicate improved inventory management or changes in demand.
• Goodwill increased by 5.2%, potentially due to acquisitions or upward adjustments.
• Other Intangible Assets decreased by 6.9%, possibly due to amortization.
• Long-term Debt decreased by 12.2%, indicating a reduction in leverage and improved financial health.
• Total Stockholders' Equity increased by 4.7%, driven by retained earnings and indicating increased book value.

Capital Allocation

Xylem increased its first-quarter dividend by 11% to $0.40 per share, signaling commitment to returning value to shareholders. Management mentioned capital deployment actions to optimize the portfolio, including increasing stake in Adrica, acquiring tuck-in businesses, and divesting a non-core business. They aim to be consistent deployers of capital, focusing on core business, accretive M&A, and opportunistic share buybacks. Capex is guided to be around $390M for FY2025.

Management Commentary

The team delivered a strong fourth quarter to close a record-breaking year for Xylem.

We set new benchmarks for full-year revenue, net income and adjusted EBITDA margins, and earnings per share.

All segments delivered strong Q4 orders growth, giving us momentum coming into 2025 on resilient underlying demand.

Full-year 2025 adjusted EBITDA margin is expected to be approximately 21.3 to 21.8 percent, an increase of 70 to 120 basis points from Xylem’s 2024 adjusted results.

Cash flow will be impacted in 2025 by our recently announced restructuring actions that may drop us slightly below our long term goals.

We will see headwinds from eightytwenty actions as we simplify Water Infrastructure's offerings and we do expect weakness in China's utility market.

In Applied Water, we expect modest growth of low single digits. Growth will be offset in Applied Water as well by eightytwenty actions as we exit unprofitable businesses.

Overall Sentiment: Positive. Management is very positive about the record performance in 2024 and the momentum going into 2025. They are confident in delivering on their long-term framework and are actively simplifying the business to improve customer focus and profitability. While there are some headwinds anticipated from restructuring costs and portfolio optimization actions (80/20), the overall tone is optimistic and forward-looking.

Recommendation

Rating: Buy

Reason for Rating: Based on strong financial performance in Q4 2024 and FY 2024, positive outlook for 2025, and healthy cash flow generation, a Buy recommendation is warranted.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/5/2025, 5:07:29 AM