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    XYL
    Earnings call· Jun 2026(Q2 FY26)

    Xylem Q2 FY26 earnings call XYL

    Jul 28, 2026 Source

    Executive summary

    Xylem Q2 FY26 — Strong Margins and Industrial Growth Offset Electric Metering Delays

    Xylem delivered solid Q2 FY26 results, driven by strong margin expansion and strategic positioning in high-growth industrial verticals, particularly within the AI ecosystem and data centers. While electric metering project delays led to a narrowed full-year revenue outlook, the company's focus on comprehensive water solutions and 80/20 simplification efforts are building momentum for future growth, especially in municipal and outsourced water contracts.

    Highlights

    5

    • Ending backlog at $5.3 billion with book-to-bill well above 1.

    • Record quarterly EPS of $1.46, a 16% increase over the prior year.

    • EBITDA margin of 23.3%, up 150 basis points versus the prior year.

    • Water Infrastructure EBITDA margin expansion of 480 basis points.

    • Data center orders in Q2 were up over 300%.

    Concerns

    4

    • Revenue was up 1% in the quarter, impacted by a 27% decline in China and almost 2% walk-away revenue.

    • MCS electric project delays impacting the near-term outlook, leading to a narrowed full-year organic revenue growth guidance of 2% to 3% (from 2% to 4%).

    • Water Infrastructure orders were down 4%, driven by continued softness in treatment due to 80/20 actions and China.

    • Applied Water EBITDA margin was slightly below expectations, down 50 basis points year-over-year.

    Guidance & targets

    14
    CategoryTargetConfidence
    Full-year reported revenue
    roughly $9.2 billion
    high materiality
    High
    Full-year organic revenue growth
    2% to 3%
    high materiality
    High
    Full-year EBITDA margin
    23.1% to 23.5%
    high materiality
    High
    Full-year Adjusted EPS
    $5.55 and to $5.70
    high materiality
    High
    Full-year Free Cash Flow Margin
    low double-digit
    medium materiality
    High
    Q3 Reported Revenue Growth
    flat
    medium materiality
    High
    Q3 Organic Revenue Growth
    up roughly 3%
    medium materiality
    High
    Q3 EBITDA Margin
    approximately 23.5% to 24%
    medium materiality
    High
    Q3 EPS
    $1.42 to $1.47
    medium materiality
    High
    FY27 Walk-away Revenue
    significantly lower
    medium materiality
    High
    Data Center Revenue Growth
    approximately 200%
    medium materiality
    High
    Data Center Revenue as % of Total Revenue
    about 2%
    medium materiality
    High
    View Platform Business Growth
    30% to 40%
    low materiality
    High
    M&A Capital Deployment
    $1 billion
    medium materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Measurement and Control Solutions
    Orders driven by double-digit growth in water, offsetting declines in electric due to difficult comps and project delays. EBITDA margin impacted by unfavorable mix, inflation, and volume, partly offset by productivity and price. Full-year outlook lowered to low single-digit revenue due to electric project delays.
    Orders growth: 2%Book-to-bill: below 1Backlog: roughly $1.2 billionEBITDA margin change: 200 bps lower YoY
    		down 1%——21.1%
    Water Infrastructure
    Orders driven by continued softness in treatment due to 80/20 actions and China, offset by strong demand in transport. Revenue driven by transport, offsetting walk-away actions. Double-digit growth in U.S. municipalities offset a 40% decline in China. EBITDA margin expansion driven by productivity, mix, price, and volume.
    Orders growth: down 4%EBITDA margin expansion: 480 bps
    		up 3%———
    Applied Water
    Revenue primarily driven by strength in U.S. commercial buildings, offsetting softness in residential and China. EBITDA margin impacted by inflation and volume, mostly offset by productivity and price.
    Orders growth: up 9%Book-to-bill: well above 1Data center orders growth: over 300% in Q2EBITDA margin change: down 50 bps YoY
    		up 3%———
    Water Solutions and Services
    Significant orders growth due to its largest order ever (Dow contract) and an approximately $850 million 23-year outsourced water project. Revenue driven by capital projects, including the finalized all contract and strength in dewatering. EBITDA margin driven by price, mix, and productivity, offset by inflation and lower volume.
    Orders growth: significantEBITDA margin change: up 90 bps YoY
    		increased 1%——25.3%

    Operational metrics

    21
    Net debt to adjusted EBITDA
    0.8xincreased
    Q2 FY26

    Increased driven by opportunistic share repurchases in the quarter.

    Working capital efficiency
    —
    Q2 FY26

    Teams continue to make progress with working capital efficiency metrics.

    Walk away revenue
    almost 2%
    Q2 FY26

    Impacted Q2 revenue.

    Walk away revenue
    close to 2%
    FY26

    Expected to be the height of walk-away revenue for the year.

    China revenue decline
    27%
    Q2 FY26

    Impacted overall revenue growth.

    China orders decline
    over 30%
    Q2 FY26

    Reflects ongoing economic headwinds.

    US municipalities growth
    Double-digit growth
    Q2 FY26

    More than offset a 40% decline in China for Water Infrastructure.

    China revenue decline
    40%
    Q2 FY26

    Offset by double-digit growth in U.S. municipalities.

    View platform business growth
    30% to 40%doubled last year
    FY26

    On pace to grow significantly in 2026, following doubling in the prior year.

    M&A capital deployment target
    $1 billion
    FY26

    Company is tracking to this goal for the year.

    EBITDA margin expansion
    90 basis points to 130 basis pointsvs prior year
    FY26

    Driven by productivity, volume, and price more than offsetting inflation and investments.

    Q4 revenue growth
    mid-single digits
    Q4 FY26

    Expected as the company builds momentum into next year.

    MCS water orders growth
    double digits
    Q1 & Q2 FY26

    Positive order activity and customer engagement.

    MCS water orders growth
    high single-digit range
    H2 FY26

    Expected to continue in the second half, leading to a positive book-to-bill.

    Water Infrastructure backlog
    —
    H1 FY26

    Built in the first half of the year.

    Water Infrastructure orders growth
    positive
    H2 FY26

    Expected in the second half, leading to strong momentum into next year.

    Applied Water book-to-bill
    above 1
    last several quarters

    Consistent strong orders.

    China sales as % of total
    3%
    last year

    Overall sales contribution in the prior year.

    China sales as % of total
    2%
    this year

    Overall sales contribution for the current year, representing a 1% headwind for total Xylem.

    Supply of rare earth
    about a year
    current

    Pulled in from a safety stock perspective.

    Supply of chips/wafers
    about 6 months
    current

    Safety stock buffer.

    Industry KPIs

    3
    MetricValueDetails
    Tariff cost impactno material impact
    Data center prime power demandover 300%%
    Order backlog order intake by segmentroughly $1.2 billionUSD

    Orderbook & backlog

    3
    Ending Backlog$5.3 billionQ2 FY26
    Book-to-bill ratiowell above 1Q2 FY26

    For the quarter.

    WSS outsourced water projects$850 millionQ2 FY26

    23-year duration.

    Product announcements

    2
    ProductTypeDetails
    TriOSexpansion
    Water Fleetexpansion

    Deals & partnerships

    6
    DowExpansion of long-term partnership, becoming the largest contract in company's history.

    Expansion of long-term partnership with Dow, which became the largest contract in Xylem's history.

    One of the world's largest chemical companiesSelected over incumbent for integrated water solution, including advanced treatment technology, operations, maintenance, and digital monitoring.20-year commitment

    Secured a 20-year commitment, bringing together advanced treatment technology, operations, maintenance, and digital monitoring under a single integrated model.

    TriOSStrengthens the intelligence layer of the portfolio through advanced sensing and water quality capabilities.

    Recently closed acquisition of TriOS, strengthening advanced sensing and water quality capabilities highly relevant to industrial customers.

    Water FleetExpands capabilities in mobile water treatment and strengthens position across AI-related infrastructure markets.

    Recently signed agreement to acquire Water Fleet, a services-led business with recurring revenue, established customer relationships, and strong commercial momentum.

    World's largest lithium battery cell manufacturerSecured a win to treat the recycling of a novel wastewater system, utilizing cutting-edge wastewater treatment and 0 liquid discharge asset.

    Built a solution to treat the recycling of a novel wastewater system, including cutting-edge wastewater treatment and the 0 liquid discharge asset from the Wacom acquisition.

    Hyperscaler (Pennsylvania data center)Treating settled river water to ensure quantity and quality for a state-of-the-art data center facility.

    Treating settled river water to bring it into a state-of-the-art facility to ensure the quantity and quality of water needed for a data center.

    Risks & headwinds

    5
    Market volatility and broader market conditions

    Unquantified

    Mitigation: Balanced outlook reflects strong commercial position, durability of portfolio, and simplification efforts.

    Electric metering project delaysNear-term

    Impacted MCS full-year performance to low single-digit revenue.

    Mitigation: Long-term electric demand remains healthy, driven by the ongoing AMI 2.0 refresh cycle.

    China market challengesOngoing, expected to stabilize

    Q2 orders down over 30%, sales down almost 30%. Represents 2% of total Xylem sales this year.

    Mitigation: Rightsized presence, selective investment in areas with differentiated technology.

    Walk-away revenue from 80/20 actionsFY26 (height), significantly lower in FY27

    Close to 2% of revenue in FY26.

    Mitigation: Drives margin increase and enables the growth algorithm longer term by shifting resources to high-potential areas.

    Middle East conflict, changes in tariffs, and other inflationary pressures

    Unquantified

    Mitigation: Company continues to monitor these broader market conditions.

    What to watch in Q3 FY26

    5

    MCS Electric Metering Recovery

    Next quarter
    CurrentProject delays, low single-digit revenue outlook for full year.
    TargetImprovement in investment cycle, signs of project resumption.

    Why it matters

    Electric metering delays impacted full-year guidance; recovery is key for MCS segment performance and overall revenue growth.

    With recent project delays in electric metering, we are bringing down our outlook for the MCS full year performance to low single-digit revenue versus the prior year.

    Q&A highlights

    7

    What were the key industrial non-municipal drivers for the 9% organic revenue growth in Applied Water, and what is the outlook?

    The growth in Applied Water was largely driven by data centers, with orders up over 300% in Q2. The North America commercial building services business also performed well. Data centers are expected to contribute about 2% of total revenue by the end of the year.

    “Primarily, it was, I would say, in Applied Water, it was largely data center-driven. Although in North America, our commercial building services business has done well across multiple verticals.”

    asked by Deane Dray · answered by William Grogan

    2 min read7 chapters

    Detailed Narrative

    01

    Strategic Positioning in Water Solutions

    Xylem is intentionally positioning itself for comprehensive water solutions, focusing on improving resilience, performance, and efficiency for utilities and industrial customers. This strategy is driven by increasing reliance on water in industries, the AI ecosystem build-out, and portfolio actions. The company aims to be a strategic partner for customers managing complexity around regulation, operational resiliency, and risk management.

    02

    Industrial Growth and AI Ecosystem

    The company is increasing exposure to high-growth industrial verticals, with data centers serving as an early indicator of a larger opportunity across the AI ecosystem. Data center revenue is expected to increase by approximately 200% in FY26, reaching about 2% of total revenue by year-end. This trend is also extending into other verticals like food and beverage and life sciences where water quality and reliability are essential.

    03

    Portfolio Reshaping and Acquisitions

    Xylem has actively reshaped its portfolio through over $400 million in divestitures while acquiring assets that expand its capabilities in high-growth markets. Recent acquisitions include TriOS, strengthening advanced sensing and water quality, and Water Fleet, expanding mobile water treatment and AI-related infrastructure presence, including a multimillion-dollar project for a hyperscaler's data center in Texas.

    04

    80/20 Simplification and Margin Expansion

    The 80/20 transformation is maturing, with FY26 marking the height of walk-away revenue at close to 2%. Next year, walk-away revenue is expected to be significantly lower, and the focus will shift to how 80/20 enables growth by optimizing resources and strategies in high-potential areas like U.S. transport, data centers, mining, and outsourced water offerings, acting as a catalyst for incremental growth in 2027.

    05

    Electric Metering Delays and Water Strength

    Near-term electric metering project delays, attributed to affordability concerns and cautious capital spending ahead of upcoming elections, impacted the MCS segment and led to a narrowed full-year revenue outlook. However, the water side of MCS continues to show strength with double-digit order growth in both Q1 and Q2, and positive book-to-bill expected in the second half.

    06

    China Market Dynamics

    China remains a challenging market, with orders and sales down almost 30% in Q2, reflecting broader economic headwinds, increased competition, and selective bidding strategies due to 80/20. The company believes the market has bottomed out and is rightsizing its presence, focusing on differentiated technology, with China representing 2% of total sales this year, down from 3% last year.

    07

    Outsourced Water Contracts Momentum

    The company secured its largest contract ever with Dow and another 20-year commitment with a major chemical company, highlighting the success of its integrated model and the expanded capabilities from the Evoqua acquisition in outsourced water projects. These wins demonstrate the increasing customer demand for comprehensive solutions that combine advanced treatment, operations, maintenance, and digital monitoring.

    AI-generated summary of the company’s earnings call. Not investment advice.