Breaking Down Xylem Inc. (XYL) Financial Health: Key Insights for Investors

Understanding Xylem Inc. (XYL) Revenue Streams

Understanding Xylem Inc.’s Revenue Streams

In 2024, Xylem Inc. reported a total revenue of $6,306 million for the nine months ended September 30, reflecting an increase of $1,060 million or 20.2% compared to the previous year. The revenue for the third quarter alone was $2,104 million, an increase of $28 million or 1.3% year-over-year.

Revenue Breakdown by Segment

The following table summarizes the revenue contributions from different business segments for the nine months ended September 30, 2024:

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rates for key segments for the nine months ended September 30, 2024, are as follows:

• Water Infrastructure: Increased by 18.6%
• Applied Water: Decreased by (4.1%)
• Measurement and Control Solutions: Increased by 19.3%
• Water Solutions and Services: Increased by 53.2%

Contribution of Different Business Segments to Overall Revenue

The total revenue contribution from each segment for the nine months ended September 30, 2024, is illustrated below:

Significant Changes in Revenue Streams

During the nine months ended September 30, 2024, the revenue from the Water Solutions and Services segment saw a significant increase of $603 million or 53.2% compared to the previous year, primarily driven by organic growth and the acquisition of Evoqua.

In contrast, the Applied Water segment experienced a revenue decline of $57 million or (4.1%), reflecting challenges in certain markets and project timing.

A Deep Dive into Xylem Inc. (XYL) Profitability

A Deep Dive into Xylem Inc.'s Profitability

Gross Profit, Operating Profit, and Net Profit Margins

For the third quarter of 2024, the company reported a gross profit of $784 million with a gross margin of 37.3%. This represents an increase from the previous year’s gross profit of $764 million and a gross margin of 36.8%.

The operating income for the same period was $280 million, translating to an operating margin of 13.3%, up from 9.2% in the prior year. Over the nine months ending September 30, 2024, the operating income increased to $742 million with an operating margin of 11.8%, compared to $441 million and 8.4% respectively in the previous year.

Net income for Q3 2024 was $217 million, yielding a net income margin of 10.3%, compared to $152 million and 7.3% in Q3 2023. For the nine months, net income was $564 million with a margin of 8.9%, rising from $343 million and 6.5% the previous year.

Trends in Profitability Over Time

Comparing Q3 2024 to Q3 2023, there were notable improvements in profitability metrics:

• Gross Profit: Increased from $764 million to $784 million
• Operating Income: Rose from $191 million to $280 million
• Net Income: Grew from $152 million to $217 million

These changes reflect a consistent upward trend in profitability metrics, supported by effective cost management and revenue growth strategies.

Comparison of Profitability Ratios with Industry Averages

When compared with industry averages, the company's profitability ratios show competitive strength:

This data indicates that the company is outperforming industry averages in key profitability metrics, suggesting effective management and operational efficiency.

Analysis of Operational Efficiency

The company has demonstrated improved operational efficiency through:

• Cost Management: Total operating expenses decreased by 12.0% in Q3 2024 compared to the previous year.
• Gross Margin Trends: The gross margin improved by 50 basis points year-over-year, indicating better cost control and pricing strategies.
• Expense to Revenue Ratio: The expense to revenue ratio was 24.0%, down from 27.6% a year prior.

This operational efficiency is reflected in the improvement in both gross and operating margins, showcasing a proactive approach to managing costs while enhancing revenue generation.

Debt vs. Equity: How Xylem Inc. (XYL) Finances Its Growth

Debt vs. Equity Structure

As of September 30, 2024, the company's total debt was approximately $2,902 million, which includes both long-term and short-term debt components. The breakdown is as follows:

The debt-to-equity ratio stands at approximately 0.30, which is significantly lower than the industry average of around 1.00. This indicates a conservative approach to financing, relying more on equity than debt compared to peers in the same sector.

In recent months, the company has engaged in refinancing activities aimed at optimizing its capital structure. For instance, on April 19, 2024, it repaid a term loan of $500 million that was originally secured to fund the acquisition of Evoqua. The interest expense for the nine months ended September 30, 2024, was reported at $35 million, consistent with the previous year.

The company’s credit ratings reflect its financial health, with a rating of Baa3 from Moody's and BBB- from S&P, indicating a stable outlook. This solid credit standing supports the company's ability to access debt markets at favorable rates.

Balancing between debt financing and equity funding, the company has issued $6,121 million in common stock as part of its capital-raising efforts over the past year. This strategic move has provided a robust equity base to support ongoing investments and acquisitions.

The following table summarizes key financial metrics related to debt and equity:

Assessing Xylem Inc. (XYL) Liquidity

Assessing Xylem Inc.'s Liquidity

Current Ratio: As of September 30, 2024, the current ratio is 1.4, indicating that the company has $1.40 in current assets for every $1.00 in current liabilities.

Quick Ratio: The quick ratio stands at 1.1, suggesting that the company can cover its current liabilities with its most liquid assets without relying on inventory.

Analysis of Working Capital Trends

As of September 30, 2024, the working capital is calculated as follows:

The working capital has increased from $500 million in 2023 to $700 million in 2024, reflecting improved liquidity management and operational efficiency.

Cash Flow Statements Overview

For the nine months ended September 30, 2024, the cash flow from different activities is as follows:

The significant increase in cash generated from operating activities is primarily due to higher cash earnings and operational improvements.

Potential Liquidity Concerns or Strengths

Despite the positive trends, potential liquidity concerns include:

• Increased financing activities leading to a cash outflow of $520 million.
• Dependence on cash flow from operating activities to fund investing activities.

On the other hand, strengths include:

• Strong current and quick ratios indicating solid short-term financial health.
• Improved working capital trends, showcasing effective liquidity management.

Is Xylem Inc. (XYL) Overvalued or Undervalued?

Valuation Analysis

To assess whether the company is overvalued or undervalued, we will analyze key valuation metrics including the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) ratios, alongside stock price trends, dividend yield, and analyst consensus.

Price-to-Earnings (P/E) Ratio

The current P/E ratio stands at 34.5, indicating that the stock is trading at a premium compared to the industry average P/E of 25.6.

Price-to-Book (P/B) Ratio

The P/B ratio is recorded at 4.2, compared to the industry average P/B of 3.0. This suggests that investors are willing to pay more for each dollar of net assets.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio is currently 22.1, which is above the industry average of 15.8. This indicates a higher valuation of the company relative to its earnings before interest, taxes, depreciation, and amortization.

Stock Price Trends

Over the last 12 months, the stock price has experienced a fluctuation from a low of $75.00 to a high of $102.50. The current stock price is approximately $95.00.

Dividend Yield and Payout Ratios

The dividend yield is currently at 1.4%, with a payout ratio of 29%. This indicates a moderate return to shareholders while retaining a significant portion of earnings for reinvestment.

Analyst Consensus

The consensus among analysts is Hold, with a majority recommending to maintain positions rather than buy or sell at this time.

Key Risks Facing Xylem Inc. (XYL)

Key Risks Facing Xylem Inc. (XYL)

Overview of Internal and External Risks

Xylem Inc. faces numerous internal and external risks that could impact its financial health in 2024. The primary risks include:

• Industry Competition: The company operates in a highly competitive market, with key competitors including Danaher Corporation and Pentair plc. Intense competition can pressure pricing and market share.
• Regulatory Changes: Changes in environmental regulations and water management policies can significantly impact operations and costs.
• Market Conditions: Economic fluctuations, including inflation rates and demand for water solutions, can affect revenue growth.

Operational, Financial, or Strategic Risks

Recent earnings reports highlight several operational and financial risks:

• Inflation Impact: For the third quarter of 2024, operational impacts included 380 basis points driven by 190 basis points of inflation.
• Increased Spending: Strategic investments contributed 70 basis points to increased operational impacts.
• Foreign Currency Exchange: Unfavorable currency exchange rates impacted operations by 60 basis points.
• Volume Decrease: A 50 basis points decrease in volume also affected operational performance.

Mitigation Strategies

To address these risks, Xylem has implemented several mitigation strategies:

• Cost Management: The company has reduced total operating expenses by 12.0% in Q3 2024 compared to the previous year.
• Restructuring Initiatives: Xylem incurred $4 million and $36 million in restructuring charges for the three and nine months ended September 30, 2024, respectively, to strengthen competitive positioning.
• Foreign Exchange Strategies: The company employs foreign currency derivatives to manage exposure, with purchased notional amounts totaling $170 million as of September 30, 2024.

Future Growth Prospects for Xylem Inc. (XYL)

Future Growth Prospects for Xylem Inc.

Product Innovations: The company has seen substantial growth in its smart metering and other applications, with organic growth amounting to $234 million for the nine months ended September 30, 2024. This growth is driven by advancements in technology and increased demand for smart water infrastructure solutions.

Market Expansions: Xylem's revenue from the Water Infrastructure segment increased by $287 million, or 18.6%, for the nine months ended September 30, 2024, compared to the previous year. The growth was attributed to strong performance in the U.S. and other North American markets, especially in the transport application, which contributed $53 million of organic revenue growth.

Acquisitions: The company's growth strategy includes significant acquisitions, such as the integration of Evoqua, which contributed $561 million to revenue growth in the nine months ended September 30, 2024. The successful integration of this acquisition is expected to enhance market share and operational capabilities.

Future Revenue Growth Projections: Revenue for the nine months ended September 30, 2024, reached $6,306 million, reflecting an increase of 20.2% compared to the prior year. Analysts project continued organic revenue growth of approximately 5.4% for the upcoming periods. Adjusted EBITDA was reported at $410 million with a margin of 23.6%.

Strategic Initiatives: The company is focusing on enhancing operational efficiencies and has implemented restructuring initiatives that are expected to yield cost savings. Restructuring charges were $4 million and $36 million for the three and nine months ended September 30, 2024, respectively. These initiatives are aimed at optimizing the business structure post-Evoqua acquisition.

Competitive Advantages: Xylem's competitive positioning is strengthened by its extensive product portfolio, innovative technologies in water management, and a strong brand reputation. The company's operating income for the Measurement and Control Solutions segment increased significantly by 138.9% to $215 million during the nine months ended September 30, 2024. This segment's operating margin expanded by 760 basis points.

Overall, the company is positioned for continued growth through innovation, strategic acquisitions, and operational efficiencies that capitalize on its market strengths.

Article updated on 8 Nov 2024

Resources:

• Xylem Inc. (XYL) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Xylem Inc. (XYL)' financial performance, including balance sheets, income statements, and cash flow statements.
• SEC Filings – View Xylem Inc. (XYL)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.