Xylem Inc. (NYSE: XYL) saw its shares recover on Monday, closing up 1.8% at $119.08, following a 2.3% decline in the prior week. The rebound came as investors digested the company's second-quarter results, which were heavily influenced by a single large contract from Dow Inc. (NYSE: DOW).
The $850 million agreement, which spans approximately 23 years, accounted for 93% of the reported increase in quarterly orders. Excluding this contract, order growth would have been approximately 2.9% rather than the reported 42%, according to calculations based on the company's disclosures.
The contract involves Xylem designing, building, and operating water systems at Dow's Alberta site, with operations targeted to begin by August 2028. This long timeline means the revenue impact will be spread over several years, providing insight into the company's backlog and future cash flow expectations.
Despite the concentration risk, Xylem's profitability metrics showed strength. Adjusted EBITDA margin expanded by 150 basis points to 23.3%, while organic revenue grew 1% and adjusted EPS rose 16% to $1.46. The company credited productivity gains, pricing, and product mix for offsetting inflation and volume declines.
Segment performance was mixed. Water Infrastructure saw organic orders decline 4% but organic revenue rise 3%, with a book-to-bill ratio of 0.98 and an EBITDA margin of 26.6%—a 480 basis point improvement. Applied Water orders grew 9% on data center wins, while Measurement and Control saw orders up 2% but revenue down 1%, with a book-to-bill of 0.85 and a margin decline of 200 basis points. Water Solutions and Services orders surged 147%, primarily due to the Dow contract, with a book-to-bill of 2.25.
Looking ahead, Xylem updated its full-year 2026 guidance. Revenue is now expected to be approximately $9.2 billion, down about 0.5% from the previous midpoint, while organic revenue growth is projected at 2%-3%, a slight reduction. However, adjusted EBITDA margin guidance was raised to 23.1%-23.5%, and adjusted EPS guidance was increased to $5.55-$5.70, a 2.7% midpoint improvement. Free cash flow margin remains unchanged at 10.2%-11.0%.
The company's capital return program provided additional support to earnings. Xylem repurchased $1.24 billion of its own shares in the first half, reducing the diluted share count by approximately 3% year-over-year.
CEO Matthew Pine noted that "demand drivers behind our business continue to strengthen," pointing to the profit figures as evidence. However, the company faces execution risks with the Dow project and potential headwinds from softer demand in China, inflation, and lower volumes.
Analysts have taken note of the results. Baird's Michael Halloran raised his price target to $165 from $163, maintaining an Outperform rating and citing "few near-term surprises" and a return to normal conditions.
Investors will be watching to see if the company can deliver on its improved margin outlook. Third-quarter revenue is expected to be close to $2.3 billion, reflecting 3% organic growth, with adjusted EPS in the range of $1.42 to $1.47.
Shares of Xylem trade at a trailing P/E of 28.4, higher than peers Veralto (23.9) and Pentair (16.9), but lower than Watts Water (32.1) and Badger Meter (32.1).
