Xylem Inc.

10/27/2026 | Press release | Distributed by Public on 10/27/2026 10:26

Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes, included elsewhere in this report on Form 10-Q (this "Report").
This Report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "contemplate," "predict," "forecast," "likely," "believe," "target," "goal," "objective," "will," "could," "would," "should," "potential," "may" and similar expressions or their negative, may, but are not necessarily to, identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements that: are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals (including those related to our social, environmental and other sustainability goals); or address possible or future results of operations or financial performance, including statements relating to orders, revenues, operating margins and earnings per share growth.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector demand and spending, interest rates, availability of funding to our customers, timing of our customers' capital spending and project deployments, inflation and governments' related monetary policy in response, and the strength of the real estate markets, on economic activity and our operations; geopolitical matters, including nationalism, protectionism and anti-global sentiment, volatility involving the U.S. and other governments, ongoing, escalation or outbreak of international conflicts, and regulatory, trade protection, economic and other risks associated with our global sales and operations; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, energy supply, supply chain shortages, logistics challenges, labor shortages, trade agreements, tariffs, and other trade protection measures, and other factors; demand for our products, disruption, competition or pricing pressures in the markets we serve; cybersecurity incidents, data breaches, or other disruptions of information technology systems on which we or our customers rely, or involving our connected products and services; lack of availability or delays in receiving parts and raw materials from our supply chain, including semiconductors or other key components; operational disruptions at our facilities or that of third parties upon which we rely; safe and compliant treatment and handling of water, wastewater and hazardous materials; failure to successfully execute large projects, including as respects performance guarantees and customers' budgets, timelines and safety requirements; our ability to retain, compete for, and attract leadership, other key talent and labor; defects, security, warranty and liability claims, and recalls related to our products; uncertainty around productivity, simplification, restructuring and realignment actions and related costs and savings; our ability to execute strategic investments for growth and portfolio optimization actions, including acquisitions and divestitures; availability, regulation or interference with radio spectrum used by certain of our products; volatility in served markets or impacts on our business and operations due to weather conditions, volatile weather events, or changing climate patterns; risks related to our sustainability efforts and related disclosures; fluctuations in foreign currency exchange rates; our level of indebtedness, including debt incurred to finance the pending Cornell Pump and Roper Pump acquisition, difficulty predicting our financial results; risk of future impairments to goodwill and other intangible assets; changes in our effective tax rates or tax expenses; failure to comply with, or changes in, laws or regulations, pertaining to our business conduct, operations, products and services, including anti-corruption, artificial intelligence, data privacy and security, trade, competition, the environment, and health and safety; legal, governmental or regulatory claims, investigations or proceedings and associated contingent liabilities; matters related to intellectual property infringement or expiration of rights; and other factors set forth under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2025 (" 2025 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission ("SEC").
Overview
Xylem is a leading global water technology company. We design, manufacture and service highly engineered products and solutions ranging across a wide variety of critical applications in utility, industrial, residential and commercial building services settings. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test, treatment and analysis of wastewater, to the return of water to the environment. Our product and service offerings are organized into four reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water, Measurement and Control Solutions and Water Solutions and Services.
•Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater and storm water to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process.
•Applied Water serves the water usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning, and for fire protection systems to the residential and commercial building solutions markets.
•Measurement and Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control capabilities and critical infrastructure technologies that allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. We also provide analytical instrumentation used to measure and analyze water quality, flow and level in clean water, wastewater and outdoor water environments.
•Water Solutions and Services provides tailored services and solutions, in collaboration with customers, including on-demand water, outsourced water, recycle/reuse, pipeline assessment services, specialty dewatering and emergency response service alternatives to improve operational reliability, performance and environmental compliance.
Executive Summary
Xylem reported revenue for the third quarter of 2026 of $2,201 million, a decrease of 3.0% compared to $2,268 million reported in the third quarter of 2025. The revenue decreases consisted of the net impact of $80 million of revenue loss from divestitures and $17 million of additional revenue from acquisitions, organic declines of $7 million, or 0.3%, partially offset by favorable foreign currency impacts of $3 million.
Additional financial highlights for the quarter ended September 30, 2026 include the following:
•Orders of $2,331 million, up 6.9% from $2,181 million in the prior year period, and up 9.9% on an organic basis.
•Earnings per share of $1.25, up 34.4% compared to prior year ($1.44, up 5.1% versus prior year, on an adjusted basis).
•Net income attributable to Xylem as a percent of revenue of 13.2%, up 320 basis points compared to 10.0% in the prior year. Adjusted EBITDA margin of 23.9%, up 70 basis points when compared to 23.2% in the prior year.
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margins, segment operating income and margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and to provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities
as determined in accordance with GAAP. We consider the following non-GAAP measures to be key performance indicators, as well as the related reconciling items to the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
•"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales or discontinuance of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate.
•"adjusted net income" and "adjusted earnings per share" defined as net income attributable to Xylem and corresponding earnings per share, respectively, adjusted to exclude restructuring and realignment costs, amortization of acquired intangible assets, gain or loss from sale of businesses, special charges and tax-related special items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below.
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions, except per share data) 2026 2025 2026 2025
Net income attributable to Xylem & Earnings per share $ 291 $ 1.25 $ 227 $ 0.93 $ 747 $ 3.14 $ 622 $ 2.55
Restructuring and realignment 14 0.06 31 0.13 67 0.29 87 0.36
Acquired intangible amortization 52 0.22 55 0.23 159 0.67 165 0.68
Special charges (23) (0.10) 9 0.04 (16) (0.07) 34 0.14
Tax-related special items 5 0.02 1 - 21 0.09 6 0.02
Loss from sale of businesses 5 0.02 37 0.15 17 0.07 47 0.19
Tax effects of adjustments (a) (8) (0.03) (27) (0.11) (42) (0.18) (69) (0.28)
Adjusted net income & Adjusted earnings per share $ 336 $ 1.44 $ 333 $ 1.37 $ 953 $ 4.01 $ 892 $ 3.66
Weighted average number of shares - diluted 233.0 244.1 237.7 243.9
(a) The tax effects of adjustments are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction.
•"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs, amortization of acquired intangible assets, gain or loss from sale of businesses, special charges and tax-related special items, as applicable, and "adjusted operating margin" defined as adjusted operating income divided by total revenue.
•"EBITDA" defined as earnings before interest, taxes, depreciation and amortization expense, "EBITDA margin" defined as EBITDA divided by total revenue, "adjusted EBITDA" reflects the adjustments to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, gain or loss from sale of businesses and special charges, and "adjusted EBITDA margin" defined as adjusted EBITDA divided by total revenue.
•"realignment costs" defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs.
•"special charges" defined as non-recurring costs incurred by the Company, such as those related to acquisitions and integrations, divestitures, non-cash impairment charges and other special charges. In 2026, these charges include reductions of expense related to the refunds of certain tariffs previously imposed under the International Emergency Economic Powers Act ("IEEPA").
•"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, excess tax benefits/losses and other discrete tax adjustments.
•"free cash flow" defined as net cash from operating activities, less capital expenditures, as reported in the Statement of Cash Flows. Our definition of "free cash flow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.
(in millions) 2026 2025
Net cash provided by operating activities $ 729 $ 698
Capital expenditures (268) (248)
Free cash flow $ 461 $ 450
Net cash used in investing activities $ (554) $ (329)
Net cash used in financing activities $ (935) $ (382)
Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2026 2025 Change 2026 2025 Change
Revenue $ 2,201 $2,268 (3.0) % $ 6,662 $6,638 0.4 %
Gross profit 907 883 2.7 % 2,673 2,543 5.1 %
Gross margin 41.2 % 38.9 % 230 bp 40.1 % 38.3 % 180 bp
Total operating expenses 522 549 (4.9) % 1,654 1,673 (1.1) %
Expense to revenue ratio 23.7 % 24.2 % (50) bp 24.8 % 25.2 % (40) bp
Operating income 385 334 15.3 % 1,019 870 17.1 %
Operating margin 17.5 % 14.7 % 280 bp 15.3 % 13.1 % 220 bp
Interest and other non-operating expense, net (15) - NM (29) (10) 190.0 %
Loss on sale of businesses (5) (37) (86.5) % (17) (47) (63.8) %
Income tax expense (77) (71) 8.5 % (235) (196) 19.9 %
Tax rate 21.1 % 23.9 % (280) bp 24.2 % 24.1 % 10 bp
Net income $ 288 $ 226 27.4 % $ 738 $ 617 19.6 %
Net loss attributable to non-controlling interest 3 1 200.0 % 9 5 80.0 %
Net income attributable to Xylem $ 291 $ 227 28.2 % $ 747 $ 622 20.1 %
NM Not Meaningful
Revenue
Revenue generated during the three and nine months ended September 30, 2026 was $2,201 million and $6,662 million, respectively, reflecting a decrease of $67 million, or 3.0%, and an increase of $24 million, or 0.4% compared to the prior year. Organic revenue decreased $7 million, or 0.3%, and increased $14 million, or 0.2% for the three and nine months ended September 30, 2026, respectively. Foreign currency translation had a favorable impact on revenue of $3 million and $97 million for the three and nine months ended September 30, 2026. The loss of revenue from divestitures of $80 million was partially offset by a corresponding increase in revenue from acquisitions of $17 million for the three months ended September 30, 2026. For the nine months ended September 30, 2026 the loss of revenue from divestitures of $116 million was partially offset by a corresponding increase in revenue from acquisitions of $29 million. The decrease in organic revenue for the three months ended September 30, 2026 is primarily due to reduced sales volume in U.S. metering in our Measurement and Control Solutions segment and service and rental volume in our Water Solutions and Services segment, mostly offset by strong growth in our Applied Water segment. The increase in organic revenue for the nine months ended September 30, 2026 is primarily due to strong price realization and backlog execution in the U.S. in our Applied Water segment and increased sales volume in the U.S. in our Water Infrastructure segment.
The following tables illustrate the impact from organic growth, recent acquisitions and divestitures, and foreign currency translation in relation to revenue during the three and nine months ended September 30, 2026:
Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services Total Xylem
(in millions) $ Change % Change (b) $ Change % Change (b) $ Change % Change (b) $ Change % Change (b) $ Change % Change (b)
2025 Revenue $ 656 $ 456 $ 522 $ 634 $ 2,268
Organic Growth (8) (1.2) % 39 8.7 % (23) (5.1) % (15) (2.4) % (7) (0.3) %
Acquisitions 1 0.2 % - - % 6 1.1 % 10 1.6 % 17 0.7 %
Divestitures (6) (0.9) % (6) (1.3) % (68) (13.0) % - - % (80) (3.5) %
Foreign currency translation (a) 2 0.3 % - - % (1) (0.2) % 2 0.3 % 3 0.1 %
Total change in revenue (11) (1.7) % 33 7.2 % (86) (16.5) % (3) (0.5) % (67) (3.0) %
2026 Revenue $ 645 $ 489 $ 436 $ 631 $ 2,201
(a)Foreign currency translation impact for the year primarily due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Australian Dollar and the Chinese Yuan, offset by the weakening in the Euro.
(b)Percentages may not foot due to differences in computational basis.
Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services Total Xylem
(in millions) $ Change % Change (b) $ Change % Change (b) $ Change % Change (b) $ Change % Change (b) $ Change % Change (b)
2025 Revenue $ 1,887 $ 1,374 $ 1,552 $ 1,825 $ 6,638
Organic Growth 4 0.2 % 51 3.7 % (23) (1.6) % (18) (1.0) % 14 0.2 %
Acquisitions 8 0.4 % - - % 6 0.4 % 15 0.8 % 29 0.4 %
Divestitures (13) (0.7) % (6) (0.4) % (97) (6.3) % - - % (116) (1.7) %
Foreign currency translation (a) 45 2.4 % 19 1.4 % 14 0.9 % 19 1.0 % 97 1.5 %
Total change in revenue 44 2.3 % 64 4.7 % (100) (6.4) % 16 0.9 % 24 0.4 %
2026 Revenue $ 1,931 $ 1,438 $ 1,452 $ 1,841 $ 6,662
(a)Foreign currency translation impact for the year primarily due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, Australian Dollar, Hungarian Forint, Chinese Yuan, British Pound, Norwegian Krone, and the Swedish Krona.
(b)Percentages may not foot due to differences in computational basis.
Water Infrastructure
Water Infrastructure revenue decreased $11 million, or 1.7%, for the third quarter of 2026 as compared to the prior year. Revenue declines for the quarter included decreased organic revenue of $8 million, or 1.2%, the impact of $6 million of lost revenue from divestitures and $1 million of increased revenue from acquisitions, and $2 million of favorable impacts from foreign currency translation. Revenue in the treatment application declined $19 million organically due to timing of revenue recognition in western Europe, market softness in China, and targeted exits on non-strategic capital revenue and market softness in emerging markets. The decreased organic revenue was partially offset by organic revenue growth in the transport application of $8 million due to strong backlog execution in the U.S., partially offset by reduced backlog execution and project timing in the emerging markets.
Water Infrastructure revenue increased $44 million, or 2.3%, for the nine months ended September 30, 2026 as compared to the prior year. Revenue growth for the period included $45 million of favorable impacts from foreign currency translation, an increase of $8 million of revenue from acquisitions, organic revenue growth of $4 million, or 0.2% and a loss of revenue of $13 million from divestitures. Organic revenue growth was driven by $42 million of organic growth in the transport application due to increased sales volume and strong backlog execution in the U.S. partially offset by market softness and reduced backlog execution in the emerging markets. Revenue in the treatment application declined by $38 million organically, driven by targeted exits on non-strategic capital revenue, market softness in China and reduced sales volume and capital project revenue in western Europe, partially offset by favorable capital project revenue in the U.S.
Applied Water
Applied Water revenue increased $33 million, or 7.2% for the third quarter of 2026 as compared to the prior year. Revenue growth for the quarter included organic revenue growth of $39 million, or 8.7%, and $6 million of lost revenue from divestitures. Revenue from the industrial application grew $24 million organically, due primarily to increased data center project revenue and backlog execution in the emerging markets and U.S. Building solutions revenue grew $15 million organically due to strong backlog execution and price realization in the U.S. commercial market, partially offset by declines in the residential market across all major geographies.
Applied Water revenue increased $64 million, or 4.7% for the nine months ended September 30, 2026 as compared to the prior year. Revenue growth for the period included $51 million, or 3.7%, of organic revenue growth, $19 million of favorable foreign currency translation and $6 million of lost revenue from divestitures. Building solutions revenue grew $36 million organically, due primarily to commercial backlog execution and price in the U.S., partially offset by residential declines in the emerging markets and western Europe. Revenue from the industrial application grew by $15 million organically due primarily to increased data center project revenue and backlog execution in the U.S. and emerging markets, partially offset by reduced demand in western Europe driven by geopolitical uncertainty.
Measurement and Control Solutions
Measurement and Control Solutions revenue decreased $86 million, or 16.5%, for the third quarter of 2026 as compared to the prior year. The decrease in revenue was primarily due to the net impact of $68 million of lost revenue from divestitures and $6 million of additional revenue from acquisitions. The decline in revenue also included a $23 million, or 5.1%, decrease in organic revenue and $1 million of unfavorable foreign currency translation. Organic revenue declines were driven by $16 million from the smart metering and other applications, driven by reduced electric metering sales volume in the U.S. Organic revenue decline by $7 million in the analytics application due primarily to lapping of prior year project revenue in western Europe and reduced sales volume in the U.S.
Measurement and Control Solutions revenue decreased $100 million, or 6.4%, for the nine months ended September 30, 2026 as compared to the prior year. The decrease in revenue was primarily due to the net effect of $97 million of lost revenue from divestitures and $6 million of additional revenue from acquisitions. Revenue declines also included organic revenue declines of $23 million, or 1.6%, partially offset by $14 million of favorable foreign currency translation. Organic revenue declines were driven by $16 million from the smart metering and other applications, driven by reduced sales volume in water metering, partially offset by energy metering due to lower shippable backlog coming into the year in the U.S. Organic revenue declined by $7 million in the analytics application due primarily to reduced sales volume in the emerging markets and U.S.
Water Solutions and Services
Water Solutions and Services revenue decreased $3 million, or 0.5%, for the third quarter of 2026 as compared to the prior year. The decrease in revenue was primarily driven by $15 million, or 2.4%, of organic declines, mostly offset by $10 million of revenue from acquisitions, and $2 million of favorable impacts from foreign currency translation. Organic revenue declines were driven by $9 million of organic declines in the service application, driven by unfavorable service and rental volume in the U.S. Organic revenue for the capital application declined by $6 million as compared to the prior year, driven by capital project revenue in North America, partially offset by lapping of prior year capital project revenue in the emerging markets.
Water Solutions and Services revenue increased $16 million, or 0.9%, for the nine months ended September 30, 2026 as compared to the prior year. The revenue growth was primarily driven by $19 million of favorable impacts from foreign currency and $15 million of revenue from acquisitions, offset by $18 million, or 1.0%, of organic declines. Revenue in the capital and other applications declined by $12 million organically, primarily due to lower sales volume, in the U.S. and lapping of prior year capital project revenue in the emerging markets, partially offset by increased capital project revenue recognized in North America as the result of a contract modification and favorable sales volume in the emerging markets and western Europe. Organic revenue from the service application declined by $6 million driven by unfavorable service project timing in the U.S., partially offset by favorable service and rental volume in the emerging markets.
Orders/Backlog
An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business.
The following table illustrates the impact from organic growth, recent acquisitions and divestitures, and foreign currency translation in relation to orders during 2026:
Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services Total Xylem
(in millions) $
Change 		%
Change 		$
Change 		%
Change 		$
Change 		%
Change 		$
Change 		%
Change 		$
Change 		%
Change
2025 Orders $ 683 $ 445 $ 446 $ 607 $ 2,181
Organic Impact (8) (1.2) % 67 15.4 % 114 29.5 % 36 5.9 % 209 9.9 %
Acquisitions 2 0.3 % - - % 4 0.9 % 5 0.8 % 11 0.5 %
Divestitures (4) (0.6) % (10) (2.2) % (60) (13.5) % - - % (74) (3.4) %
Foreign currency translation (a) 2 0.3 % - - % - - % 2 0.3 % 4 0.2 %
Total change in orders (8) (1.2) % 57 12.8 % 58 13.0 % 43 7.1 % 150 6.9 %
2026 Orders $ 675 $ 502 $ 504 $ 650 $ 2,331
(a)Foreign currency translation impact for the year primarily due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Australian Dollar and the Chinese Yuan, offset by the weakening in the Euro.
(b)Percentages may not foot due to differences in computational basis.
Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services Total Xylem
(in millions) $
Change 		%
Change 		$
Change 		%
Change 		$
Change 		%
Change 		$
Change 		%
Change 		$
Change 		%
Change
2025 Orders $ 1,981 $ 1,419 $ 1,285 $ 1,828 $ 6,513
Organic Impact (20) (1.0) % 123 8.7 % 186 15.4 % 792 43.3 % 1,081 16.9 %
Acquisitions 23 1.2 % - - % 4 0.3 % 11 0.6 % 38 0.6 %
Divestitures (12) (0.6) % (10) (0.7) % (80) (6.2) % - - % (102) (1.6) %
Foreign currency translation (a) 47 2.4 % 20 1.4 % 14 1.1 % 34 1.9 % 115 1.8 %
Total change in orders 38 1.9 % 133 9.4 % 124 9.6 % 837 45.8 % 1,132 17.4 %
2026 Orders $ 2,019 $ 1,552 $ 1,409 $ 2,665 $ 7,645
(a)Foreign currency translation impact for the year primarily due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, Australian Dollar, Hungarian Forint, Chinese Yuan, British Pound, Norwegian Krone, and the Swedish Krona.
(b)Percentages may not foot due to differences in computational basis.
Backlog
Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, capital projects require longer lead production cycles and deployment schedules and delays occur from time to time. Total backlog was $5,466 million at September 30, 2026, an increase of $647 million, or 13.4%, as compared to September 30, 2025 backlog of $4,819 million. The backlog increase was due to strong order intake in the Water Solutions and Services and Applied Water segments, including the securing of a significant contract in Water Solutions and Services during the nine months ended September 30, 2026. The backlog increase was partially offset by backlog declines in the Measurement and Control Solutions due to the net impact of divestiture and acquisition activity, and Water Infrastructure segments primarily due to revenue outpacing orders and contract wins. Backlog increased $851 million, or 18.4%, at September 30, 2026, as compared to December 31, 2025 backlog of $4,615 million. The increase in backlog as compared to December 31, 2025 was driven primarily by strong order intake across all segments, including the securing of a significant contract in the Water Solutions and Services segment, partially offset by the divestiture of the international metering business in the Measurement and Control Solutions segment. We anticipate that approximately 20% of the backlog as of September 30, 2026 will be recognized as revenue in the remainder of 2026. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue increased 230 basis points to 41.2% for the three months ended September 30, 2026, as compared to 38.9% for the three months ended September 30, 2025. The gross margin increase included net favorable impacts of 160 basis points from IEEPA tariff refunds in special charges, and decreased realignments costs, and acquired intangible amortization as compared to the prior year. Gross margin expansion also included 420 basis points of favorable operational impacts, driven by 220 basis points of productivity savings and 140 basis points of price realization. These increases in gross margin were partially offset by 350 basis points of unfavorable operational impacts driven by 150 basis points of inflation, 80 basis points of unfavorable foreign currency impacts and 70 basis points of unfavorable mix.
Gross margin as a percentage of revenue increased 180 basis points to 40.1% for the nine months ended September 30, 2026, as compared to 38.3% for the nine months ended September 30, 2025. The gross margin increase included net favorable impacts of 80 basis points from IEEPA tariff refunds in special charges and acquired intangible amortization, partially offset by realignment costs as compared to the prior year. Gross margin expansion also included 430 basis points of favorable operational impacts, led by 250 basis points of productivity savings and
150 basis points of price realization. These increases in gross margin were partially offset by 330 basis points of unfavorable operational impacts driven by 210 basis points of inflation and 40 basis points of decreased volume.
Operating Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2026 2025 Change 2026 2025 Change
Selling, general and administrative expenses $ 458 $ 474 (3.4) % $ 1,433 $ 1,437 (0.3) %
SG&A as a % of revenue 20.8 % 20.9 % (10) bp 21.5 % 21.6 % (10) bp
Research and development expenses 56 52 7.7 % 171 166 3.0 %
R&D as a % of revenue 2.5 % 2.3 % 20 bp 2.6 % 2.5 % 10 bp
Restructuring and asset impairment charges 8 23 (65.2) % 50 70 (28.6) %
Operating expenses $ 522 $ 549 (4.9) % $ 1,654 $ 1,673 (1.1) %
Expense to revenue ratio 23.7 % 24.2 % (50) bp 24.9 % 25.2 % (30) bp
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased by $16 million to $458 million, or 20.8% of revenue in the third quarter of 2026, as compared to 20.9%, of revenue, in the comparable 2025 period. In the third quarter of 2026, SG&A benefited from productivity savings and favorable foreign currency effects, which was partially offset by inflation.
SG&A expenses decreased by $4 million to $1,433 million, or 21.5% of revenue, in the nine months ended September 30, 2026, as compared to $1,437 million, or 21.6% of revenue, in the nine months ended September 30, 2025. The decrease in SG&A in the nine months ended September 30, 2026 as compared to the prior year was driven by productivity savings, mostly offset by inflation, increased spending on strategic investments, and the net impact of decreased special charges and realignment costs, partially offset by increased acquired intangible asset amortization as compared to the prior year.
Research and Development ("R&D") Expenses
R&D expense was $56 million, or 2.5% of revenue, in the third quarter of 2026, as compared to $52 million, or 2.3% of revenue, in the third quarter of 2025, and was $171 million, or 2.6% of revenue, in the nine months ended September 30, 2026, as compared to $166 million, or 2.5% of revenue, in the nine months ended September 30, 2025. R&D expense was fairly consistent year over year and in line with planned spending in this area.
Restructuring and Asset Impairment Charges
Restructuring
From time to time, the Company incurs costs related to restructuring actions undertaken to optimize our cost base and improve its strategic positioning. During the three and nine months ended September 30, 2026, we incurred restructuring charges of $8 million and $50 million, respectively. During the three and nine months ended September 30, 2025, we incurred restructuring charges of $23 million and $62 million, respectively.
Actions commenced in 2025 and 2026 were primarily related to simplification actions, informed by 80/20 principles to streamline the organization and better serve our customers. We currently expect to incur between $55 and $65 million in restructuring costs for the full year.
Refer to Note 5, "Restructuring and Asset Impairment Charges" for more information.
Asset Impairment
Refer to Note 9, Goodwill and Other Intangible Assets," for more information on intangible asset impairment charges incurred during the nine months ended September 30, 2026 and 2025.
Operating Income, Net Income, and Adjusted EBITDA
Operating income was $385 million (operating margin of 17.5%) during the third quarter of 2026, an increase of $51 million, or 15.3%, when compared to operating income of $334 million (operating margin of 14.7%) during the prior year. Operating margin increased 280 basis points. Operating margin expansion included 230 basis points of favorable impacts from IEEPA tariff refunds in special charges and reduced restructuring and realignment costs and acquired intangible amortization relative to the prior year period. Additionally, operating margin expansion included 510 basis points of favorable operational impacts consisting of 320 basis points of productivity savings and 190 basis points of price realization. These favorable impacts were partially offset by 460 basis points of unfavorable operational impacts, driven by 210 basis points of inflation, 90 basis points of decreased volume and 70 basis points of unfavorable mix. Excluding restructuring and realignment costs, acquired intangible asset amortization, and special charges, adjusted operating income was $428 million (adjusted operating margin of 19.4%) for the third quarter of 2026 as compared to adjusted operating income of $429 million (adjusted operating margin of 18.9%) during the comparable quarter in the prior year, an increase in adjusted operating margin of 50 basis points.
Net income attributable to Xylem for the third quarter was $291 million (net income margin of 13.2%), an increase of $64 million as compared to net income attributable to Xylem in the prior year of $227 million (net income margin of 10.0%). The increase in net income attributable to Xylem was driven by increased operating income of $51 million and decreased loss on sale of business of $32 million and an increase in the net loss attributable to non-controlling interest of $2 million partially offset by increased interest expense of $15 million and increased income tax expense of $6 million.
Adjusted EBITDA was $527 million (adjusted EBITDA margin of 23.9%) during the third quarter of 2026, flat as compared to adjusted EBITDA of $527 million (adjusted EBITDA margin of 23.2%) during the comparable quarter in the prior year, an increase to adjusted EBITDA margin of 70 basis points. The increase in adjusted EBITDA margin was primarily driven by the same factors impacting the adjusted operating margin increase.
Operating income was $1,019 million (operating margin of 15.3%) during the nine months ended September 30, 2026, an increase of $149 million, or 17.1%, when compared to operating income of $870 million (operating margin of 13.1%) during the prior year. Operating margin increased 220 basis points. Operating margin expansion included 130 basis points of favorable impacts from a reduction in special charges, including IEEPA tariff refund benefits in the current year, and reduced restructuring and realignment costs and acquired intangible amortization relative to the prior year period. Additionally, operating margin expansion included 570 basis points of favorable operational impacts consisting of 370 basis points of productivity savings and 200 basis points of price realization. These favorable impacts were partially offset by 480 basis points of unfavorable operational impacts, driven by 260 basis points of inflation and 120 basis points of decreased volume. Excluding restructuring and realignment costs, acquired intangible asset amortization, and special charges, adjusted operating income was $1,217 million (adjusted operating margin of 18.3%) for the nine months ended September 30, 2026 as compared to adjusted operating income of $1,156 million (adjusted operating margin of 17.4%) during the comparable period in the prior year, an increase of 90 basis points.
Net income attributable to Xylem for the nine months ended September 30, 2026 was $747 million (net income margin of 11.2%), an increase of $125 million as compared to net income attributable to Xylem in the prior year of $622 million (net income margin of 9.4%). The increase in net income attributable to Xylem was driven by increased operating income of $149 million, decreased loss on sale of businesses of $30 million and an increase in the net loss attributable to non-controlling interests of $4 million, partially offset by increased income tax expense of $39 million, decreased non-operating income of $10 million and increased interest expense of $9 million.
Adjusted EBITDA was $1,508 million (adjusted EBITDA margin of 22.6%) during the nine months ended September 30, 2026, an increase of $56 million, or 3.9%, when compared to adjusted EBITDA of $1,452 million (adjusted EBITDA margin of 21.9%) during the comparable period in the prior year, an increase to adjusted EBITDA margin of 70 basis points. The increase in adjusted EBITDA margin was primarily driven by the same factors impacting the adjusted operating margin increase.
The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2026 2025 Change 2026 2025 Change
Water Infrastructure
Operating income $ 147 $ 113 30.1 % $ 380 $ 296 28.4 %
Operating margin 22.8 % 17.2 % 560 bp 19.7 % 15.7 % 400 bp
Restructuring and realignment costs 2 22 (90.9) % 37 49 (24.5) %
Purchase accounting intangible amortization 10 10 - % 30 30 - %
Special charges (5) - NM (8) 4 (300.0) %
Adjusted operating income $ 154 $ 145 6.2 % $ 439 $ 379 15.8 %
Adjusted operating margin 23.9 % 22.1 % 180 bp 22.7 % 20.1 % 260 bp
Applied Water
Operating income $ 100 $ 85 17.6 % $ 278 $ 241 15.4 %
Operating margin 20.4 % 18.6 % 180 bp 19.3 % 17.5 % 180 bp
Restructuring and realignment costs 3 4 (25.0) % 8 19 (57.9) %
Special charges (9) - NM (15) - NM %
Adjusted operating income $ 94 $ 89 5.6 % $ 271 $ 260 4.2 %
Adjusted operating margin 19.2 % 19.5 % (30) bp 18.8 % 18.9 % (10) bp
Measurement and Control Solutions
Operating income $ 66 $ 64 3.1 % $ 186 $ 188 (1.1) %
Operating margin 15.1 % 12.3 % 280 bp 12.8 % 12.1 % 70 bp
Restructuring and realignment costs 7 1 600.0 % 14 9 55.6 %
Purchase accounting intangible amortization 19 20 (5.0) % 57 58 (1.7) %
Special charges (8) 5 (260.0) % (7) 15 (146.7) %
Adjusted operating income $ 84 $ 90 (6.7) % $ 250 $ 270 (7.4) %
Adjusted operating margin 19.3 % 17.2 % 210 bp 17.2 % 17.4 % (20) bp
Water Solutions and Services
Operating income $ 92 $ 98 (6.1) % $ 239 $ 220 8.6 %
Operating margin 14.6 % 15.5 % (90) bp 13.0 % 12.1 % 90 bp
Restructuring and realignment costs 2 3 (33.3) % 8 9 (11.1) %
Purchase accounting intangible amortization 23 25 (8.0) % 72 76 (5.3) %
Special charges (3) 1 (400.0) % (2) 6 (133.3) %
Adjusted operating income $ 114 $ 127 (10.2) % $ 317 $ 311 1.9 %
Adjusted operating margin 18.1 % 20.0 % (190) bp 17.2 % 17.0 % 20 bp
Corporate and other
Operating loss $ (20) $ (26) (23.1) % $ (64) $ (75) (14.7) %
Restructuring and realignment costs - 1 (100.0) % - 1 (100.0) %
Purchase accounting intangible amortization - - NM - 1 (100.0) %
Special charges 2 3 (33.3) % 4 9 (55.6) %
Adjusted operating loss $ (18) $ (22) (18.2) % $ (60) $ (64) (6.3) %
Total Xylem
Operating income $ 385 $ 334 15.3 % $ 1,019 $ 870 17.1 %
Operating margin 17.5 % 14.7 % 280 bp 15.3 % 13.1 % 220 bp
Restructuring and realignment costs 14 31 (54.8) % 67 87 (23.0) %
Purchase accounting intangible amortization 52 55 (5.5) % 159 165 (3.6) %
Special charges (23) 9 (355.6) % (28) 34 (182.4) %
Adjusted operating income $ 428 $ 429 (0.2) % $ 1,217 $ 1,156 5.3 %
Adjusted operating margin 19.4 % 18.9 % 50 bp 18.3 % 17.4 % 90 bp
NM Not Meaningful
The table below provides a reconciliation of net income attributable to Xylem to consolidated EBITDA and adjusted EBITDA:
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2026 2025 Change 2026 2025 Change
Net Income attributable to Xylem $ 291 $ 227 28 % $ 747 $ 622 20 %
Net Income margin 13.2 % 10.0 % 320 bp 11.2 % 9.4 % 180 bp
Depreciation 65 64 2 % 195 201 (3) %
Amortization 72 78 (8) % 222 231 (4) %
Interest expense, net 15 - NM 13 3 333 %
Income tax expense 77 71 8 % 235 196 20 %
EBITDA $ 520 $ 440 18 % $ 1,412 $ 1,253 13 %
Share-based compensation 14 12 17 % 39 37 5 %
Restructuring and realignment 14 30 (53) % 65 86 (24) %
Special charges (23) 9 (356) % (16) 34 (147) %
Loss on sale of businesses 5 37 (86) % 17 47 (64) %
Loss attributable to non-controlling interest (3) (1) 200 % (9) (5) 80 %
Adjusted EBITDA $ 527 $ 527 - % $ 1,508 $ 1,452 4 %
Adjusted EBITDA margin 23.9 % 23.2 % 70 bp 22.6 % 21.9 % 70 bp
The tables below provide a reconciliation of each segment's operating income (loss) to EBITDA and adjusted EBITDA:
Three Months Ended
September 30, 2026
(in millions) Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services
Operating Income $ 147 $ 100 $ 66 $ 92
Operating margin 22.8 % 20.4 % 15.1 % 14.6 %
Loss attributable to non-controlling interests - - 3 -
Gain (loss) on sale of businesses $ 2 8 (15) -
Depreciation 12 7 7 38
Amortization 12 1 33 25
Other non-operating expense, excluding interest (2) - - -
EBITDA $ 171 $ 116 $ 94 $ 155
Share-based compensation 3 2 2 3
Restructuring and realignment 2 3 7 2
Special charges (5) (9) (8) (3)
(Gain) loss on sale of businesses (2) (8) 15 -
Loss attributable to non-controlling interests $ - $ - $ (3) $ -
Adjusted EBITDA $ 169 $ 104 $ 107 $ 157
Adjusted EBITDA margin 26.2 % 21.3 % 24.5 % 24.9 %
Three Months Ended
September 30, 2025
(in millions) Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services
Operating Income $ 113 $ 85 $ 64 $ 98
Operating margin 17.2 % 18.6 % 12.3 % 15.5 %
Loss (gain) attributable to non-controlling interests - - 2 (1)
Gain (loss) on sale of businesses 2 - (39) -
Depreciation 11 6 8 38
Amortization 13 2 35 26
EBITDA $ 139 $ 93 $ 70 $ 161
Share-based compensation 2 2 1 1
Restructuring and realignment 21 4 1 3
Special charges - - 5 1
(Gain) loss on sale of businesses (2) - 39 -
(Loss) gain attributable to non-controlling interests - - (2) 1
Adjusted EBITDA $ 160 $ 99 $ 114 $ 167
Adjusted EBITDA margin 24.4 % 21.7 % 21.8 % 26.3 %
Three Months Ended
2026 versus 2025
(in millions) Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services
Operating Income (Loss) $ 34 $ 15 $ 2 $ (6)
Operating margin 560 bp 180 bp 280 bp (90) bp
Loss (gain) attributable to non-controlling interests - - 1 1
Gain (loss) on sale of businesses - 8 24 -
Depreciation 1 1 (1) -
Amortization (1) (1) (2) (1)
Other non-operating expense, excluding interest (2) - - -
EBITDA $ 32 $ 23 $ 24 $ (6)
Share-based compensation 1 - 1 2
Restructuring and realignment (19) (1) 6 (1)
Special charges (5) (9) (13) (4)
(Gain) loss on sale of businesses - (8) (24) -
(Loss) gain attributable to non-controlling interests - - (1) (1)
Adjusted EBITDA $ 9 $ 5 $ (7) $ (10)
Adjusted EBITDA margin 180 bp (40) bp 270 bp (140) bp
Nine Months Ended
September 30, 2026
(in millions) Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services
Operating Income $ 380 $ 278 $ 186 $ 239
Operating margin 19.7 % 19.3 % 12.8 % 13.0 %
Loss attributable to non-controlling interests - - 9 -
Gain (loss) from sale of businesses 4 8 (29) -
Depreciation 35 20 22 116
Amortization 39 3 99 78
Other non-operating expense, excluding interest (12) (1) - (5)
EBITDA $ 446 $ 308 $ 287 $ 428
Share-based compensation 7 5 6 6
Restructuring and realignment 35 8 14 8
Special charges (1) (15) (7) 3
(Gain) loss on sale of businesses (4) (8) 29 -
Loss attributable to non-controlling interests $ - $ - $ (9) $ -
Adjusted EBITDA $ 483 $ 298 $ 320 $ 445
Adjusted EBITDA margin 25.0 % 20.7 % 22.0 % 24.2 %
Nine Months Ended
September 30, 2025
(in millions) Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services
Operating Income $ 296 $ 241 $ 188 $ 220
Operating margin 15.7 % 17.5 % 12.1 % 12.1 %
Loss (gain) attributable to non-controlling interests - - 6 (1)
Loss from sale of businesses (8) - (39) -
Depreciation 32 21 25 122
Amortization 39 4 101 81
Other non-operating expense, excluding interest (4) - (1) (1)
EBITDA $ 355 $ 266 $ 280 $ 421
Share-based compensation 7 4 5 5
Restructuring and realignment 48 19 9 9
Special charges 4 - 15 6
Loss on sale of businesses 8 - 39 -
(Loss) gain attributable to non-controlling interests - - (6) 1
Adjusted EBITDA $ 422 $ 289 $ 342 $ 442
Adjusted EBITDA margin 22.4 % 21.0 % 22.0 % 24.2 %
Nine Months Ended
2026 versus 2025
(in millions) Water Infrastructure Applied Water Measurement and Control Solutions Water Solutions and Services
Operating Income (Loss) $ 84 $ 37 $ (2) $ 19
Operating margin 400 bp 180 bp 70 bp 90 bp
Loss (gain) attributable to non-controlling interests - - 3 -
Gain (loss) on sale of businesses 12 8 10 -
Depreciation 3 (1) (3) (6)
Amortization - (1) (2) (3)
Other non-operating expense, excluding interest (8) (1) 1 (4)
EBITDA $ 91 $ 42 $ 7 $ 7
Share-based compensation - 1 1 1
Restructuring and realignment (13) (11) 5 (1)
Special charges (5) (15) (22) (3)
Gain (loss) from sale of businesses (12) (8) (10) -
(Loss) gain attributable to non-controlling interests - - (3) (1)
Adjusted EBITDA $ 61 $ 9 $ (22) $ 3
Adjusted EBITDA margin 260 bp (30) bp - bp - bp
Water Infrastructure
Operating income for our Water Infrastructure segment was $147 million (operating margin of 22.8%) during the third quarter of 2026, an increase of $34 million, or 30.1%, when compared to operating income of $113 million (operating margin of 17.2%) during the prior year, or a total increase in operating margin of 560 basis points. Operating margin expansion included net favorable impacts of 380 basis points from decreased restructuring and realignment costs and IEEPA tariff refunds in special charges, as compared to the prior year. Additionally, operating margin expansion included 700 basis points of favorable operating impacts consisting of 520 basis points of productivity improvements and 180 basis points of price realization. Margin expansion was partially offset by 520 basis points of unfavorable operational impacts, driven by 150 basis points unfavorable volume, 100 basis points of unfavorable foreign currency impacts, 80 basis points of inflation, 80 basis points of increased spending on strategic investments, and 60 basis points of inventory management costs. Excluding restructuring and realignment costs, amortization of acquired intangibles, and special charges, adjusted operating income was $154 million (adjusted operating margin of 23.9%) for the third quarter of 2026 as compared to adjusted operating income of $145 million (adjusted operating margin of 22.1%) for the third quarter of 2025, an increase of 180 basis points.
Adjusted EBITDA was $169 million (adjusted EBITDA margin of 26.2%) for the third quarter of 2026, an increase of $9 million, or 5.6%, when compared to adjusted EBITDA of $160 million (adjusted EBITDA margin of 24.4%) during the prior year. The increase in adjusted EBITDA margin of 180 basis points was primarily driven by the same factors impacting the increase in adjusted operating margin.
Operating income for our Water Infrastructure segment was $380 million (operating margin of 19.7%) during the nine months ended September 30, 2026, an increase of $84 million, or 28.4%, when compared to operating income of $296 million (operating margin of 15.7%) during the prior year, or a total increase in operating margin of 400 basis points. Operating margin expansion included net favorable impacts of 140 basis points from decreased special charges, including IEEPA tariff refund benefits and decreased restructuring and realignment costs as compared to the prior year. Operating margin expansion included 660 basis points of favorable operating impacts driven by 510 basis points of productivity savings and 110 basis points of favorable price realization. Margin expansion was partially offset by 400 basis points of unfavorable operational impacts, driven by 180 basis points of inflation, 60 basis points of increased spending on strategic investments and 60 basis points of unfavorable foreign currency impacts. Excluding restructuring and realignment costs, amortization of acquired intangibles, and special charges,
adjusted operating income was $439 million (adjusted operating margin of 22.7%) for the nine months ended September 30, 2026 as compared to adjusted operating income of $379 million (adjusted operating margin of 20.1%) for the nine months ended September 30, 2025, an increase of 260 basis points.
Adjusted EBITDA was $483 million (adjusted EBITDA margin of 25.0%) for the nine months ended September 30, 2026, an increase of $61 million, or 14.5%, when compared to adjusted EBITDA of $422 million (adjusted EBITDA margin of 22.4%) during the prior year. The increase in adjusted EBITDA margin of 260 basis points was primarily driven by the same factors impacting the increase in adjusted operating margin.
Applied Water
Operating income for our Applied Water segment was $100 million (operating margin of 20.4%) during the third quarter of 2026, an increase of $15 million, or 17.6%, when compared to operating income of $85 million (operating margin of 18.6%) during the prior year, or a total increase in operating margin of 180 basis points. Operating margin expansion included 210 basis points from IEEPA tariff refunds in special charges and decreased restructuring and realignment costs as compared to the prior year. Additionally, operating margin expansion included 660 basis points of favorable operational impacts consisting primarily of 370 basis points of productivity savings, 170 basis points of favorable volume and 110 basis points of price realization. Operating margin expansion was offset by 690 basis points of unfavorable operational impacts driven primarily by 320 basis points of inflation, 100 basis points of unfavorable mix and 50 basis points of unfavorable foreign currency impacts. Excluding restructuring and realignment costs and special items, adjusted operating income was $94 million (adjusted operating margin of 19.2%) for the third quarter of 2026 as compared to adjusted operating income of $89 million (adjusted operating margin of 19.5%) for the third quarter of 2025, a decrease of 30 basis points.
Adjusted EBITDA was $104 million (adjusted EBITDA margin of 21.3%) for the third quarter of 2026, an increase of $5 million, or 5.1%, when compared to adjusted EBITDA of $99 million (adjusted EBITDA margin of 21.7%) during the prior year, a decrease of 40 basis points. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the decrease in adjusted operating margin.
Operating income for our Applied Water segment was $278 million (operating margin of 19.3%) during the nine months ended September 30, 2026, an increase of $37 million, or 15.4%, when compared to operating income of $241 million (operating margin of 17.5%) during the prior year, or a total increase in operating margin of 180 basis points. Operating margin expansion included 190 basis points from IEEPA tariff refunds in special charges and decreased restructuring and realignment costs as compared to the prior year. Additionally, operating margin expansion included 710 basis points of favorable operational impacts consisting of 570 basis points of productivity savings and 140 basis points of price realization. Operating margin expansion was offset by 720 basis points of unfavorable operational impacts driven primarily by 390 basis points of inflation, 110 basis points of unfavorable mix, 70 basis points of decreased volume and 50 basis points of increased spending on strategic investments. Excluding restructuring and realignment costs and special items, adjusted operating income was $271 million (adjusted operating margin of 18.8%) for the nine months ended September 30, 2026 as compared to adjusted operating income of $260 million (adjusted operating margin of 18.9%) for the nine months ended September 30, 2025, a decrease of 10 basis points.
Adjusted EBITDA was $298 million (adjusted EBITDA margin of 20.7%) for the nine months ended September 30, 2026, an increase of $9 million, or 3.1%, when compared to adjusted EBITDA of $289 million (adjusted EBITDA margin of 21.0%) during the prior year, a decrease of 30 basis points. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the decrease in adjusted operating margin.
Measurement and Control Solutions
Operating income for our Measurement and Control Solutions segment was $66 million (operating margin of 15.1%) during the third quarter of 2026, an increase of $2 million, or 3.1%, when compared to operating income of $64 million (operating margin of 12.3%) during the prior year, or a total increase in operating margin of 280 basis points. The operating margin expansion included favorable impacts of 70 basis points from the positive impact of a reduction in special charges, including IEEPA tariff refund benefits in the current year, and lower acquired intangible asset amortization, partially offset by higher restructuring and realignment costs compared to the prior year. Additionally, operating margin expansion included 910 basis points of favorable operational impacts, driven by 380 basis points of productivity savings, 310 basis points of price realization and 80 basis points of margin growth from net acquisition and divestiture activity. Margin expansion was partially offset by unfavorable operational impacts of 700 basis points driven by 280 basis points of reduced volume, 210 basis points of inflation and 170 basis points of unfavorable mix. Excluding restructuring and realignment costs, acquired intangible asset amortization and special charges, adjusted operating income was $84 million (adjusted operating margin of 19.3%) for the third quarter of 2026 as compared to adjusted operating income of $90 million (adjusted operating margin of 17.2%) for the third quarter of 2025, an increase of 210 basis points.
Adjusted EBITDA was $107 million (adjusted EBITDA margin of 24.5%) for the third quarter of 2026, a decrease of $7 million, or 6.1%, when compared to adjusted EBITDA of $114 million (adjusted EBITDA margin of 21.8%) during the prior year, an increase of 270 basis points of margin expansion. The increase in adjusted EBITDA margin was primarily due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA did not benefit from the relative impact of decreased depreciation and amortization expense.
Operating income for our Measurement and Control Solutions segment was $186 million (operating margin of 12.8%) during the nine months ended September 30, 2026, a decrease of $2 million, or 1.1%, when compared to operating income of $188 million (operating margin of 12.1%) during the prior year, or a total increase in operating margin of 70 basis points. The operating margin expansion included favorable operating impacts of 90 basis points from the favorable impact of reduction in special charges, including IEEPA tariff refund benefits, and lower acquired intangible asset amortization, partially offset by higher restructuring and realignment costs compared to the prior year. Additionally, operating margin expansion included 560 basis points of favorable operational impacts, driven primarily by 310 basis points of productivity savings and 210 basis points of price realization. Margin expansion was offset by unfavorable operational impacts of 580 basis points driven by 230 basis points of inflation, 190 basis points of unfavorable mix and 140 basis points of decreased volume. Excluding restructuring and realignment costs, acquired intangible asset amortization and special charges, adjusted operating income was $250 million (adjusted operating margin of 17.2%) for the nine months ended September 30, 2026 as compared to adjusted operating income of $270 million (adjusted operating margin of 17.4%) for the nine months ended September 30, 2025, a decrease of 20 basis points.
Adjusted EBITDA was $320 million (adjusted EBITDA margin of 22.0%) for the nine months ended September 30, 2026, a decrease of $22 million, or 6.4%, when compared to adjusted EBITDA of $342 million (adjusted EBITDA margin of 22.0%) during the prior year. Adjusted EBITDA margin was flat when compared to the prior year, primarily due to the same factors as those impacting the decrease in adjusted operating margin.
Water Solutions and Services
Operating income for our Water Solutions and Services segment was $92 million (operating margin of 14.6%) during the third quarter of 2026, a decrease of $6 million, or 6.1%, when compared to operating income of $98 million (operating margin of 15.5%) during the prior year, or a total decrease in operating margin of 90 basis points. The operating margin declines were partially offset by favorable impacts of 100 basis points from reduced special charges, including IEEPA tariff refund benefits in the current year, and decreased acquired intangible asset amortization and restructuring and realignment costs relative to the prior year period. Operating margin declines included 430 basis points of unfavorable operational impacts, driven by 210 basis points of inflation, 90 basis points of decreased volume and 60 basis points of unfavorable mix. Margin declines were partially offset by favorable operational impacts of 240 basis points driven primarily by 190 basis points of price realization. Excluding special charges, acquired intangible asset amortization, and restructuring and realignment costs, adjusted operating income was $114 million (adjusted operating margin of 18.1%) for the third quarter of 2026 as compared to adjusted operating income of $127 million (adjusted operating margin of 20.0%) for the third quarter of 2025, a decrease in margin of 190 basis points.
Adjusted EBITDA was $157 million (adjusted EBITDA margin of 24.9%) for the third quarter of 2026, a decrease of $10 million, or 6.0%, when compared to adjusted EBITDA of $167 million (adjusted EBITDA margin of 26.3%) during the prior year, a decrease of 140 basis points. The decrease in adjusted EBITDA margin was primarily due to the same factors as those impacting the decrease in adjusted operating margin; however, adjusted EBITDA margin was not negatively impacted from the relative impact of increased depreciation and amortization expense and share-based compensation.
Operating income for our Water Solutions and Services segment was $239 million (operating margin of 13.0%) during the nine months ended September 30, 2026, an increase of $19 million, or 8.6%, when compared to operating income of $220 million (operating margin of 12.1%) during the prior year, or a total increase in operating margin of 90 basis points. The operating margin expansion included favorable impacts of 70 basis points from reduced special charges, including IEEPA tariff refund benefits in the current year, and decreased acquired intangible asset amortization and restructuring and realignment costs relative to the prior year period. Additionally, operating margin expansion included 540 basis points of favorable operational impacts, driven by 330 basis points of price realization, 90 basis points of favorable mix and 90 basis points of productivity savings. Margin expansion was partially offset by unfavorable operational impacts of 520 basis points driven primarily by 230 basis points of inflation and 210 basis points of decreased volume. Excluding special charges, acquired intangible asset amortization, and restructuring and realignment costs, adjusted operating income was $317 million (adjusted operating margin of 17.2%) for the nine months ended September 30, 2026 as compared to adjusted operating income of $311 million (adjusted operating margin of 17.0%) for the nine months ended September 30, 2025, an increase in margin of 20 basis points.
Adjusted EBITDA was $445 million (adjusted EBITDA margin of 24.2%) for the nine months ended September 30, 2026, an increase of $3 million, or 0.7%, when compared to adjusted EBITDA of $442 million (adjusted EBITDA margin of 24.2%) during the prior year. Adjusted EBITDA margin was flat when compared to the prior year, primarily due to the same factors as those impacting the increase in adjusted operating margin.
Corporate and other
Operating loss for corporate and other decreased $6 million, or 23.1%, during the third quarter of 2026 compared to the prior year period. Operating loss decreased due to lower special charges and restructuring and realignment costs. Excluding special charges and restructuring and realignment costs, adjusted operating loss for corporate and other decreased $4 million, or 18.2%, for the three months ended September 30, 2026, driven by lower spending on strategic investments.
Operating loss for corporate and other decreased $11 million, or 14.7%, during the nine months ended September 30, 2026 compared to the prior year period. Operating loss decreased due to lower special charges, restructuring and realignment costs, and acquired intangible asset amortization. Excluding these items, adjusted operating loss for corporate and other decreased $4 million, or 6.3% for the nine months ended September 30, 2026.
Interest Expense
Interest expense was $21 million for the three months ended September 30, 2026, compared to $6 million for the comparable prior year period. The increase in interest expense was primarily driven by increased interest expense from the May 2026 Notes, partially offset by increased interest income generated on cross currency swaps reducing interest expense.
Interest expense was $32 million for the nine months ended September 30, 2026, compared to $23 million for the comparable prior year period. The increase in interest expense was primarily driven by the same dynamics impacting the decrease for the quarter.
See Note 10, "Derivative Financial Instruments" and Note 12, "Credit Facilities and Debt," of our condensed consolidated financial statements for a description of our net investment hedges and credit facilities and debt, respectively.
Income Tax Expense
The income tax provision for the three months ended September 30, 2026 was $77 million resulting in an effective tax rate of 21.1%, compared to $71 million of expense resulting in an effective tax rate of 23.9% for the same period in 2025. The income tax provision for the nine months ended September 30, 2026 was $235 million resulting in an effective tax rate of 24.2%, compared to $196 million of expense resulting in an effective tax rate of 24.1% for the same period in 2025. The effective lower tax rate for the three months ended September 30, 2026 compared to the same period in 2025 was primarily due to the jurisdictional mix of earnings.
Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
Nine Months Ended
September 30,
(in millions) 2026 2025 Change
Operating activities $ 729 $ 698 $ 31
Investing activities (554) (329) (225)
Financing activities (935) (382) (553)
Foreign exchange (a) (23) 83 (106)
Increase in cash classified within assets held for sale - (11) 11
Decrease in cash classified within assets held for sale 12 11 1
Total $ (771) $ 70 $ (841)
(a)The impact is primarily due to weakening of the Euro against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
Cash generated by operating activities was $729 million for the nine months ended September 30, 2026 as compared to cash generated by operating activities of $698 million in comparable prior year period. The increase in cash provided was primarily driven by increased cash earnings, timing of payments for prepaid and accrued expenses, as well as lower annual incentives, offset by increased investment in working capital and increased use of cash related to long-term outsourced water projects.
Investing Activities
Cash used in investing activities was $554 million in nine months ended September 30, 2026, as compared to $329 million used in the comparable prior year period. The increase in cash used primarily reflects higher cash paid for acquisitions of businesses and increased investments in capital expenditures, offset by higher proceeds from sales of businesses and lower cash paid for asset acquisitions.
Financing Activities
Cash used in financing activities was $935 million in nine months ended September 30, 2026 as compared to cash used of $382 million in the comparable prior year period. The increase in cash used reflects the repurchase of common stock during the period, offset by the issuance of new long-term debt in the form of senior notes.
Funding and Liquidity Strategy
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. We continually evaluate aspects of our spending, including capital expenditures, strategic investments and dividends.
If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. Our securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note 12, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.
We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis. In addition, our existing committed credit facilities and access to the public debt markets would provide further liquidity, if required.
Based on our current global cash positions, cash flows from operations and access to the capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other obligations in both the U.S. and outside of the U.S. during the year. Currently, we have available liquidity of approximately $2.2 billion, consisting of $708 million of cash and $1.5 billion of available credit facilities as disclosed in Note 12 "Credit Facilities and Debt", of our condensed consolidated financial statements.
Credit Facilities & Contractual Commitments
See Note 12, "Credit Facilities and Debt" of our condensed consolidated financial statements for a description of our credit facilities and debt.
Non-U.S. Operations
As we continue to grow our operations outside of the U.S., we expect to continue to generate significant revenue from non-U.S. operations and expect that a substantial portion of our cash will be held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when we believe it is cost-effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations.
Tariff Developments
See Note 1, "Background and Basis of Presentation," of our condensed consolidated financial statements for a description of tariff developments in 2026.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We believe the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2025 Annual Report describes the critical accounting estimates used in preparation of the condensed consolidated financial statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in the information concerning our critical accounting estimates as stated in our 2025 Annual Report.
2026 Outlook
We are updating our outlook to include a decline in total revenue of approximately 1% and flat organic revenue in 2026. Our outlook is being provided in the context of the current volatility, including due to geopolitical, trade, macroeconomic and regulatory uncertainty. Our ability to meet our expectations is subject to a number of risks, including, but not limited to, those described in "Item 1A. Risk Factors" in our 2025 Annual Report.
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