Xylem Inc. XYL has failed to impress investors with its recent operational performance due to softness in the Applied Water segment. Also, increasing expenses are likely to impede the company’s earnings in the quarters ahead.

Headquartered in Rye Brook, NY, Xylem is one of the leading providers of water solutions worldwide. The company is involved in the full water-process cycle, including the collection, distribution and return of water to the environment. It has a significant presence in the United States, the Asia Pacific, Europe and various other nations.

In the past year, this Zacks Rank #4 (Sell) company’s shares have gained 19% compared with the industry’s 30.3% growth.

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Let’s discuss the factors, which are likely to continue taking a toll on this company.

Segment Weakness: Xylem has been experiencing weakness in the Applied Water segment owing to a decrease in demand for industrial and building solutions applications including pumps, valves, heat exchangers, controls and dispensing equipment. Amid these challenges, the segment’s third-quarter revenues declined 4% on a year-over-year basis. A reduced number of project wins is likely to impact the segment’s performance in the near term. The lapping of large capital projects in the United States is ailing the Water Solutions and Services segment. The segment’s sales declined 2% year over year in the third quarter of 2024.

Increasing Costs: Xylem has been grappling with the adverse impacts of cost inflation. In the first nine months of 2024, the company’s cost of revenues increased 20.3% year over year due to high raw material, labor, freight and overhead costs. Selling, general and administrative expenses surged 8.8% due to additional operational expenditure from the acquisition of Evoqua. Escalating costs pose a threat to the company’s bottom line.

Forex Woes: The company has a significant presence in the international markets. As a result, its financial performance is subject to various risks like the foreign currency exchange rate, interest rate fluctuations and hyperinflation in some foreign countries. The increased value of the U.S. dollar relative to the local currencies of the foreign markets may affect the company’s top line in the quarters ahead.

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