Grade: C — Some Red Flags, Investigate
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-25, FY ended December 31, 2025) + Yahoo Finance
Auditor: Deloitte & Touche LLP — Unqualified opinion (serving since 2010)
CIK: 0001524472
One-line verdict: Xylem's C grade is driven by a single red flag — goodwill plus intangibles of $10.6B representing 92% of equity, the legacy of the 2023 Evoqua Water Technologies acquisition. Operationally, the company is clean: CFFO/NI of 1.30, free cash flow of $910M, M-Score of -2.49, and Debt/EBITDA of only 1.2x. Revenue grew 5.5% to $9.0B with gross margin expanding 100bps to 38.5%. Two watch items — cash covering 72% of debt and other assets growing 39.1% vs. 5.5% revenue growth — warrant monitoring but are not alarming. Xylem is not a company to eliminate; the goodwill load is the only structural concern, and it is actively being digested.
| Metric | Result |
|---|---|
| Red Flags | **1** (Goodwill+Intangibles = 92% of equity) |
| Watch Items | **2** (Cash-to-debt 72%, soft asset growth) |
| Checks Completed | **18/18** |
| Beneish M-Score | **-2.49** (clean) |
| Altman Z-Score | **3.86** (safe zone) |
| Auditor | Deloitte & Touche LLP — Unqualified opinion |
Revenue and Profitability
Per the 10-K (in millions):
| Metric | FY2024 | FY2025 | Change |
|---|---|---|---|
| Revenue | $8,562 | $9,035 | +5.5% |
| Gross Profit | $3,212 | $3,475 | +8.2% |
| Gross Margin | 37.5% | 38.5% | +100bps |
| Operating Expenses | $2,203 | $2,252 | +2.2% |
| Operating Income | $1,009 | $1,223 | +21.2% |
| Net Income (attributable) | $890 | $957 | +7.5% |
| EPS (diluted) | $3.66 | $3.92 | +7.1% |
The filing provides useful context on organic growth: revenue was "$8,898 million, up 2.0% from $8,730 million in 2024 (up 1.6% on an organic basis)." The gross margin expansion includes "favorable operational productivity" and benefits from the Evoqua integration.
Interest expense declined from $44M to $29M, "primarily driven by increased income generated on cross currency swaps offsetting interest on borrowings" — a notable improvement as Xylem paid down the term loan used to fund the Evoqua acquisition.
The income tax provision was $231M at a 19.5% effective rate (vs. 18.1% in FY2024). The filing notes a Swedish tax authority dispute related to the 2013 European business reorganization, which could result in "increased tax assessments."
Cash Flow and Free Cash Flow
Per the filing's reconciliation:
| Metric | FY2024 | FY2025 |
|---|---|---|
| Net Cash from Operations | $1,263 | $1,241 |
| Capital Expenditures | ($321) | ($331) |
| **Free Cash Flow** | **$942** | **$910** |
| CFFO/Net Income | 1.42 | 1.30 |
| FCF/Net Income | 1.06 | 0.95 |
Free cash flow decreased modestly from $942M to $910M despite higher net income, as CFFO dipped $22M. The decline is minor and does not signal a problem — working capital timing in a water infrastructure business naturally fluctuates.
Dividends per share "increased 11% in 2025," per the filing. The first quarter 2026 dividend was declared at $0.43/share, payable March 24, 2026.
Balance Sheet: Evoqua Aftermath
| Item | FY2024 | FY2025 |
|---|---|---|
| Cash & Equivalents | $1,121 | $1,479 |
| Total Debt | $2,016 | $1,942 |
| Total Long-term Debt | $1,978 | $1,408 |
| Short-term/Current Maturities | $38 | $534 |
| Goodwill + Intangibles | ~$10,400 | ~$10,600 |
Cash grew $358M to $1,479M while total debt declined $74M — the balance sheet is strengthening post-Evoqua. The ING Bank Term Loan Facility used for the Evoqua acquisition was repaid on April 19, 2024. Current maturities of $534M in FY2025 are manageable against $1.5B in cash.
Total backlog was "$4,615 million at December 31, 2025 and $5,070 million at December 31, 2024, a decrease of 9.0%." The filing anticipates "more than 60% of our total backlog at December 31, 2025 will be recognized as revenue during 2026." The backlog decline merits monitoring — it could signal normalizing demand or timing of large municipal contracts.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | ✅ | DSO 71 days, flat YoY |
| A2 | AR vs Revenue Growth | ✅ | AR +5.5% = revenue +5.5% |
| A3 | Revenue vs CFFO | ✅ | Revenue +5.5%, CFFO -1.7% |
All three revenue quality checks pass. AR growth exactly matches revenue growth — no quality concerns.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | Inventory -1.3% vs COGS +3.9% |
| B2 | CapEx vs Revenue | ✅ | CapEx +3.1% vs revenue +5.5% |
| B3 | SG&A Ratio | ✅ | SG&A/Gross Profit = 55.3% |
| B4 | Gross Margin | ✅ | 38.5%, +0.9pp improvement |
Inventory shrinking while COGS grows is a positive signal — Xylem is managing inventory more efficiently.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 1.30 |
| C2 | Free Cash Flow | ✅ | FCF $910M, FCF/NI = 0.95 |
| C3 | Accruals Ratio | ✅ | -1.6%, low |
| C4 | Cash vs Debt | ⚠️ | Cash $1.5B covers 72% of $2.1B debt |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ❌ | $10.6B = 92% of equity |
| D2 | Leverage | ✅ | Debt/EBITDA = 1.2x |
| D3 | Soft Asset Growth | ⚠️ | Other assets +39.1% vs revenue +5.5% |
| D4 | Asset Impairment | ✅ | Write-offs normal |
The D3 watch item (soft asset growth of 39.1%) warrants explanation. This likely reflects deferred tax assets and intangible amortization adjustments following the Evoqua integration — not a manipulation signal.
Acquisition Risk & Manipulation
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF after acquisitions positive |
| E2 | Goodwill Surge | ✅ | G&I change +2% YoY (stable) |
| F1 | Beneish M-Score | ✅ | -2.49 (clean) |
Key Risks from the 10-K
Backlog normalization. Total backlog declined 9% to $4,615M. While 60%+ should convert in 2026, the trend is worth watching — municipal water infrastructure spending is sensitive to federal funding cycles and interest rates.
Trade policy. The filing cites "tariffs, and other trade protection measures" and "manufacturing and operating cost increases due to macroeconomic conditions" as risk factors. Xylem has global manufacturing footprint exposure.
Swedish tax dispute. The 2019 tax assessment from the Swedish tax authority related to the 2013 European reorganization remains unresolved and could "result in increased tax assessments."
Evoqua integration. The $10.6B goodwill load depends on Evoqua's water treatment business delivering on synergy expectations. The filing cautions that integrations can be "adversely impacted by failure to efficiently, effectively and timely integrate acquired businesses."
Summary
Grade: C. Xylem should not be flagged for elimination.
The earnings quality is strong across all operating dimensions: CFFO/NI 1.30, FCF of $910M, declining inventory, expanding margins, and an M-Score of -2.49. The Z-Score of 3.86 places Xylem firmly in the safe zone. The sole red flag — goodwill at 92% of equity — is the structural residue of the Evoqua acquisition, and with Debt/EBITDA at only 1.2x, the balance sheet can absorb it. Watch the backlog trajectory and the Swedish tax dispute.
**Disclaimer**: This report is based on Xylem's FY2025 10-K filed with SEC EDGAR on February 25, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Deloitte & Touche LLP (Unqualified opinion, serving since 2010)
Fiscal year ended: December 31, 2025