Zurn Elkay Water Solutions Corporation (NYSE:ZWS) is a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets what the company believes to be the broadest sustainable product portfolio of specification-driven water management solutions. The company's product offerings span professional grade water safety and control products, flow systems products, hygienic and environmental products, and filtered drinking water products for public and private spaces.

Business Overview

Zurn Elkay's heritage of innovation and specification has allowed it to provide highly-engineered, mission-critical solutions to customers for decades, affording it the privilege of having long-term, valued relationships with market leaders. The company operates in a disciplined way, with the Zurn Elkay Business System ("ZEBS") serving as its operating philosophy. Grounded in the spirit of continuous improvement, ZEBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of the business.

In July 2022, Zurn completed its combination with Elkay Manufacturing Company, a market leader of drinking water solutions and commercial sinks, through a merger transaction. The acquired Elkay operations have been integrated seamlessly, with the combined entity now operating as Zurn Elkay Water Solutions Corporation. The company's results of operations include the acquired Elkay business subsequent to the July 1, 2022 merger date.

Financials

For the full year 2023, Zurn Elkay reported annual net income of $61.7 million, annual revenue of $1,281.8 million, annual operating cash flow of $97.0 million, and annual free cash flow of $89.4 million. In the first quarter of 2024, the company generated net sales of $373.8 million and net income of $34.3 million, representing a year-over-year increase of 0.5% and 50.4%, respectively.

Geographically, the majority of Zurn Elkay's sales are derived from the United States, which accounted for $341.2 million, or 91.3%, of total net sales in the first quarter of 2024. Canada contributed $21.1 million, or 5.6%, while the rest of the world made up the remaining $11.5 million, or 3.1%, of net sales.

From a product perspective, Zurn Elkay's net sales are diversified across three main customer types: Institutional ($178.3 million or 47.7% of Q1 2024 net sales), Commercial ($106.8 million or 28.6%), and all other customers ($88.7 million or 23.7%). The company has seen core sales growth across nearly all product categories, partially offset by the planned exit of certain residential sink products.

Key Growth Areas

A key area of focus and growth for Zurn Elkay has been its drinking water solutions business. The company continues to see double-digit growth in this category, driven by both the expansion of its filtered water units installed base, which is growing at a high single-digit to low double-digit rate annually, as well as strong demand for its filtration replacement cartridges, which are growing at a rate well above 10% per year.

Zurn Elkay has also recently launched its Hydro X sensor flush valve, a $450 million market opportunity where the company holds a strong #2 market share position. The Hydro X offers several innovative features, including being hydro-powered with no solenoid, eliminating the need for constant battery changes and solenoid failures - two of the biggest pain points in the field. This product has been well-received by customers, particularly large national accounts, where reliability and sustainability are critical.

The company's focus on sustainability is a key differentiator, with the vast majority of its sales in the first quarter of 2024 coming from products that deliver sustainable attributes to customers, such as reduced water consumption, protection of the potable water supply, reduced energy or greenhouse gas consumption, or high levels of recycled content.

Recent Developments

Zurn Elkay's financial performance has been strong, with the company reporting significant margin expansion in recent periods. In the first quarter of 2024, the company's adjusted EBITDA margin expanded 460 basis points year-over-year to 24.1%, driven by the benefits of its productivity initiatives, including cost synergies from the Elkay merger, as well as lower material and transportation costs.

Outlook

Looking ahead, Zurn Elkay has provided guidance for the second quarter of 2024, projecting year-over-year pro forma core sales growth in the low single digits and an adjusted EBITDA margin in the range of 24.5% to 25%. For the full year 2024, the company now expects to expand its adjusted EBITDA margin between 150 and 200 basis points, an improvement from its previous guidance of 150 basis points of expansion.

Liquidity

The company's strong financial performance has enabled it to maintain a healthy balance sheet and liquidity position. As of March 31, 2024, Zurn Elkay had $157.1 million in cash and cash equivalents and $188.8 million of additional borrowing capacity under its revolving credit facility, providing ample flexibility for strategic investments and capital allocation initiatives.

One such initiative has been the company's share repurchase program, under which it deployed $19 million to repurchase approximately 620,000 shares in the first quarter of 2024. Zurn Elkay remains committed to a balanced capital allocation strategy, evaluating opportunities to invest in organic growth, pursue strategic acquisitions, and return capital to shareholders through share repurchases and dividends.

Conclusion

Overall, Zurn Elkay's position as a leading provider of water management solutions, its focus on sustainability and innovation, and its strong financial performance and liquidity make it an intriguing investment opportunity in the industrial and water technology sectors. The company's disciplined execution of its strategic priorities and the successful integration of the Elkay business have positioned it well for continued growth and value creation.