Executive Summary / Key Takeaways

• Zurn Elkay Water Solutions (ZWS) demonstrated solid operational execution in Q1 2025, achieving 5% core sales growth and expanding adjusted EBITDA margin by 110 basis points year-over-year, driven by productivity initiatives and continuous improvement.
• The company benefits from a strategic focus on resilient institutional end markets (education, healthcare) and a significant retrofit/replacement business, which provide stability amidst softer commercial and residential construction trends.
• Differentiated growth drivers, particularly the secular trend in filtered drinking water solutions and supportive legislation like Michigan's "Filter First," offer meaningful future growth potential independent of traditional construction cycles.
• ZWS is proactively managing the evolving tariff environment through a multi-year supply chain repositioning strategy aimed at significantly reducing China exposure and maintaining a competitive cost structure, with confidence in remaining price-cost positive.
• A strong balance sheet with low leverage and robust free cash flow generation provides significant capital allocation flexibility, enabling increased shareholder returns through dividends and share repurchases while pursuing strategic M&A.

A Foundation Built on Water Management Excellence

Zurn Elkay Water Solutions Corporation stands as a focused pure-play in the critical realm of water management. With a history stretching back to 1891, the company has evolved into a leading provider of specification-driven solutions designed to enhance health, hydration, safety, and environmental sustainability in public and private spaces. Its comprehensive portfolio spans professional-grade water safety and control products, flow systems, hygienic and environmental solutions, and filtered drinking water products. This targeted approach allows ZWS to serve stable and growing end markets, particularly institutional settings like education and healthcare, which form the bedrock of its demand profile.

The company's strategic execution is deeply embedded in the Zurn Elkay Business System (ZEBS), an operating philosophy centered on continuous improvement across people, plan, process, performance, and purpose. This system is not merely theoretical; it drives tangible results, evidenced by significant gross margin improvement and consistent operational performance. ZWS's market positioning is further strengthened by its extensive distribution network and long-standing relationships with market leaders, built on decades of innovation and specification expertise.

Within the broader water technology and plumbing industry, ZWS competes with a range of players, from large diversified companies like Xylem Inc. (XYL) and Pentair plc (PNR) to more focused peers such as Watts Water Technologies, Inc. (WTS) and utility-centric American Water Works Company, Inc. (AWK). While larger competitors like XYL and PNR may offer broader global reach or deeper technological investment in areas like smart water infrastructure, ZWS carves out its niche through a concentrated focus on building-specific water management solutions in North America. Its competitive strategy emphasizes operational efficiency, product performance, and strong channel relationships, rather than competing solely on scale or broad technological fronts.

Technological Differentiation and Operational Strength

ZWS's product portfolio incorporates several technological differentiators that provide tangible benefits to customers and contribute to the company's competitive moat. In water conservation, products like the EcoVantage series fixtures are designed to offer significant water efficiency, reducing water usage by up to 30% per unit compared to standard models. The company's sensor-operated flush valves and faucets, under brands like AquaSense and AquaSpec, provide hygienic, touchless operation, with some systems offering faster response times. In flow systems, ZWS products are engineered for efficiency, contributing to lower energy consumption per unit. Furthermore, advancements in PEX piping systems enable faster installation times, estimated to be around 20% quicker than traditional methods. The filtered drinking water solutions, particularly filtered bottle fillers under the Elkay and Halsey Taylor brands, incorporate filtration technology designed for high efficiency, offering up to 30% more effective filtration in removing contaminants.

While ZWS's R&D investment (estimated at 2-3% of revenue) trails that of larger, more diversified competitors like XYL (4-5%) or PNR (4%), its innovation efforts are strategically focused on enhancing its core product lines and capitalizing on secular trends. A key area of current R&D focus is on new product development within the drinking water category, with new offerings expected later in 2025 and early 2026. These initiatives aim to further improve filtration technology and product features, directly supporting the company's growth strategy in this high-potential market. The "so what" for investors is that these technological advantages, while perhaps not as headline-grabbing as large-scale digital infrastructure, translate into practical benefits for building owners—reduced operating costs, improved hygiene, faster installation, and enhanced sustainability—which support ZWS's premium positioning and contribute to its gross and operating margins.

Operational excellence, powered by the Zurn Elkay Business System, is a critical driver of profitability. The company's commitment to continuous improvement is quantified through initiatives like the #CI program, which documented 3,749 unique submissions in 2024, a 33% increase year-over-year, estimated to yield approximately $5.9 million in savings. This culture of incremental improvement, combined with the successful realization of over $50 million in synergies from the Elkay merger, has significantly enhanced ZWS's cost structure. This is reflected in the company's recent financial performance.

Performance and Outlook

ZWS delivered a solid start to 2025, building on the momentum from the prior year. For the three months ended March 31, 2025, the company reported net sales of $388.8 million, a 4.0% increase from $373.8 million in the prior-year period. Core sales growth stood at 5%, driven by volume increases across all product categories, despite a 1% headwind from foreign currency. This top-line growth translated into strong profitability expansion. Income from operations surged by 19.2% to $63.4 million, up from $53.2 million, expanding the operating margin by 210 basis points to 16.3%. Net income from continuing operations increased to $41.0 million from $34.0 million, and total net income reached $43.6 million, a 27.1% increase year-over-year. Adjusted EBITDA margin reached 25.2% in Q1 2025, a 110 basis point improvement from the prior year, benefiting from productivity gains, lower restructuring charges ($1.7 million in Q1 2025 vs. $6.3 million in Q1 2024), and synergy realization.

Looking back at 2024, ZWS achieved 4% organic growth in a largely flattish market, leveraging $36 million of sales growth into $50 million of EBITDA growth. Full-year 2024 adjusted EBITDA reached $390 million, up 15%, with margins expanding by 270 basis points to 24.9%. The company's ability to consistently generate strong incremental margins, expected to be in the 30-35% range going forward, underscores the effectiveness of its operational model and cost structure improvements.

The company's balance sheet remains robust, providing significant financial flexibility. As of March 31, 2025, ZWS held $144.7 million in cash and cash equivalents and had $188.9 million available under its revolving credit facility. Net debt leverage stood at a low 0.9 times, well below the covenant maximum, inclusive of $77.4 million deployed for share repurchases in Q1 2025 (2.27 million shares at an average price of $34.07). This follows $150 million in buybacks during 2024. The company also continues to return capital through dividends, raising the quarterly payout by 12.5% in 2024 to $0.09 per share, with expectations for continued double-digit growth.

For the second quarter of 2025, ZWS projects core sales growth in the low to mid-single digits and adjusted EBITDA margin in the range of 25.5% to 26%, representing 20 to 70 basis points of expansion. The company affirmed its full-year 2025 guidance, expecting core sales growth similar to 2024 (low single digits), adjusted EBITDA between $405 million and $420 million, and approximately $290 million in free cash flow. This outlook assumes end markets will perform similarly to 2024, with low single-digit declines in commercial partially offset by low single-digit growth in institutional and waterworks, and flattish residential conditions. The guidance also incorporates approximately one point of price realization.

Market Dynamics and Strategic Responses

ZWS's performance is significantly influenced by the dynamics of the non-residential construction market, particularly the institutional segment. While broader indices like the Dodge Momentum Index and ABI provide general sentiment, ZWS's specific exposure within institutional (80% in education and healthcare) and commercial (75% in office, retail, hospitality, with low exposure to warehouses) positions it favorably compared to the overall market. The lag effect in new construction means that current sales are primarily driven by starts from prior periods; in Q1 2025, virtually all new construction sales stemmed from 2024 and earlier starts, with current year starts expected to contribute about 40% by Q4 2025. Projections for starts in ZWS's key verticals in 2025 are seen as better than in recent years, potentially providing a tailwind, particularly into 2026. Complementing new construction, the company's substantial retrofit/replace/break fix business (45% of revenue) provides a stable base growing in the low single digits.

A key secular growth driver is the increasing demand for filtered drinking water solutions. This is fueled by a growing installed base of filtered bottle fillers (an incremental 200,000-300,000 units added since July 2022) and rising filter attachment rates. Legislation, such as Michigan's "Filter First" law requiring filtered water in K-12 schools and daycare facilities (impacting ~1.5 million occupants and requiring significant unit installations over 2025-2026), represents a concrete opportunity for accelerated growth in this category, with other states pursuing similar mandates.

A notable challenge is the evolving tariff environment. ZWS anticipates a tariff cost impact of $45 million to $55 million in 2025 before price increases, stemming from tariffs on China-sourced products (up to 145% with exceptions) and reciprocal tariffs on goods from other countries (generally 10% with exceptions). However, ZWS has been proactively repositioning its supply chain for approximately eight years, aiming to reduce China exposure to less than 10% by the end of 2026 (from 25% in 2024) and targeting 2-3% of COGS from China by that time. This multi-year effort, involving dual sourcing and regional flexibility, is expected to yield $5 million to $10 million in run-rate benefits starting in 2025. Management expresses high confidence in its ability to manage these costs through supply chain actions and selective price increases, aiming to remain price-cost positive.

Conclusion

Zurn Elkay Water Solutions has demonstrated a consistent track record of operational excellence and profitable growth, underpinned by its strategic focus on resilient end markets, a robust business system, and differentiated product offerings. The company's ability to expand margins and generate strong free cash flow, even amidst mixed macroeconomic signals, highlights the effectiveness of its strategy and execution.

The investment thesis for ZWS centers on its continued operational discipline, the compounding benefits of its continuous improvement culture, and the long-term growth potential driven by secular trends like filtered drinking water and supportive legislation. While the evolving tariff landscape presents a notable risk, ZWS's proactive supply chain strategy and pricing power position it to manage these headwinds. The company's strong balance sheet and capital allocation flexibility further enhance its appeal, allowing for consistent shareholder returns and strategic growth investments. Investors should monitor the pace of recovery in commercial construction, the successful implementation of the supply chain repositioning, and the traction gained from drinking water initiatives and related legislation as key indicators for future performance.