Zurn Elkay (ZWS) Q2 2025: Margin Peaks at 26.5% as Supply Chain Shifts Drive Resilience
Margin expansion to a post-merger high underscores Zurn Elkay’s operational discipline and supply chain agility, even as end-market softness and tariff volatility persist. Management’s confidence is visible in raised full-year guidance, but the quarter’s results also highlight how proactive pricing and continuous improvement culture are offsetting macro and policy headwinds. Investors should watch for sustainability tailwinds and further M&A deployment as the company enters a pivotal product refresh cycle.
Summary
- Supply Chain Localization Accelerates: Progress on reducing China exposure is ahead of schedule, lowering tariff risk.
- Filtration Product Refresh Gains Traction: New LK-PRO launch and higher ASPs drive double-digit growth in filtration.
- Guidance Lift Signals Confidence: Raised full-year outlook reflects robust margin management and end-market stability.
Performance Analysis
Zurn Elkay delivered strong Q2 results driven by 8% organic growth and significant margin expansion, with adjusted EBITDA margins reaching 26.5%—the highest since the merger. This margin improvement was underpinned by volume leverage, productivity initiatives, and the company’s Zurn-LK business system, a continuous improvement framework embedded across operations.
End-market performance was mixed: non-residential demand remained healthy, while residential markets softened, but all product categories posted growth. Pull-forward demand from price increases contributed $8–10 million to Q2 sales, with these orders expected to ship in Q3, smoothing revenue recognition. Free cash flow exceeded $100 million for the first time, and leverage dropped to a historic low of 0.7x, despite $33 million in share buybacks. These results position the company for continued M&A activity and organic investment.
- Tariff Impact Moderates: Net tariff exposure for 2025 was revised down by $10 million due to China’s rollback, partially offset by new steel and copper tariffs.
- Productivity Culture Scales: Continuous improvement initiatives increased by 210% YoY, materially supporting margin gains.
- Channel Inventory Stable: Management reports no material inventory build, with pre-buying effects transitory and well managed.
Overall, Zurn Elkay’s financial discipline and operational agility are offsetting external headwinds, while product innovation and sustainability initiatives are creating new growth vectors.
Executive Commentary
"The underlying momentum in our business continued in the second quarter as we posted 8% organic growth, EBITDA grew 13% year-over-year, and margins expanded 120 basis points. As things have evolved and changed over the last 90 days, that framework has only improved despite the inclusion of some new items like the 232 copper tariff, as well as various trade deals that have been announced as finalized. As a result of our core business trajectory and inclusion of the now more known tariff situation, we're raising our outlook for the year as it relates to top line growth, EBITDA, and free cash flow."
Todd Adams, Chairman and CEO
"Our second quarter sales totaled $445 million as we continue to have solid execution on our growth initiatives. The $445 million of sales represents 8% core growth year over year. At 26.5%, our margins are the highest we've delivered in a quarter since the Zern-LK merger occurred a little more than three years ago. Our .7 times leverage is inclusive of the $33 million we deployed to repurchase shares in the quarter. Free cash flow exceeded $100 million in the quarter for the first time and ended at $102 million."
David Pauley, Chief Financial Officer
Strategic Positioning
1. Supply Chain Localization and Tariff Insulation
Zurn Elkay’s accelerated shift away from China for direct material sourcing is central to its risk mitigation strategy. The company is on track to reduce China exposure to less than 2–3% of cost of goods sold by end of 2026, ahead of prior timelines. This move is already yielding benefits: tariff cost estimates for 2025 were reduced by $10 million versus last quarter, reflecting both external trade shifts and internal execution.
2. Filtration and Drinking Water Product Innovation
The launch of LK-PRO filtration marks a major refresh for the bottle filler category, incorporating customer-driven features such as faster filter changes, longer filter life, and improved aesthetics. Filters now support up to 20,000 gallons per change and include proprietary heads, which should drive higher attachment rates and recurring revenue. The filtration line is experiencing double-digit growth, with a 10% increase in average selling price (ASP) for new units, and management expects the $100 million sales target to be surpassed in coming years.
3. Continuous Improvement as a Margin Lever
The Zurn-LK business system is delivering tangible results, with 2,575 continuous improvement projects executed in Q2, up 210% YoY. This relentless focus on operational excellence is a key driver of margin expansion and creates a durable cost advantage that offsets input volatility and pricing pressure.
4. End-Market Diversification and Legislative Tailwinds
Institutional and commercial markets remain resilient, with education and healthcare—Zurn Elkay’s largest verticals—unaffected by recent budgetary pressures seen elsewhere in industrials. State-level “filter first” legislation is expanding, driving upgrades in K–12 schools and supporting long-term demand for water safety and filtration solutions.
5. Capital Allocation and M&A Readiness
With leverage at a record low and free cash flow at new highs, Zurn Elkay is positioned to pursue strategic acquisitions. The M&A pipeline is active, though management remains disciplined, emphasizing relationship building and patience for the right opportunities to deploy capital and integrate targets using its business system playbook.
Key Considerations
Q2 results highlight Zurn Elkay’s ability to navigate external turbulence through operational rigor and portfolio innovation. The company’s proactive approach to tariffs, pricing, and channel management is supporting both growth and profitability, while sustainability and legislative drivers are expanding the addressable market.
Key Considerations:
- Tariff Volatility Mitigation: Rapid supply chain localization is reducing future tariff risk and improving cost visibility.
- Recurring Revenue Growth: Enhanced filtration attachment rates and proprietary filter systems support higher-margin, recurring sales.
- End-Market Exposure: Institutional and commercial strength offset residential softness, with legislative mandates providing incremental demand.
- Balance Sheet Firepower: Low leverage and robust free cash flow enable both organic investment and opportunistic M&A.
- Pricing Power: Pricing actions are sticking, with only modest channel pre-buys, and management remains price-cost positive despite policy shifts.
Risks
Tariff and trade policy remain fluid, with potential for further disruption or cost escalation despite current mitigation efforts. Residential market softness could deepen, pressuring top-line growth if not offset by other segments. Execution risk around M&A and integration exists, especially if the pace of acquisitions accelerates. Finally, input cost volatility in steel and copper, absent hedging, could pressure margins if not matched by further pricing or productivity gains.
Forward Outlook
For Q3 2025, Zurn Elkay guided to:
- Core sales growth and adjusted EBITDA margin similar to Q2 levels
For full-year 2025, management raised guidance:
- Core sales growth of at least 5% YoY
- Adjusted EBITDA of $420–430 million
- Free cash flow of approximately $300 million
Management emphasized a quarter-by-quarter approach to guidance, citing ongoing external uncertainties but reaffirmed confidence in margin sustainability and continued supply chain progress.
- Q4 margin guidance remains conservative, with no event-driven risks signaled
- Further legislative wins and product attach rates could provide upside to outlook
Takeaways
Zurn Elkay’s Q2 performance demonstrates how a disciplined operating system and proactive supply chain management can create resilience amid volatility. The company is executing on pricing, productivity, and innovation levers while positioning for further growth through legislative tailwinds and M&A.
- Margin Expansion Is Structural: Continuous improvement and supply chain shifts are embedding higher profitability, not just temporary gains.
- Filtration and Sustainability Are Growth Engines: Product innovation and regulatory mandates are expanding the company’s addressable market and recurring revenue base.
- Watch for M&A and Legislative Developments: Capital deployment and further state-level water quality laws could accelerate growth and diversify revenue streams.
Conclusion
Zurn Elkay’s Q2 results showcase a company executing with discipline and agility, converting external challenges into opportunities for market share and margin expansion. With a robust balance sheet and a clear innovation roadmap, ZWS is positioned for continued outperformance as it navigates a dynamic policy and demand landscape.
Industry Read-Through
Zurn Elkay’s results highlight the growing importance of supply chain localization and continuous improvement cultures for industrials facing tariff and input cost volatility. The company’s success in capturing value from sustainability and regulatory trends signals opportunity for peers in water infrastructure, filtration, and building products—particularly those able to align with state-level mandates and recurring revenue models. Margin resilience driven by operational rigor and pricing power is a key differentiator as macro and policy headwinds persist across the sector.