Zurn Elkay (ZWS) Q4 2025: Organic Sales Up 10% as Margin Expansion Drives $317M Free Cash Flow
Zurn Elkay capped 2025 with double-digit organic sales growth and robust margin expansion, underpinned by disciplined execution and supply chain optimization. The company’s strategic planning cycle is unlocking new adjacent market opportunities, while a resilient balance sheet and cash flow profile provide ample capital allocation flexibility. Management’s 2026 outlook signals steady execution, prudent margin guidance, and a focus on organic and inorganic growth levers.
Summary
- Margin Expansion Momentum: Continuous improvement and supply chain actions drove margin gains despite mixed end-market signals.
- Adjacency Growth Pathways: Strategic planning identified new verticals and product adjacencies for organic and M&A-driven growth.
- 2026 Execution Focus: Guidance reflects confidence in incremental margin baseline, careful price management, and ongoing investment in innovation.
Business Overview
Zurn Elkay Water Solutions (ZWS) is a leading provider of water management and plumbing solutions, serving non-residential, commercial, institutional, and residential end markets. The company generates revenue primarily through the sale of professional-grade plumbing products, water filtration systems, bottle filling stations, and hand dryers. Its business segments are anchored in North America, with a focus on institutional and waterworks markets, and a growing presence in adjacent verticals such as fire protection and data centers.
Performance Analysis
Zurn Elkay delivered a fourth quarter marked by 10% organic sales growth and 100 basis points of EBITDA margin expansion, reflecting the effectiveness of its supply chain optimization and pricing strategies. Non-residential end markets outpaced residential and certain commercial pockets, with tariff-related pricing actions contributing roughly five points to quarterly price realization. The company’s productivity initiatives, rooted in its Zurn LK business system, enabled a strong 14% EBITDA increase to $104 million, while free cash flow reached $83 million for the quarter and $317 million for the year, up 17% year over year.
Shareholder returns remained a priority, with 3% of shares repurchased ($160 million) and $64 million in dividends paid, all while leverage dropped to a record low of 0.4 times. The company’s 40% drop-through on volume and 120 basis points of annual margin improvement underscore the operating leverage embedded in its model. Management highlighted solid execution on growth initiatives, with sales exceeding prior outlooks and strong cash conversion supporting future capital allocation flexibility.
- Supply Chain Optimization: Margin gains were driven by supply chain improvements, cost controls, and continuous productivity initiatives.
- Tariff Pricing Actions: Tariff-related pricing contributed to positive price-cost dynamics, especially in the first half of the year.
- Cash Flow Strength: Free cash flow growth and low leverage position Zurn Elkay for both organic investment and opportunistic M&A.
The company’s ability to offset end-market softness with pricing and productivity initiatives, coupled with a disciplined capital allocation approach, positions it well for continued profitable growth.
Executive Commentary
"We see more new organic growth opportunities largely in adjacencies and underserved verticals than I can remember. We have a plan to attack these opportunities, and assuming we execute, which we have a reasonable track record of doing, I'm confident this only enhances our organic growth trajectory over the coming two to three years."
Todd Adams, Chairman and Chief Executive Officer
"Our combination of management team capability, low leverage, and cash flow generation all support our ability to execute on the right M&A opportunity. At the same time, we're actively working on entering organic adjacencies through investment and internal development."
David Pauley, Chief Financial Officer
Strategic Positioning
1. Adjacency and Vertical Expansion
Management’s annual strategic planning cycle has identified actionable opportunities in adjacent markets and underserved verticals, mirroring past success in fire protection. The approach leverages existing expertise, supply chain, and go-to-market capabilities to build out new product bundles, both organically and through targeted M&A.
2. Resilient Operating Model
The Zurn LK business system, a continuous improvement culture and operating framework, is central to driving productivity, quality, and engagement. This system underpins margin expansion, customer satisfaction, and operational agility, with 49% more continuous improvement submissions logged by associates year over year.
3. Capital Allocation Flexibility
Record-low leverage and robust free cash flow generation provide ample flexibility for capital deployment, including share repurchases, dividends, and strategic M&A. The company remains disciplined, cultivating a refreshed M&A funnel while balancing organic investments in new product development and commercialization.
4. Sustainability and Innovation
Sustainability remains a differentiator, with advancements in drinking water filtration, bottle filling stations, and hand dryers. New products like profiltration and the Sanitize and Dry hand dryer address regulatory and customer demands for water quality, hygiene, and environmental impact, supporting both revenue growth and brand equity.
5. End-Market Diversification
Growth in institutional and waterworks end markets continues to offset softness in residential and certain commercial segments. The company is also seeing traction in emerging verticals like data centers, leveraging its water management expertise to participate in high-growth infrastructure categories.
Key Considerations
This quarter’s results underscore Zurn Elkay’s ability to drive profitable growth and margin expansion even in a mixed demand environment. The company’s strategic priorities are increasingly focused on leveraging core strengths to access new markets and unlock incremental growth avenues.
Key Considerations:
- Organic and Inorganic Growth Levers: Strategic planning has surfaced adjacencies that can be attacked via both internal development and M&A, expanding the company’s served market opportunity.
- Supply Chain and Tariff Navigation: Ongoing efforts to exit China sourcing and optimize the supply chain are reducing cost risk and supporting price-cost management.
- Product Innovation as a Growth Driver: New launches like profiltration are increasing filter attachment rates and recurring revenue potential, while sustainability credentials enhance market positioning.
- Capital Deployment Optionality: Strong cash flow and low leverage enable continued share repurchases, dividend increases, and selective M&A, supporting shareholder value creation.
Risks
Key risks include ongoing end-market volatility, particularly in residential and segments of commercial construction, as well as potential changes in the tariff environment or commodity inflation (notably metals). The company’s 2026 guidance assumes stable tariffs and a flat-to-slightly-positive market backdrop, but any deterioration could pressure margins or sales growth. Execution risk around new adjacency launches and M&A integration also remains, especially as the company scales innovation and enters new verticals.
Forward Outlook
For Q1 2026, Zurn Elkay guided to:
- Core sales growth of 7% to 8% year over year
- EBITDA margin of approximately 25.5% to 26%, with incremental margins of roughly 35%
For full-year 2026, management maintained guidance:
- Core sales up mid-single digits
- Incremental adjusted EBITDA margins of approximately 35% on increased sales
- Free cash flow of approximately $335 million
Management highlighted several factors that will shape 2026:
- End-market mix expected to mirror 2025, with institutional and waterworks growth offsetting residential softness
- Tariff and commodity cost monitoring, with price carryover and supply chain actions supporting margin stability
Takeaways
Zurn Elkay’s disciplined execution, margin expansion, and robust cash flow provide a solid foundation for continued organic and inorganic growth.
- Margin Expansion Embedded: Supply chain and continuous improvement initiatives are driving sustainable margin gains, supporting reinvestment and shareholder returns.
- Strategic Adjacency Pipeline: The company’s refreshed planning cycle is surfacing actionable opportunities in new verticals and product categories, providing a multi-year growth runway.
- Execution and Innovation Watch: Investors should monitor the pace of adjacency commercialization, filter attachment rate growth, and the company’s ability to deploy capital into high-return M&A or organic investments.
Conclusion
Zurn Elkay exits 2025 with strong momentum, anchored by margin expansion, cash flow strength, and a clear roadmap for adjacent market growth. Disciplined execution and a robust balance sheet position the company to capitalize on both organic and inorganic opportunities in 2026 and beyond.
Industry Read-Through
Zurn Elkay’s results and commentary signal ongoing divergence between institutional/waterworks strength and residential/commercial softness across building products and infrastructure supply chains. The company’s ability to offset macro headwinds through price, productivity, and innovation is a template for peers navigating supply chain and tariff volatility. Emerging verticals like data centers and water quality regulation (PFAS, lead, microplastics) are creating new growth vectors for water solutions and filtration providers, while sustainability and ESG performance are increasingly table stakes for competitive differentiation. Other industry players should closely watch Zurn Elkay’s adjacency expansion and supply chain localization strategies as indicators of evolving end-market demand and margin resilience.