Zurn-LK Water Solutions (ZWS) Q3 2025: EBITDA Margin Hits 26.8% as Supply Chain Shift Shields Against Tariffs
Zurn-LK delivered another quarter of margin expansion, leveraging internal initiatives and a proactive supply chain overhaul to offset tariff headwinds and maintain growth. Management’s disciplined capital allocation, including a refreshed $500 million buyback and a 22% dividend hike, underscores confidence in business durability. With end markets stable and incremental growth from specification-driven products, ZWS is positioned for continued outperformance even as macro tailwinds moderate into 2026.
Summary
- Margin Resilience Through Tariff Volatility: Proactive supply chain shifts and pricing actions preserved profitability despite rising tariff costs.
- Capital Deployment Emphasizes Flexibility: Expanded buyback authorization and dividend increase reflect robust cash generation and conservative leverage.
- Growth Levers Extend Beyond Market Cycles: Outperformance in core segments and new product lines position ZWS for above-market growth in a low-growth environment.
Performance Analysis
Zurn-LK’s third quarter highlighted organic sales growth of 11% and a step-up in adjusted EBITDA margin to 26.8%, the highest since the LK merger. This margin expansion was driven by volume leverage, disciplined pricing, and productivity gains via the Zurn LK business system, a continuous improvement operating model. The company’s free cash flow reached $94 million for the quarter, supporting aggressive capital returns and further deleveraging, with net leverage at a record low of 0.6 times.
While the non-residential market remained constructive, residential softness persisted, and the company benefited from an $8 million pull-forward of orders ahead of a September price increase. Importantly, ZWS managed incremental tariff costs—now expected to reach $50 million for the year—by passing through price increases and accelerating its shift away from China-based sourcing. Year-to-date, the company achieved a 42% EBITDA drop-through on incremental sales, with core sales up 8% and margins expanding 120 basis points.
- Pricing Power Maintained: Five points of price realization in Q3 offset higher tariffs and input costs.
- Segment Breadth Drives Consistency: Core categories, including flow systems and water safety, sustained unit growth across the cycle.
- Capital Returns Accelerate: $135 million in year-to-date buybacks and a 22% dividend increase signal confidence and discipline.
Operational strength and a balanced end-market mix underpin ZWS’s ability to deliver consistent growth, even as macro conditions flatten. The company’s outperformance in specification-driven and drinking water products continues to be a differentiator.
Executive Commentary
"We've been very intentional, and I'll say picky, about getting this piece right, because it's easy to drift and convince yourself that it's close enough to make sense, but having this filter, if you will, provides perfect clarity and avoids distractions or any strategic drift. It guides how we drive our strategy, beginning with our end markets, what we look for in terms of what geographies, competitive dynamics, and characteristics approach around our portfolio, and most importantly, our relentless focus on bringing a premier pure play water business in North America."
Todd Adams, Chairman and Chief Executive Officer
"26.8% consolidated EBITDA margins are the highest quarterly margins we've had since the LK merger. Year-to-date, our sales in EBITDA have increased 93 million and 39 million, respectively, which represents a 42% drop-through on the year-over-year volume increase."
David Pauley, Chief Financial Officer
Strategic Positioning
1. Supply Chain Localization as a Defensive Moat
ZWS’s multi-year effort to relocate manufacturing and sourcing out of China—now with only 2% to 3% of cost of goods sold expected from China by end of next year—has proven prescient. This forward planning enabled the company to absorb tariff shocks better than peers, with over half of COGS now U.S.-based. The result is superior margin stability and service reliability in a volatile trade environment.
2. Product Portfolio Anchored in Specification and Compliance
The company’s focus on specification-driven products—solutions that are required by building codes or regulations—has ensured a steady flow of demand, particularly in institutional markets like education and healthcare. The Filter First initiative in Michigan and similar legislative tailwinds in New Jersey exemplify how ZWS leverages regulatory momentum to drive bottle filler adoption and share gains.
3. Balanced Capital Allocation and M&A Discipline
ZWS continues to deploy free cash flow across dividends, buybacks, and targeted M&A. The refreshed $500 million buyback program and 22% dividend hike reflect management’s confidence and flexibility. While the M&A funnel has broadened, the company remains selective, focusing on deals that deliver strong returns on invested capital and fit within its core water solutions strategy.
4. Innovation and Adjacency Expansion
New products such as LK Live EZ residential filtered bottle fillers extend ZWS’s technology into adjacent markets, while maintaining a disciplined approach to avoid strategic drift. Early uptake of these offerings has been positive, but management does not expect residential to become a major growth pillar—rather, it serves as an innovation test bed and incremental growth lever.
5. End Market Overweight to Stable Verticals
Sixty percent of ZWS’s institutional exposure is in education and healthcare, which are projected to remain resilient even as commercial construction slows. This overweight to stable segments, combined with a portfolio that covers the entire construction cycle, gives ZWS durable visibility and reduces cyclicality.
Key Considerations
ZWS’s Q3 performance underscores the value of operational discipline, end-market mix, and proactive risk management in a period of modest market growth and policy uncertainty.
Key Considerations:
- Tariff Mitigation Strategy: Early supply chain relocation insulated margins and reduced exposure to future trade policy shifts.
- Shareholder Returns: Buyback and dividend increases highlight management’s confidence in cash generation and business durability.
- Product Innovation as Growth Driver: Specification-driven launches and compliance-focused products continue to outgrow underlying markets.
- Institutional Market Overweight: Heavy exposure to education and healthcare mitigates risk from commercial construction volatility.
- M&A Optionality: A broad and growing deal funnel provides levers for inorganic expansion without sacrificing capital discipline.
Risks
Tariff exposure remains a moving target despite recent mitigation, with 2025 costs now expected at $50 million—higher than prior estimates. Macro uncertainty, especially around interest rates and non-residential construction demand, could dampen future growth. Residential market softness and potential delays in regulatory-driven demand (e.g., school bottle fillers) also present headwinds. Any misstep in pricing or supply chain execution could pressure margins in a low-growth environment.
Forward Outlook
For Q4 2025, ZWS guided to:
- High single-digit year-over-year core sales growth
- Adjusted EBITDA between $99 million and $102 million
For full-year 2025, management raised guidance:
- Core sales growth of approximately 8%
- Adjusted EBITDA in the $437 million to $440 million range
- Free cash flow greater than $300 million
Management cited continued price-cost discipline, robust order rates, and incremental growth from new product launches as key drivers. Tariff costs are now expected to be $50 million for the year, with further price actions possible if needed in 2026.
- Stable end market demand expected to persist into 2026
- Incremental upside from specification-driven products and legislative mandates
Takeaways
ZWS’s ability to expand margins and maintain growth in a low-growth market reflects the strength of its operating system, product mix, and capital discipline.
- Margin Expansion Is Structural: Supply chain moves and pricing discipline have established a new baseline for profitability, with 26.8% EBITDA margin likely sustainable barring major market disruptions.
- Capital Returns Are a Core Theme: Expanded buyback and dividend increases are likely to continue as long as cash generation remains robust and leverage stays low.
- Watch for Adjacency Growth: Ongoing innovation in specification-driven and adjacent product lines could provide incremental upside even if macro growth remains muted.
Conclusion
Zurn-LK Water Solutions delivered a quarter that validates its strategic focus on operational excellence, risk mitigation, and disciplined capital deployment. The company’s proactive approach to tariffs, end-market selection, and product innovation positions it for continued resilience and incremental growth, even as market momentum moderates into 2026.
Industry Read-Through
ZWS’s results highlight the importance of supply chain localization and specification-driven product portfolios in managing through tariff and macro uncertainty. Competitors in the building products and industrial supply sectors face similar tariff headwinds, but those lacking ZWS’s early supply chain moves may see greater margin pressure. The company’s success in leveraging legislative tailwinds for drinking water infrastructure points to broader opportunities for firms that can align product development with regulatory trends. As non-residential construction growth slows, the ability to overweight stable end markets and deliver consistent cash flow will be a defining advantage across the sector.