Zurn Elkay Water Solutions (ZWS) delivered a strong finish to 2025, with Q4 sales growing 10% organically to $407 million and adjusted EBITDA increasing 14% to $104 million, driving a 100 basis point margin expansion to 25.6%. For the full year, the company generated $317 million in free cash flow, up 17% year-over-year, while significantly reducing leverage to 0.4x and returning $224 million to shareholders through buybacks and dividends. Performance was driven by solid execution in nonresidential markets, productivity initiatives via the Zurn Elkay Business System (ZEBS), and effective price/cost management amidst tariff headwinds. Looking ahead to 2026, management forecasts mid-single-digit core sales growth, incremental EBITDA margins of approximately 35%, and free cash flow of around $335 million, supported by new organic growth opportunities in adjacencies and continued supply chain optimization.
| Metric | Value | Change |
|---|---|---|
| Q4 Sales | $407 million | +10% |
| Q4 Adj. EBITDA | $104 million | +14% |
| Q4 Adj. EBITDA Margin | 25.6% | +100 bps |
| FY 2025 Free Cash Flow | $317 million | +17% |
| Net Leverage | 0.4x | Lowest as public company |
| FY 2025 Share Repurchases | $160 million | 3% of shares |
Management is aggressively pursuing growth in new verticals and adjacencies, leveraging their existing market position. They identified 'more new organic growth opportunities... than I can remember' and are utilizing a dual-path approach of internal development and M&A cultivation. This strategy aims to expand their total addressable market by $1-2 billion over time, utilizing their existing supply chain and go-to-market capabilities to enter these spaces as a 'formidable competitor' immediately.
ZWS is actively mitigating tariff risks by exiting direct material purchases from China, aiming for only a few points of COGS spend from China by the end of 2026. This strategic shift not only reduces geopolitical risk but also lowers costs 'month by month.' The company successfully navigated 2025 tariffs and remains confident in achieving positive dollar price/cost impacts in 2026, demonstrating operational resilience and supply chain optimization.
The launch of Pro Filtration and expanded PFAS filtration capabilities positions ZWS at the forefront of water quality and sustainability. The partnership with TerraCycle for filter recycling and the introduction of products that capture 'forever chemicals' enhance their brand value and competitive moat. These innovations drive higher attachment rates and recurring revenue through filter sales, supporting long-term growth and margin expansion.
With leverage at a historic low of 0.4x and robust free cash flow generation ($317 million in 2025), ZWS possesses significant financial flexibility. Management committed to continued share repurchases, dividend payments, and potential M&A. This strong balance sheet supports their strategic pivot toward adjacency expansion and provides a buffer against macroeconomic volatility, allowing them to invest 'millions of dollars' in new product development.
The residential end market remains a headwind, described as 'tougher' than initially expected in 2025 and expected to continue facing challenges in 2026. While nonresidential and institutional markets are growing, the persistent weakness in residential could limit overall growth potential if the commercial segment does not accelerate as anticipated or if economic conditions worsen.
Management highlighted the 'evolving tariff environment' as a key uncertainty for 2026. Their guidance assumes current tariff rates remain consistent, posing a risk if new tariffs are introduced or if metal prices (specifically copper) rise significantly. While they are confident in managing costs through supply chain shifts, unexpected inflationary pressure could compress margins if pricing actions are delayed or insufficient.
Despite expressing optimism about the M&A funnel and new adjacencies, the company has not executed a significant transaction recently. Management noted they are 'not going to predict or project' specific deals. There is a risk that the identified adjacencies may not yield the expected growth or that suitable acquisition targets fail to materialize, leaving the company reliant on slower organic growth in existing markets.
Overall: Management exhibited a high degree of confidence and operational discipline throughout the call. Todd Adams and David Pauli were composed and data-driven, emphasizing the strength of their internal business systems and strategic planning. Their tone was pragmatic yet optimistic, celebrating the successful execution of 2025 plans while expressing clear enthusiasm for the growth opportunities identified for the next three years.
Confidence: HIGH - Management provided specific guidance metrics, detailed their strategic planning process, and cited strong operational performance (margins, FCF, leverage) as evidence of their capability. They explicitly stated confidence in their ability to manage tariffs and execute on price/cost, noting they are 'off to a really good start' in January.
Plus mid-single digits
Approximately 35%
Approximately $335 million
+7% to 8%
Hedging & Uncertainty: Management employed moderate hedging, primarily regarding the duration of the fiscal year ('11 months to go') and external variables like tariffs and metal prices. They used phrases like 'assuming we execute' and 'range of outcomes are possible' to set prudent expectations. However, they reduced hedging significantly regarding internal operations, stating definitively that 'costs are coming down month by month' and 'we're off to a really good start.' This pattern suggests high confidence in their operational control and strategic planning, while maintaining appropriate caution regarding macroeconomic factors they cannot control.
We see more new organic growth opportunities, largely in adjacencies and underserved verticals than I can remember. - Todd Adams, Chairman and CEO
All things equal, we're off to a really good start in January. - Todd Adams, Chairman and CEO
We continue to have solid execution on our growth initiatives, and they helped to drive our sales performance above the outlook we provided 90 days ago. - David Pauli, CFO
We're not oblivious to it. But in the same breadth, I think when you look at what we're doing with our supply chain, our costs are coming down month by month. - Todd Adams, Chairman and CEO
I think when you look at that product, the features and benefits that Todd walked through were a direct ask of the consumer and the maintenance folks that interact with that product every day. - David Pauli, CFO
Analyst Sentiment: Analysts were generally positive and inquisitive, focusing heavily on the sustainability of growth margins, the specifics of the new adjacency strategy, and the M&A pipeline. Questions regarding data centers and the 'Lead and Copper Rule' indicated an interest in both cyclical and structural growth drivers.
Management Responses: Management was responsive and open, providing specific color on product features (Pro Filtration) and strategic processes (ZEBS). They deflected specific M&A targets but elaborated on the *process* of finding them. They maintained a consistent message of 'prudent' guidance while expressing personal optimism about the start of the year.
M&A pipeline and strategy for entering new adjacencies organically vs. inorganically.
Pricing actions and the impact of tariffs and metal inflation on 2026 margins.
Market segmentation, specifically the divergence between institutional strength and residential softness.
Product innovation, specifically Pro Filtration adoption rates and the impact of EPA regulations on drinking water.
Zurn Elkay Water Solutions is executing exceptionally well, balancing strong top-line growth (10% in Q4) with significant margin expansion (100 bps) and robust cash generation ($317M FCF). The company's strategic pivot toward new adjacencies, supported by a fortress balance sheet (0.4x leverage) and a proven continuous improvement culture (ZEBS), positions it for sustained outperformance. While residential headwinds and tariff uncertainty persist, management's proven ability to manage costs and price, combined with high-margin product innovation like Pro Filtration, provides multiple avenues for growth. The valuation is supported by aggressive capital returns ($160M buybacks) and a clear path to mid-single-digit growth in 2026.
Management observes a divergence in end markets, with institutional and waterworks growing at low single digits, commercial markets flattish, and residential remaining 'tougher.' This suggests a non-uniform recovery in the broader construction sector, with specific strength in infrastructure/institutional projects but lingering weakness in housing and general commercial construction.
The 'evolving tariff environment' remains a key uncertainty, though management views it as manageable through supply chain diversification (exiting China) and pricing actions. They assume current tariff rates hold for 2026 guidance, implying a stable but elevated cost environment that they have successfully navigated in 2025.