ZWS Q3 Deep Dive: Organic Growth, Margin Expansion, and New Product Initiatives Drive Outperformance

Water management solutions company Zurn Elkay (NYSE:ZWS) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 11.1% year on year to $455.4 million. Guidance for next quarter’s revenue was optimistic at $398.5 million at the midpoint, 2.4% above analysts’ estimates. Its non-GAAP profit of $0.43 per share was 8.6% above analysts’ consensus estimates.

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StockStory’s Take

Zurn Elkay delivered a positive third quarter, with the market responding well to both higher-than-expected sales and robust non-GAAP profitability. Management credited organic growth, driven by solid execution in nonresidential construction markets, as well as timely pricing actions to offset tariff impacts. CEO Todd Adams highlighted the effectiveness of internal initiatives, stating that core categories experienced "solid unit growth on top of...market, on top of...price," and emphasized continued progress in margin expansion and free cash flow. The company also completed the termination of its U.S. pension plan, removing a significant liability and supporting balance sheet strength.

Looking to the next quarter and beyond, management expects continued momentum from core growth initiatives and further price realization to counter rising tariff costs. Adams indicated that new product launches, particularly in water filtration, and the company’s ability to shift supply chains out of China will be key drivers. CFO David Pauli noted, "We’re confident that the level that you’re seeing is a new baseline in terms of where Zurn Elkay margins can be," while warning that the environment around tariffs remains a "moving target." The company remains focused on driving organic growth through both established and adjacent markets.

Key Insights from Management’s Remarks

Management attributed the quarter’s strong performance to execution on growth initiatives, pricing to offset tariffs, ongoing margin expansion, and continued investment in product innovation.

• Tariff-driven pricing actions: The company implemented targeted price increases in response to higher copper-related tariffs, resulting in some customers pulling forward orders into the third quarter. This proactive pricing approach helped maintain margins and offset external cost pressures.
• Strong uptake in filtration products: Early feedback and adoption of the Elkay Pro Filtration system were described as "a really good, solid start," with design improvements addressing installation ease and filter longevity. The Liv EZ home bottle filler was also launched to tap into residential demand, though management downplayed expectations for it becoming a core business driver.
• Margin expansion through productivity: Adjusted EBITDA margin reached a company-high since the Elkay merger, supported by continuous improvement efforts under the Zurn Elkay Business System. Management views these margin gains as a new baseline, with ongoing productivity initiatives expected to sustain profitability.
• Exposure to stable end markets: Zurn Elkay remains overweight in nonresidential segments such as education and healthcare, which are projected to show steady growth. Management cited a "15-year track record of consistent growth," reflecting the company’s focus on stable, less cyclical end markets.
• Supply chain repositioning: The company continued executing its plan to shift manufacturing supply out of China, reducing tariff exposure. By the end of next year, only 2–3% of cost of goods sold is expected to come from China, supporting long-term resilience against trade-related risks.

Drivers of Future Performance

Management expects ongoing organic growth, product innovation, and supply chain optimization to drive results, while cautioning that tariffs and a stable construction market environment may temper upside.

• Tariff management remains critical: The company anticipates about $50 million in tariff costs this year, with price increases designed to remain price/cost positive. Management views the evolving tariff situation as a continuing risk but believes proactive supply chain moves and pricing discipline will help mitigate the impact.
• New product and market expansion: Momentum in core categories, especially drinking water and water safety products, is expected to persist, with growth initiatives targeting adjacent markets. The company is investing in commercial-grade filtration solutions for both commercial and select residential applications, aiming to outgrow the broader market.
• Stable, low-growth end markets: Management’s outlook for nonresidential construction, particularly in education and healthcare, points to a stable environment with low single-digit growth. Zurn Elkay’s focus on these segments, combined with its track record of outperformance through sales initiatives, supports confidence in durable growth.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be watching (1) the adoption trajectory of new filtration products in both commercial and residential channels, (2) the pace and effectiveness of supply chain realignment out of China to mitigate further tariff shocks, and (3) the resilience of margin expansion efforts as market growth remains modest. Progress toward capturing new business in education and healthcare construction, and the impact of any further pricing actions, will also be closely monitored.

Zurn Elkay currently trades at $51.33, up from $46.06 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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