ZWS Q4 Deep Dive: Margin Expansion and Product Innovation Drive Strong Finish

Water management solutions company Zurn Elkay (NYSE:ZWS) reported Q4 CY2025 results topping the market’s revenue expectations, with sales up 9.8% year on year to $407.2 million. Its non-GAAP profit of $0.36 per share was 5.9% above analysts’ consensus estimates.

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StockStory’s Take

Zurn Elkay’s fourth quarter was marked by robust organic sales growth and margin expansion, driving a positive market reaction. Management credited the company’s supply chain optimization and disciplined pricing for offsetting softness in residential and some nonresidential commercial segments. CEO Todd Adams noted that productivity initiatives and continuous improvement under the Zurn Elkay Business System were key contributors to performance, while CFO David Pauli highlighted the successful execution of tariff-related pricing actions. The company’s focus on higher-growth institutional and waterworks markets also supported solid results.

Looking ahead, Zurn Elkay aims to build on its strategic planning process by targeting organic growth in adjacent verticals and expanding its product portfolio. Management sees opportunities in professional-grade plumbing and water management solutions, with incremental investments in product development set to continue. Pauli emphasized ongoing efforts to mitigate tariff risks and further optimize the company’s supply chain, stating, "We again remain confident in our ability to execute to positive dollar price/cost impact from tariffs in 2026." The company’s approach centers on operational discipline and selective expansion into new markets.

Key Insights from Management’s Remarks

Management attributed the quarter’s outperformance to strong execution on growth initiatives, resilience in core institutional end markets, and sustained benefits from supply chain and productivity improvements.

• Institutional market strength: The company’s core sales growth was driven by outperformance in nonresidential institutional end markets, which offset continued weakness in residential and certain commercial segments.
• Supply chain optimization: Zurn Elkay’s supply chain initiatives, including efforts to reduce direct material purchases from China, improved cost control and enabled effective tariff management, supporting margin expansion.
• Product innovation and sustainability: The launch of the Pro Filtration system for drinking water stations addressed customer needs for easier maintenance and improved filtration, while supporting sustainability goals by reducing single-use plastics and eliminating contaminants such as PFAS (per- and polyfluoroalkyl substances, known as "forever chemicals").
• Continuous improvement culture: The Zurn Elkay Business System fostered a culture of incremental gains, with internal initiatives like the #CI portal encouraging employee engagement and sharing of process improvements.
• Cash flow and capital allocation: Strong free cash flow generation, coupled with a low net debt leverage, allowed for continued share repurchases and dividend payments, while maintaining flexibility to pursue organic and inorganic growth opportunities.

Drivers of Future Performance

Management expects continued growth in institutional and waterworks markets, supported by new product introductions, supply chain enhancements, and disciplined pricing strategies.

• Expansion into adjacencies: Management plans to pursue growth in adjacent markets and underserved verticals—particularly within North American water and professional-grade plumbing—by leveraging existing capabilities and selectively bundling products to meet new application needs.
• Tariff and cost management: The company assumes current tariff rates will persist in 2026 and is actively shifting sourcing away from China, aiming to reduce cost of goods sold exposure and maintain a favorable price/cost balance.
• Product and market mix: The fastest-growing product categories are above average in margin contribution, and management expects mix improvements and ongoing product development spend to gradually raise incremental margins over time, despite some ongoing investments.

Catalysts in Upcoming Quarters

Our team will be closely watching (1) the rollout and adoption rates of new products like Pro Filtration, (2) progress on supply chain shifts away from China and the resulting impact on margins, and (3) the pace of entry into new adjacencies and verticals within North American water and plumbing markets. The ability to maintain pricing discipline and capitalize on institutional market strength will also be critical metrics.

Zurn Elkay currently trades at $51.98, up from $47.06 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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