Executive Summary / Key Takeaways

• Zurn Elkay Water Solutions ($ZWS) is a pure-play water management powerhouse, demonstrating consistent organic growth and expanding margins driven by its differentiated product portfolio, strategic market focus, and the rigorous application of its Zurn Elkay Business System (ZEBS).
• The company's technological leadership, particularly in filtered drinking water with innovations like Elkay Pro Filtration and the Liv EZ residential line, provides tangible competitive advantages through enhanced performance, ease of use, and superior contaminant reduction.
• Strong financial performance in 2025, including 11% core sales growth and 26.8% adjusted EBITDA margins in Q3, reflects effective price realization, productivity gains, and a proactive supply chain strategy that is significantly reducing exposure to China.
• With a robust balance sheet, low leverage (0.6x net debt), and strong free cash flow generation (over $300 million projected for 2025), Zurn Elkay possesses considerable capital allocation flexibility for M&A, share repurchases, and dividend growth.
• The outlook for 2026 anticipates a low-growth market environment similar to 2025, but ZWS is poised for outperformance through continued innovation, strategic initiatives in adjacent categories, and its proven ability to manage external challenges like tariffs.

The Unseen Infrastructure: Zurn Elkay's Foundation in Water Management

Zurn Elkay Water Solutions Corporation stands as a critical, yet often unseen, pillar of North America's water infrastructure. Founded in 1891, the company has cultivated a legacy of innovation and specification, delivering highly-engineered, mission-critical water management solutions across institutional, commercial, and increasingly, residential sectors. Its comprehensive product portfolio spans professional-grade water safety and control, flow systems, hygienic and environmental products, and advanced filtered drinking water solutions. This pure-play focus on water management, particularly within stable and growing non-residential segments like education and healthcare, forms the bedrock of its enduring investment thesis.

The company's strategic advantage is deeply rooted in its Zurn Elkay Business System (ZEBS), an operating philosophy centered on continuous improvement. ZEBS provides a scalable, process-based framework that drives superior customer satisfaction and financial results by targeting world-class operating performance across all business facets. This disciplined approach has been instrumental in Zurn Elkay's consistent track record, achieving positive core growth in 55 out of the last 59 quarters, with a 10-year core sales compound annual growth rate of 6%.

Technological Leadership: The Core of Zurn Elkay's Moat

Zurn Elkay's competitive moat is significantly strengthened by its differentiated technology and relentless innovation, particularly in the critical area of filtered drinking water. The company's Elkay brand is synonymous with commercial bottle filling stations, a segment where Zurn Elkay has consistently pushed the boundaries of performance and user experience.

The recent introduction of Elkay Pro Filtration marks a major refresh in the bottle filler category, directly addressing customer feedback for enhanced functionality. This core technology offers tangible, quantifiable benefits: filters can now be changed in less than 30 seconds, a significant improvement in maintenance efficiency. The system supports multiple filters, including an optional sediment filter for areas with challenging water quality, and will soon offer the ability to filter up to 20,000 gallons in a single filter change. Crucially, the highest capacity lead filter certification has increased from 6,000 gallons to 10,000 gallons of filtered water, providing superior contaminant reduction. All new Pro Filtration units are shipped as connected devices, allowing facilities managers to remotely monitor filter life and status, optimizing maintenance schedules and ensuring consistent water quality. This connectivity enhances operational efficiency for building owners.

Beyond lead, Zurn Elkay has also introduced an improved total PFAS filter, moving beyond previous PFOA and PFOS certifications to address a broader range of "forever chemicals." This commitment to advanced filtration directly responds to growing public health concerns and evolving municipal water quality challenges. The proprietary filter head design, which ensures only Elkay filters can be installed, is a strategic move to drive enhanced attachment rates, securing recurring revenue and strengthening customer loyalty.

Expanding its technological reach, Zurn Elkay launched the Elkay Liv EZ built-in filtered bottle fillers, bringing commercial-grade filtration into residential spaces. These sleek, modern units are designed for easy, do-it-yourself installation, requiring no electricity or drain, making high-quality filtered water accessible in various home settings. While not expected to be a primary pillar of its commercial offering, the Liv EZ line represents an innovative extension of Zurn Elkay's core technology, allowing the company to test new designs and technologies with speed in an adjacent market. These innovations collectively contribute to Zurn Elkay's competitive advantage by offering superior product performance, reduced operational costs for customers, and a strong value proposition in a market increasingly prioritizing water quality and sustainability.

Operational Excellence and Financial Momentum

Zurn Elkay's financial performance in 2025 vividly demonstrates the efficacy of its strategy and operational discipline. For the three months ended September 30, 2025, the company reported net sales of $455.4 million, an impressive 11% increase year-over-year. This growth was broad-based, with core sales improving 11% year-over-year and all product categories contributing positively. Year-to-date through September 30, 2025, net sales reached $1,288.7 million, an 8% increase over the prior year. Profitability has been a standout feature, with adjusted EBITDA growing 16% to $122 million in Q3 2025.

This translated into a robust adjusted EBITDA margin of 26.8%, marking the highest quarterly margins achieved since the Elkay merger. For the nine months ended September 30, 2025, adjusted EBITDA increased by $39 million on $93 million of sales growth, representing a strong 42% drop-through on the year-over-year volume increase. The year-to-date EBITDA margin improved 120 basis points to 26.2% as core sales grew by 8%. This margin expansion is a direct result of volume leverage, productivity initiatives driven by the ZEBS, and continuous improvement activities across the organization. The company anticipates sustaining this operational efficiency, projecting 30% to 35% incremental margins on volume going forward.

The company's proactive management of the dynamic tariff environment has been a critical operational achievement. Having initiated a multi-year strategy five to six years ago to reduce supply chain exposure to China, Zurn Elkay is on track to have less than 2% to 3% of its cost of goods sold sourced from China by the end of 2026. This strategic repositioning, which has seen over 50% of COGS now coming from the U.S., provides a competitive advantage in cost, lead time, quality, and dual sourcing. Despite new tariffs, including those on copper-related goods, the estimated tariff cost impact for 2025 is approximately $50 million, which the company is confident in offsetting through price increases and ongoing supply chain adjustments, ensuring it remains price/cost positive.

A Fortress Balance Sheet and Strategic Capital Allocation

Zurn Elkay's financial strength is underpinned by a robust balance sheet and exceptional free cash flow generation, providing significant capital allocation flexibility. The company ended Q3 2025 with net debt leverage at a remarkably low 0.6x, the lowest in its history as a public company. Cash and cash equivalents stood at $260.1 million as of September 30, 2025, complemented by $189.9 million in additional borrowing capacity under its revolving credit facility.

Free cash flow generation remains a core strength, with $94 million generated in Q3 2025, contributing to a projected full-year free cash flow greater than $300 million. This strong cash flow supports a balanced capital allocation strategy. Year-to-date 2025, the company repurchased $135 million of its common stock, representing about 3.8% of total shares outstanding. On October 28, 2025, the Board of Directors further underscored its commitment to shareholder returns by increasing the share repurchase authority to $500 million of available capacity and raising the quarterly cash dividend by 22% to $0.11 per share.

Furthermore, the successful termination of the U.S. defined benefit pension plan in Q3 2025 eliminated an approximately $200 million liability and future cash payment obligations, further enhancing financial flexibility. This strong financial position enables Zurn Elkay to continue cultivating M&A opportunities, leveraging its management capabilities, low leverage, and cash flow to pursue strategic acquisitions that meet its disciplined criteria.

Competitive Positioning: Differentiated in a Fragmented Market

Zurn Elkay operates in a competitive landscape characterized by a handful of market participants, with its primary focus on the North American non-residential construction market. The company's strategic positioning is built on its integrated, user-focused solutions, which provide a distinct advantage.

Compared to Watts Water Technologies (WTS), Zurn Elkay's end-to-end water solutions, particularly its comprehensive product integration for building systems, offer greater efficiency in installation and maintenance. While WTS is strong in specialized flow control and regulatory-compliant products, Zurn Elkay's bundled offerings for safety and conservation provide a unique value proposition. In the filtered drinking water segment, Zurn Elkay's innovations like the Elkay Pro Filtration, with its ease of filter change and enhanced capacity, directly address customer pain points, potentially leading to stronger market share gains against competitors.

Against Pentair (PNR), which emphasizes industrial-scale water treatment, Zurn Elkay's focus on non-residential buildings with brands like Zurn and Elkay allows for tailored approaches. Zurn Elkay's products, such as its PEX pipe fittings, offer significantly greater ease of installation in building applications compared to some broader infrastructure offerings. While PNR benefits from scale, Zurn Elkay's emphasis on user-friendly designs and innovation in safety features fosters stronger customer loyalty in its target markets.

Mueller Water Products (MWA) specializes in water infrastructure for municipal and commercial markets. Zurn Elkay's product portfolio, particularly its hygienic and environmental solutions and water safety and control products, positions it strongly in commercial buildings, where MWA's focus is more on broader utility infrastructure. Zurn Elkay's ability to innovate with products like the total PFAS filter and connected units provides a technological edge in addressing evolving water quality concerns directly at the point of use within buildings.

Zurn Elkay's competitive advantages are further solidified by its strong brand portfolio and established distribution channels, fostering customer loyalty and recurring revenue from maintenance services. Its capital-light business model and highly variable cost structure, coupled with the continuous improvement culture of ZEBS, enable consistent strong incremental margins, differentiating it from competitors who may have higher fixed costs or less agile operational systems.

Outlook: Sustained Growth in a Stable Market

Looking ahead, Zurn Elkay anticipates a relatively stable market environment. Management projects that its end markets in 2026 will largely resemble those of 2025, characterized as a low-growth environment. Specifically, the outlook for 2025 assumes low single-digit declines in commercial end markets, offset by low single-digit growth in institutional and waterworks, with flattish conditions in residential markets.

Despite this modest market backdrop, Zurn Elkay is well-positioned for continued outperformance. The company is raising its full-year 2025 outlook, now projecting core sales growth of approximately 8%, adjusted EBITDA in the range of $437 million to $440 million, and free cash flow greater than $300 million. This confidence stems from several growth levers: continued outperformance in drinking water, strong traction in water safety and control products, and the impact of new product introductions. The company also plans to sharpen its focus on driving organic growth into adjacent categories, leveraging its competitive advantages in specification and go-to-market capabilities.

The amortization expense for intangible assets is expected to be $58.7 million for the full year 2025, with consistent annual amortization of $58.5 million from 2026 to 2030.

Risks and Challenges

While Zurn Elkay's outlook is robust, several risks warrant consideration. The dynamic tariff environment remains a key uncertainty, with potential for new or increased tariffs from both China and China sources. Although Zurn Elkay has proactively de-risked its supply chain, unexpected shifts could impact costs. The residential market continues to experience softness, which could partially offset gains in other segments. Furthermore, ongoing restructuring initiatives, while aimed at efficiency, may incur additional expenses related to workforce reductions, asset impairment, and lease terminations, the full extent of which is not yet estimable. Changes in interest rates and foreign currency exchange rates also present market risks.

Conclusion

Zurn Elkay Water Solutions is a compelling investment proposition, built on a century-long heritage of innovation and a modern, disciplined operational framework. The company's core investment thesis is anchored in its ability to deliver essential water management solutions, underpinned by a robust product portfolio and a relentless pursuit of efficiency through the Zurn Elkay Business System. Its technological leadership in filtered drinking water, exemplified by the Elkay Pro Filtration and Liv EZ lines, provides a clear competitive edge, driving both market share gains and enhanced customer value.

With strong financial performance, a fortress balance sheet, and a strategic approach to capital allocation, Zurn Elkay is well-equipped to generate superior returns. Despite a projected low-growth market in 2026 and the ongoing complexities of the tariff environment, the company's proven operational agility and commitment to innovation position it for continued outperformance. Zurn Elkay's story is one of consistent execution, strategic foresight, and a deep understanding of the critical role it plays in ensuring safer, healthier, and more sustainable water solutions for the future.