Zurn Elkay Water Solution Corporation (ZWS)

Zurn Elkay Water Solution Corporation — Q1 2025 Financial Report

Report Date: 2025-04-28
Period Covered: Quarter ended March 31, 2025 (Q1 2025)

1. Executive Summary

• Net Sales: $3,888 M, up 4.0% YoY (Q1 2024: $3,738 M).
• Gross Profit: $1,810 M, up 6.4% YoY; gross margin expanded ~70 bps to 46.6%.
• Operating Income: $634 M vs. $532 M prior year; operating margin rose to 16.3%.
• Net Income: $436 M, up 27.1%; Diluted EPS of $0.26 vs. $0.19.
• Adjusted EBITDA: $980 M, up 13.5% YoY; net first-lien leverage 0.98×.

2. Profit & Debt Analysis

• Profit Drivers: Volume growth in institutional and commercial channels, productivity gains under the ZEBS operating system, and lower restructuring charges.
• Cost Pressures: Raw material and freight inflation partially offset by price increases and continuous-improvement initiatives.
• Debt Profile: Long-term debt of $4.95 B virtually flat vs. December 2024; cash balance of $1.447 B; $1.889 B available on revolving facility after $111 M in letters of credit.
• Leverage & Coverage: Net first-lien leverage (net debt / trailing-12-month adjusted EBITDA) at 0.98×, well below the 5.0× covenant threshold.

3. Reasons for Profit Improvement

• Volume & Price: Core volume growth driven by tariff-related price adjustments and new product adoption.
• Margin Expansion: SG&A discipline and synergy realization from prior M&A improved operating margin by ~210 bps.
• Interest & Tax: Lower SOFR rates reduced net interest expense; effective tax rate rose to 26.9% due to certain non-deductible compensation items.

4. Pros and Cons

Pros:

• Strong sales momentum and healthy backlog ($723 M) to drive H2 2025 revenue.
• Best-in-class liquidity and sub-1× leverage provide acquisition and return-of-capital optionality.
• Expanding gross margins highlight operating leverage.

Cons:

• Exposure to foreign currency swings and supply-chain cost volatility.
• High absolute debt balance necessitates ongoing cash‐flow discipline.
• Competitive pressure in key markets could limit pricing power.

Conclusion: Q1 performance reinforces Zurn Elkay’s operational resilience. The combination of volume growth, margin improvement and conservative leverage underpins a constructive medium-term outlook, subject to monitoring of currency and commodity cost headwinds.

Earnings Breakdown (Q1 2025):

By Customer Type:

• Institutional: $1,914 M (↑7.3% YoY)
• Commercial: $1,089 M (↑2.0% YoY)
• Residential: $885 M (↓0.2% YoY)

By Geography:

• United States: $3,575 M (↑4.8% YoY)
• Canada: $201 M (↓4.7% YoY)
• Rest of World: $112 M (↓2.6% YoY)

Backlog: $723 M at March 31, 2025, of which ~100% is expected to be recognized over the remaining nine months of 2025.

Zurn Elkay’s sub-1× net first-lien leverage and robust cash generation position it for disciplined growth and shareholder returns. Continued execution of productivity programs should support margin expansion, while backlog visibility underpins revenue stability. Key risks include raw-material cost volatility, foreign-currency exposure and maintaining pricing power in competitive end markets. The company faces manageable debt service obligations, with ample revolving-credit capacity and no near-term covenant pressure.