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Zurn Elkay Water Solutions Corp (ZWS)·Q1 2025 Earnings Summary

Executive Summary

  • Zurn Elkay delivered a clean Q1: revenue $388.8M (+4% YoY; +5% core) and adjusted EPS $0.31, both modest beats vs S&P Global consensus ($383.6M revenue; $0.29 EPS). Adjusted EBITDA was $98.0M (25.2% margin), up 110 bps YoY, driven by productivity and prior-year synergy carryover. *
  • Management reaffirmed full-year 2025 guidance set in February (Adjusted EBITDA $405–$420M; FCF ≈$290M) and guided Q2 core growth low-to-mid single digits with adjusted EBITDA margin 25.5%–26.0%.
  • The call focused on tariffs: ZWS expects 2025 tariff cost impact of $45–$55M before price; price actions aim to be at least dollar-level price-cost neutral in 2025, with improving coverage in 2026 as China sourcing is reduced to 2–3% of COGS by end-2026.
  • Capital deployment remained active: $77M buybacks (2.3M shares) and $15M dividends in Q1; Board declared a $0.09 quarterly dividend on May 1. Net debt leverage at 0.9x provides flexibility for M&A.

What Went Well and What Went Wrong

  • What Went Well

    • Margin execution: Adjusted EBITDA margin expanded 110 bps YoY to 25.2% on productivity and synergy carryover; income from operations margin +210 bps YoY. “We had a solid Q1… 110 basis points of year-over-year improvement in EBITDA margins.”
    • Tariff playbook readiness: “We have high confidence we will be price‑cost positive” with selective price increases and supply chain actions; Q2 guide embeds current tariff structure.
    • Capital returns with disciplined balance sheet: $77M buybacks, $15M dividends; leverage 0.9x supports continued repurchases and M&A optionality.

  • What Went Wrong

    • End-market softness in pockets: Residential and pockets of commercial softened; growth was volume-driven with no tariff-related price benefit in Q1.
    • Free cash flow down YoY on working capital: Q1 FCF $38.6M vs $50.2M prior year, with higher receivables and inventory build; cash from operations $42.9M vs $53.9M.
    • Tariff overhang and demand risk: Management acknowledged potential demand destruction from higher pricing and evolving tariff regimes; outcome still uncertain.

Financial Results

MetricQ1 2024Q3 2024Q4 2024Q1 2025
Revenue ($M)$373.8 $410.0 $370.7 $388.8
GAAP Diluted EPS – Continuing Ops$0.19 $0.25 $0.21 $0.24
Adjusted EPS$0.29 $0.34 $0.32 $0.31
Adjusted EBITDA ($M)$90.0 $105.0 $91.1 $98.0
Adjusted EBITDA Margin (%)24.1% 25.6% 24.6% 25.2%
Gross Profit ($M)$170.1 $189.4 $161.2 $181.0

YoY and QoQ context

  • YoY: Revenue +4%; adjusted EPS $0.31 vs $0.29; adjusted EBITDA margin +110 bps to 25.2%. Drivers: productivity, continuous improvement, lower restructuring, synergy carryover.
  • QoQ: Revenue up from Q4’s seasonal trough; margin improved from 24.6% to 25.2% ahead of tariff-related pricing, which begins in Q2.

Estimates vs Actuals (S&P Global consensus)

MetricConsensusActualSurprise
Revenue ($M)$383.6M*$388.8M +$5.2M (beat)*
Primary EPS$0.29*$0.31 +$0.02 (beat)*
# of Estimates8 (rev); 8 (EPS)*——

Values retrieved from S&P Global.*

KPIs and Cash

KPIQ1 2024Q1 2025
Core Sales Growth+5% +5%
Free Cash Flow ($M)$50.2 $38.6
Cash from Operations ($M)$53.9 $42.9
Net Debt Leverage—0.9x
Share Repurchases$18.9M $77.4M (2.3M shares)
Dividends Paid ($M)$13.9 $15.2

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Core Sales GrowthFY 2025“Similar to 2024” Affirmed “similar to 2024” Maintained
Adjusted EBITDAFY 2025$405–$420M Affirmed $405–$420M Maintained
Free Cash FlowFY 2025≈$290M Affirmed ≈$290M (management “confident”) Maintained
Core Sales GrowthQ2 2025—Low-to-mid single digits New intra-year
Adjusted EBITDA MarginQ2 2025—25.5%–26.0% New intra-year
Dividend per ShareOngoing$0.09 quarterly (since Oct ’24) $0.09 declared May 1 for June 6 payment Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3’24, Q4’24)Current Period (Q1’25)Trend
Tariffs / Macro“Pockets of challenging end markets” (Q3); confidence moving into 2025 (Q4). Detailed tariff impact framework: 2025 cost $45–$55M pre-price; plan to be at least dollar-level price‑cost neutral in 2025. Rising focus; framework established
Supply Chain DiversificationMargin gains from synergies/lower material costs (Q3); supply chain optimization initiatives noted. China direct material cut to under $30M by end-2026; COGS from China 2–3% by end-2026; dual-sourced with shifts to SE Asia/Mexico/US. Accelerating de-risking
Pricing Strategy—Announced price increases effective mid-April; expect Q2 realization; monitor competitive moves; aim to remain price‑cost positive. Implementing/monitoring
End-Market DynamicsQ3: solid nonresidential; Q4: record year vs “pockets of challenging end markets.” Nonresidential: mid-single-digit growth; softness in residential/pockets of commercial. Mixed but resilient
Capital AllocationQ3: $50M buybacks; dividend to $0.09. Q1: $77M buybacks, $15M dividends; leverage 0.9x; capacity for continued repurchases/M&A. Ongoing returns
Drinking Water / Filtration—600M gallons filtered in Q1 (+33% YoY); rising installed base and attachment rates. Positive momentum

Management Commentary

  • Strategy and tariff posture: “We have high confidence, we will be price‑cost positive based on the work and actions we've already implemented… By the end of 2026, only 2% to 3% of our COGS will be coming from China.” — Todd Adams, CEO
  • Supply chain execution: “Our direct material spend from China will be under $30 million by the end of 2026… by the end of 2026, we are looking at … less than 2% to 3% of COGS coming from China.” — David Pauli, CFO
  • Q2 guide and pace vs FY targets: “Our first quarter actual results and second quarter guidance puts us well on track… and we are affirming our original full year guidance.” — David Pauli, CFO

Q&A Highlights

  • Price vs demand: Management affirmed intent to be at least dollar-level price‑cost neutral; acknowledged potential demand destruction from higher pricing but too early to quantify; expect net positive price impact to top line if trends hold.
  • Tariff mechanics and cost: 2025 tariff cost reflects multiple tariff layers (IEEPA, reciprocal, Section 232, Section 301) with HTS-specific rates; not all at 145%.
  • Order behavior/pull-forward: Limited pull-forward observed ahead of 4/15 price increase; no notable project push-outs; backlog managed SKU-by-SKU.
  • Sourcing cadence: Mix shifting to SE Asia/Mexico and some accelerated US sourcing; dual-sourcing to maintain reliability, quality, and lead times.
  • Capital returns: With FY FCF ≈$290M and 0.9x leverage, ZWS expects flexibility to continue buybacks opportunistically.

Estimates Context

  • Q1 vs consensus: Revenue $388.8M beat by ~$5.2M; Primary EPS $0.31 beat by ~$0.02 (8 estimates for each metric). Beats driven by volume-led growth and cost productivity; no tariff-related price in Q1. *
  • Implications for models: With Q2 pricing effective and management’s price‑cost positive objective, sell-side models may need higher 2H revenue/pricing and margin assumptions; however, management guided prudently given potential demand and tariff variability.

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Resilient start to 2025: Modest top- and bottom-line beats with 110 bps YoY margin expansion; momentum entering Q2 as price actions begin to flow through.
  • Tariff risk managed: Clear $45–$55M 2025 cost framework and multi-pronged response (pricing + supply chain); trajectory improves into 2026 as China exposure falls to 2–3% of COGS.
  • Guidance intact: FY25 Adjusted EBITDA $405–$420M and FCF ≈$290M reaffirmed; Q2 margin guide 25.5%–26.0% indicates continued discipline.
  • Capital allocation supportive: $77M Q1 buybacks; $0.09 dividend sustained; sub-1x leverage enables continued returns/M&A optionality.
  • Watch near-term catalysts: Q2 pricing realization, evolving tariff policy clarity, end-market demand elasticity, and supply chain migration milestones; management expects to remain price‑cost positive.
  • Execution edge: The Zurn Elkay Business System and dual-sourced, de-risked supply chain provide relative cost/lead-time advantages vs peers in a volatile trade environment.

Appendix: Additional Details

  • Q1 2025 GAAP summary: Net income from continuing ops $41.0M; diluted EPS $0.24; gross profit $181.0M; operating income $63.4M.
  • Adjustments recap: Q1 adjusted EPS adds back amortization of intangibles ($14.7M), restructuring ($1.7M), accelerated depreciation ($1.1M), LIFO adjustment (–$0.3M); tax effect (–$4.1M).
  • Q2 2025 outlook (as of 4/22): Core growth low-to-mid single digits; adjusted EBITDA margin 25.5%–26.0%; assumes current tariff structure persists through Q2.
  • Dividend: $0.09 per share declared May 1, payable June 6 to holders of record May 20.

Notes: *S&P Global consensus values provided for comparison purposes.