10-Q: Zurn Elkay Reports Strong Q3 2025 Earnings Growth

Zurn Elkay Water Solutions Corporation announced robust financial results for the third quarter and first nine months of 2025, driven by increased net sales and operational efficiencies.

Summary

• Net sales for the three months ended September 30, 2025, increased 11.1% to $455.4 million, with core sales also up 11% year over year.
• Net sales for the nine months ended September 30, 2025, rose 7.8% to $1,288.7 million, with core sales up 8% year over year.
• Net income for the three months ended September 30, 2025, was $61.8 million, a significant increase from $43.5 million in the prior year period.
• Diluted earnings per share (EPS) for the three months ended September 30, 2025, was $0.36, up from $0.25 in the prior year period.
• Net income for the nine months ended September 30, 2025, was $155.9 million, compared to $123.8 million in the prior year period.
• Diluted EPS for the nine months ended September 30, 2025, was $0.91, up from $0.71 in the prior year period.
• Income from operations for the three months ended September 30, 2025, increased 10.4% to $77.5 million, maintaining a 17.0% margin.
• Income from operations for the nine months ended September 30, 2025, increased 11.9% to $218.5 million, with margin improving to 17.0% from 16.3% in the prior year.
• Cash and cash equivalents increased to $260.1 million as of September 30, 2025, from $198.0 million at December 31, 2024.
• The U.S. defined benefit pension plan was terminated, resulting in a $0.7 million curtailment gain and a $10.0 million pre-tax settlement gain.
• The Board of Directors increased the share repurchase authority to $500.0 million and declared a quarterly cash dividend of $0.11 per share.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant increases in net sales, net income, and EPS. Operational efficiency improved, and the successful termination of the pension plan contributed positively. The increased dividend and expanded share repurchase program signal management's confidence and commitment to shareholder returns. While restructuring costs and tariff impacts are noted, the overall financial health and strategic execution appear robust.

Positives

• Strong net sales growth of 11.1% in Q3 2025 and 7.8% for the nine months ended September 30, 2025, indicating robust demand across all product categories.
• Significant increase in net income for both the quarter ($61.8 million vs. $43.5 million) and nine-month period ($155.9 million vs. $123.8 million).
• Improved diluted EPS to $0.36 for Q3 2025 and $0.91 for the nine months ended September 30, 2025.
• Operating income margin for the nine months ended September 30, 2025, improved to 17.0% from 16.3% in the prior year, reflecting productivity savings.
• Successful termination of the U.S. defined benefit pension plan, generating a $0.7 million curtailment gain and a $10.0 million pre-tax settlement gain.
• Reduced interest expense, net, for both the quarter and nine-month periods due to lower interest rates.
• Strong liquidity position with $260.1 million in cash and cash equivalents and $189.9 million available under the revolving credit facility.
• Net First Lien Leverage Ratio of 0.63 to 1.00 is well below the covenant maximum of 5.00 to 1.00, indicating strong financial health and compliance.
• Increased quarterly cash dividend to $0.11 per share and expanded share repurchase authority to $500.0 million, demonstrating confidence in future cash flows and commitment to shareholder returns.

Negatives

• Income from operations as a percentage of net sales remained consistent year-over-year for Q3 2025 (17.0% vs 17.1%), primarily due to the adjustment to state inventories at Last-In, First-Out ("LIFO") cost offsetting sales growth and productivity.
• Increased cash used for investing activities, rising to $20.7 million for the nine months ended September 30, 2025, from $11.1 million in the prior year.
• Increased cash used for financing activities, rising to $174.1 million for the nine months ended September 30, 2025, from $165.8 million in the prior year, primarily due to higher share repurchases and dividends.
• The company continues to incur restructuring and other similar charges, totaling $1.8 million in Q3 2025 and $5.4 million for the nine months, with management expecting further expenses.
• Accumulated other comprehensive loss increased to $(78.4) million at September 30, 2025, from $(74.4) million at December 31, 2024.

Risks

• Costs are impacted by trade policies, including additional tariffs announced by the United States government starting in Q1 2025 and reciprocal tariffs from other nations.
• Management expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of assets, lease termination costs, and other facility rationalization costs due to ongoing restructuring initiatives.
• Future changes to the balances of valuation allowances associated with deferred tax assets could impact financial statements.
• Inherent limitations in internal control over financial reporting mean it may not prevent or detect misstatements, and projections of effectiveness are subject to risks of controls becoming inadequate or compliance deteriorating.
• Involvement in various unresolved legal actions, administrative proceedings, and claims in the ordinary course of business, including product liability, commercial, employment, workers' compensation, intellectual property claims, and environmental matters.

Future Outlook

Management expects to continue executing similar initiatives to optimize the Company's operating margin and manufacturing footprint, anticipating further expenses related to workforce reductions, potential asset impairment or accelerated depreciation, lease termination costs, and other facility rationalization costs. The Company is evaluating the impact of new accounting standards ASU 2023-09 and ASU 2024-03 on its consolidated financial statements. The Board of Directors has increased the share repurchase authority to $500.0 million and declared a future quarterly cash dividend of $0.11 per share.

Management Comments

• We believe that core sales facilitates easier and more meaningful comparisons of our net sales performance with prior and future periods and to our peers.
• Management expects to continue executing similar initiatives to optimize the Company's operating margin and manufacturing footprint.
• Management believes the eventual outcome of these unresolved legal actions, either individually or in the aggregate, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Industry Context

Zurn Elkay operates as a pure-play water management business, providing specification-driven solutions. The company's focus on sustainable products and its Zurn Elkay Business System (ZEBS) for continuous improvement positions it within a growing market for health, hydration, human safety, and environmental solutions. The industry faces challenges from global trade policies and tariffs, which impact the company's costs, but Zurn Elkay states it is well-positioned to respond.

Corporate Governance

Legal Proceedings

• Involvement in various unresolved legal actions, administrative proceedings, and claims in the ordinary course of business, including product liability, commercial, employment, workers' compensation, intellectual property claims, and environmental matters. Management believes the eventual outcome will not have a material adverse effect on financial position, results of operations, or cash flows.

Stakeholder Impact

• Shareholders: Positive impact due to increased net income, EPS, dividend increase to $0.11 per share, and expanded share repurchase program, indicating strong returns and management confidence.
• Employees: Impacted by ongoing restructuring actions, which primarily result in workforce reductions, though these are aimed at driving efficiencies.
• Customers: Benefit from the company's focus on continuous improvement through the Zurn Elkay Business System (ZEBS) and its commitment to providing sustainable, specification-driven water management solutions.
• Creditors: Positive impact due to strong financial performance, healthy liquidity, and a Net First Lien Leverage Ratio of 0.63 to 1.00, well within covenant limits, indicating low credit risk.

Next Steps

• Continue executing restructuring initiatives to optimize operating margin and manufacturing footprint.
• Evaluate the impact of new accounting standards ASU 2023-09 and ASU 2024-03.
• Pay quarterly cash dividend of $0.11 per share on December 5, 2025, to stockholders of record as of November 20, 2025.
• Continue share repurchases under the expanded $500.0 million authority.

Key Dates

Recommendation

The company delivered exceptional financial results for Q3 and the first nine months of 2025, with robust growth in net sales and a significant increase in net income and EPS. Operational efficiency improved, and the successful termination of the pension plan further strengthened the financial position. The increased dividend and expanded share repurchase program demonstrate strong management confidence and a commitment to returning capital to shareholders. The company's strong liquidity and low leverage ratio indicate financial stability. Despite ongoing restructuring costs and tariff impacts, the overall performance and strategic initiatives suggest continued positive momentum, making it an attractive investment.

Keywords

Water Management Solutions, SEC Filing, Quarterly Report, Financial Results, Zurn Elkay, ZWS, Water Safety, Flow Systems, Hygienic Products, Filtered Drinking Water, Share Repurchase, Dividend, Pension Plan, Restructuring, Tariffs, Corporate Governance