10-Q: Zurn Elkay Water Solutions Reports Strong Q2 2025 Earnings with Revenue and Profit Growth

Zurn Elkay Water Solutions Corporation announced a robust second quarter and first half of 2025, demonstrating significant growth in net sales and income from operations, alongside strategic financial management including share repurchases and pension plan termination.

Summary

• Net sales for the three months ended June 30, 2025, increased by 7.9% to $444.5 million, up from $412.0 million in the prior year period.
• Income from operations for the three months ended June 30, 2025, rose by 7.9% to $77.6 million, compared to $71.9 million in the same period last year, maintaining an operating margin of 17.5%.
• Net income for the three months ended June 30, 2025, was $50.5 million, an increase from $46.0 million in the prior year quarter.
• Diluted net income per share for the three months ended June 30, 2025, was $0.29, up from $0.27 in the corresponding period of 2024.
• For the six months ended June 30, 2025, net sales grew by 6.0% to $833.3 million, with core sales improving 7% year over year.
• Income from operations for the six months ended June 30, 2025, increased by 12.7% to $141.0 million, with the operating margin expanding by 100 basis points to 16.9%.
• Net income for the six months ended June 30, 2025, was $94.1 million, compared to $80.3 million for the same period in 2024.
• Diluted net income per share for the six months ended June 30, 2025, was $0.55, an increase from $0.46 in the first half of 2024.
• Cash provided by operating activities for the six months ended June 30, 2025, was $153.5 million, up from $139.0 million in the prior year period.
• The company repurchased 972,619 shares of common stock for $32.5 million in Q2 2025, and 3,244,641 shares for $109.9 million in H1 2025, with approximately $130.3 million remaining under the repurchase program.
• The U.S. defined benefit pension plan was terminated effective April 1, 2025, resulting in a curtailment gain of $0.7 million in Q1 2025.
• The Net First Lien Leverage Ratio was 0.79 to 1.00 as of June 30, 2025, well below the covenant limit of 5.00 to 1.00.

Sentiment

Score: 8

Explanation: The company reported strong financial performance with significant increases in net sales, income from operations, and net income. Operating margins expanded, and cash flow from operations improved. The company also demonstrated sound financial management through share repurchases and maintaining a very low leverage ratio. While restructuring charges are ongoing, the overall financial health and growth trajectory are positive.

Positives

• Net sales increased by 7.9% for the quarter and 6.0% for the six months, indicating strong top-line growth.
• Core sales improved by 8% for the quarter and 7% for the six months, showing underlying business strength across all product categories.
• Income from operations grew by 7.9% for the quarter and 12.7% for the six months, demonstrating improved operational efficiency.
• Operating margin for the six months ended June 30, 2025, increased by 100 basis points to 16.9%, reflecting favorable sales growth and productivity savings.
• Net income and diluted EPS showed consistent year-over-year increases for both the three and six-month periods.
• Interest expense, net, decreased for both the three and six-month periods, primarily due to lower interest rates.
• Cash provided by operating activities increased to $153.5 million for the six months, indicating strong cash generation from core operations.
• The company's Net First Lien Leverage Ratio of 0.79 to 1.00 is significantly below the covenant limit of 5.00 to 1.00, indicating strong financial health and ample borrowing capacity.
• The termination of the U.S. defined benefit pension plan resulted in a $0.7 million curtailment gain and is expected to simplify future pension liabilities.
• The ongoing share repurchase program demonstrates a commitment to returning capital to shareholders and confidence in the company's valuation.

Negatives

• Restructuring and other similar charges increased to $1.9 million for the three months ended June 30, 2025, from $0.7 million in the prior year, indicating ongoing operational adjustments.
• Other expense, net, increased for the three months ended June 30, 2025, primarily due to increased non-operational and foreign currency transaction losses.
• The effective income tax rate for both periods was above the U.S. federal statutory rate of 21% due to compensation deduction limitations, state income taxes, and foreign income taxes.
• Cash used for investing activities increased to $13.3 million for the six months ended June 30, 2025, from $7.0 million in the prior year, driven by higher capital expenditures.
• Total stockholders' equity decreased from $1,586.8 million at December 31, 2024, to $1,564.4 million at June 30, 2025, partly due to share repurchases and dividends exceeding net income.

Risks

• Costs are impacted by tariffs and other trade protection measures, with additional tariffs announced by the U.S. government starting in Q1 2025 and reciprocal tariffs from other nations.
• Management expects to continue incurring expenses related to workforce reductions, potential asset impairment or accelerated depreciation, lease termination costs, and other facility rationalization costs due to ongoing restructuring initiatives.
• The company is subject to periodic income tax examinations by domestic and foreign authorities, and future changes to valuation allowances for deferred tax assets could impact financial statements.
• The company is involved in various unresolved legal actions, administrative proceedings, and claims in the ordinary course of business, including product liability, commercial, employment, workers' compensation, intellectual property, and environmental matters.

Future Outlook

Management expects to continue executing initiatives to optimize operating margin and manufacturing footprint, anticipating further expenses related to workforce reductions, asset impairment, lease termination, and facility rationalization. The company also expects to annuitize the remaining pension liability in fiscal year 2025. The impact of the recently enacted One Big Beautiful Bill Act (OBBBA) on income tax payable and deferred tax liability is currently being evaluated.

Management Comments

• Management expects to continue executing similar initiatives to optimize the Company's operating margin and manufacturing footprint.

Industry Context

Zurn Elkay Water Solutions operates as a pure-play water management business, specializing in specification-driven solutions for health, hydration, human safety, and environmental improvement. The company's product portfolio, including water safety and control, flow systems, hygienic, environmental, and filtered drinking water products, serves public and private spaces. Its disciplined approach, guided by the Zurn Elkay Business System (ZEBS), focuses on continuous improvement to drive customer satisfaction and financial results, positioning it within the broader building products and infrastructure sectors.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or industry benchmarks to assess the results against global standards. However, the company's strong operating margin expansion (100 basis points for H1 2025) and low Net First Lien Leverage Ratio (0.79 to 1.00) suggest a healthy financial position relative to typical industry averages for manufacturing and water infrastructure companies, which often carry higher debt loads and may experience more volatile margins.

Corporate Governance

Legal Proceedings

• The company's subsidiaries are involved 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: Benefit from increased net income, diluted EPS, and the ongoing share repurchase program, which indicates capital return and management's confidence. The declared dividend also provides direct returns.
• Employees: Affected by ongoing restructuring actions, which include workforce reductions, but also benefit from the Employee Stock Purchase Plan and the Performance Incentive Plan, which align their interests with company performance. The termination of the pension plan may impact some employees' retirement benefits, though the company expects to annuitize the liability.
• Customers: Benefit from the company's focus on continuous improvement through the Zurn Elkay Business System (ZEBS) and its broad portfolio of water management solutions, aiming for superior satisfaction and reduced product installation time.
• Creditors: The company's strong Net First Lien Leverage Ratio (0.79 to 1.00) and compliance with debt covenants indicate a healthy financial position, reducing credit risk.

Next Steps

• Annuitize the remaining pension liability in fiscal year 2025.
• Continue executing restructuring initiatives to optimize operating margin and manufacturing footprint.
• Evaluate the impact of the One Big Beautiful Bill Act (OBBBA) on income tax payable and deferred tax liability.
• Pay a quarterly cash dividend of $0.09 per share on September 5, 2025, to stockholders of record as of August 20, 2025.

Key Dates

Recommendation

The company demonstrates solid financial performance with consistent revenue and profit growth, strong operating cash flow, and a healthy balance sheet with low leverage. The ongoing share repurchase program is a positive signal for shareholders. However, without explicit forward-looking guidance or new strategic initiatives beyond ongoing restructuring, a 'hold' recommendation is appropriate for a seasoned investor. The company is performing well within its current operational framework, but there are no immediate catalysts for a 'strong buy' without further external analysis of market conditions or competitive landscape.

Keywords

Water Management Solutions, SEC Filing, Quarterly Report, Financial Performance, Net Sales, Income from Operations, Net Income, EPS, Share Repurchase, Pension Plan Termination, Restructuring, Corporate Governance, Tariffs, Zurn Elkay