Zurn Elkay Water Solutions (ZWS) Q3 2026 earnings review
Zurn Elkay profit margins hit a record, but sales slow
Zurn Elkay Water Solutions, the maker of commercial plumbing parts and drinking fountains, lifted profit margins to a record even as underlying sales growth cooled. Sales from businesses owned a year ago rose 7%, down from 10% in the second quarter, while the Intellihot water-heater acquisition added another 2 percentage points. Adjusted EBITDA margin climbed 1.5 percentage points to 28.3% on lower manufacturing costs, and chief executive Todd Adams raised the annual dividend by 18%.
| Sales from businesses owned a year ago | +7% 10% last quarter |
|---|---|
| Total net sales | $495.1M +8.7% from a year ago |
| Adjusted EBITDA margin | 28.3% +1.5 percentage points from a year ago |
| Implied full-year adjusted EBITDA plan | Raised $5.6M middle of the range: $513.6M by our math |
⚖️ Verdict: 🟢 Bullish
The story got better because the company proved its profit margins can keep rising even after last year's big price increases fade. By our math, the fourth-quarter outlook lifts full-year adjusted EBITDA above the top of management's prior range and holds the margin at 28%. One caution: Adams warned of uncertainty in construction markets, and the fourth-quarter plan has underlying sales growth slowing to about 5% by our math.
The question now is whether the slowdown to roughly 5% underlying sales growth is just the math of lapping last year's tariff price hikes or the start of a commercial construction slump. Either underlying unit volumes are holding near 3% to 4% while price fades, or weaker building activity is starting to hit orders. Management's initial 2027 sales outlook in February will settle it.
🐂 Bull Case
Lower Production Costs Lifted Profit Margins to a Record
Zurn Elkay makes commercial plumbing parts and drinking fountains, and its profit margins keep climbing. Adjusted EBITDA—profit before interest, taxes, depreciation, and one-offs—rose 15% to $140.1 million, lifting that margin by 1.5 percentage points to a record 28.3% of sales. The company credited "product mix, Zurn Elkay Business System led productivity initiatives and supply chain repositioning" for the gain.
- Cost of making products: 50.4% of sales, down 5.6 percentage points from a year ago (down 2.8 points excluding inventory accounting, tariff refunds, and acquisition charges, by our math)
- Selling and administrative overhead: 24.4% of sales, up 1.0 percentage point from a year ago
- Profit drop-through: 45% of the extra $39.7 million in sales turned into adjusted EBITDA, by our math
- Implied full-year adjusted EBITDA: $512 million to $515 million by our math, above last quarter's $503 million to $513 million plan
This matters because the margin expanded even as last year's tariff-driven price increases started to lap out of the comparison. Furthermore, the fourth-quarter outlook points to a 28.0% adjusted EBITDA margin at the middle of the range, up 2.4 percentage points from a year ago, when the fourth quarter usually dips.
What to watch: fourth-quarter cost of sales excluding one-offs when full-year results arrive in February. Holding the 28% adjusted EBITDA margin on seasonally lower sales will show that supply-chain savings, rather than last year's price hikes, are carrying the profitability.
New Hot-Water Products Expand the Addressable Market
The Milwaukee-based manufacturer is adding commercial hot-water equipment to sell alongside its existing valves and drains. During the third quarter, it closed the $107.3 million purchase of Intellihot, a maker of tankless gas and electric water heaters. In October, chief executive Todd Adams said the business "continued to build out our presence in the hot water loop with the entrance into the digital master mixing valve market with internally developed new products".
Intellihot added 2 percentage points to third-quarter revenue growth, or about $8 million to $9 million by our math. Together with the new digital valves, Adams said, "In 2026 alone, we believe we’ve expanded our served markets by roughly $400 million". Because building engineers specify water heaters and mixing valves alongside Zurn's existing backflow preventers, the sales force can pitch a complete hot-water package to commercial builders.
What to watch: Intellihot's fourth-quarter revenue contribution when full-year results are reported. Three months ago the company projected $16 million to $18 million of Intellihot sales for the second half, so fourth-quarter sales need to reach at least $7 million to hit that initial target.
Cash Generation Funded an Acquisition and Higher Payouts
Strong cash generation is paying for acquisitions and shareholder returns at the same time, though critics note that management is buying back stock at steadily higher prices. Free cash flow—operating cash minus factory spending and net tariff refunds—rose 17% from a year ago to $109.6 million, or 22% of sales. That cash covered the $107.3 million Intellihot outlay while keeping net debt at just 0.4 times annual adjusted EBITDA.
Alongside the acquisition, the water-solutions group spent $35 million to buy back 0.7 million shares and raised its annual dividend by 18% to $0.52 per share. Adams said the dividend hike was "reflecting the confidence we have in the long-term fundamentals of our business and business model driven by the Zurn Elkay Business System". However, those 0.7 million shares cost about $50 each by our math, up from roughly $48 in the first half and $34 a year earlier.
What to watch: fourth-quarter share repurchases and ending cash in the annual filing. With the full-year outlook calling for at least $85.9 million of fourth-quarter free cash flow by our math, cash will build rapidly unless the pace of buybacks or deal-making steps up.
🐻 Bear Case
Underlying Sales Growth Is Slowing as Price Increases Fade
While total revenue grew 9% to $495.1 million with the help of Intellihot, sales from businesses Zurn Elkay owned a year ago are losing speed. Underlying sales grew 7% in the third quarter, down from 10% in the second quarter and 11% in the first. That 7% reading matched the top of the 6% to 7% outlook, but the half-point beat against the middle of the range was the smallest in four quarters.
The slowdown gets steeper in the fourth-quarter plan. Management projected fourth-quarter net sales of $430 million to $437 million, which is 6.5% total growth at the middle of the range. After stripping out roughly $7.5 million of expected Intellihot sales, underlying growth slows to about 4.6% by our math. That cuts the underlying growth rate in half from the first half of 2026 as last year's tariff price hikes drop out of the comparison.
What to watch: the split between price and unit volume on the conference call and in the quarterly filing. If price increases contributed 1 to 2 percentage points as previously indicated, fourth-quarter unit volume growth would be down to roughly 3%.
Management Turns Cautious on Construction and the Economy
After two quarters of upbeat commentary, Adams struck a more guarded tone about commercial building and the wider economy. He noted that the team must keep "finding pockets of growth to offset the general uncertainty that exists within our served markets and the broader economy". About half of Zurn Elkay's sales come from new construction, where demand follows building starts by roughly 18 months.
"As we start the fourth quarter, it feels like a time to be conservative in our assumptions while remaining aggressive with our actions with everything that’s happening in the world right now," Adams said. The numbers back up his caution: fourth-quarter sales are set to fall 12% from the third quarter at the middle of the range, a sharper drop than the 10.6% seasonal decline in the fourth quarter of 2025.
What to watch: the initial 2027 underlying sales outlook when fourth-quarter results arrive in February. A target below mid-single digits would show that commercial construction delays and residential softness are weighing on 2027 orders.
Risks this quarter didn't answer
Four standing items from our prior analysis could not be checked because the earnings release omits segment tables, customer breakdowns, and balance-sheet footnotes.
- Product category sales and margins: the release states only that growth occurred in "nearly all product categories", leaving the size of each product line unquantified.
- Filtered drinking-water sales and attach rate: not mentioned in the release; the conference call is the only place management updates progress toward its 70% filtered-unit goal for 2027.
- Intellihot purchase accounting and amortization: three months ago management promised to update depreciation and amortization for Intellihot in Q3, but the release gives no standalone breakdown.
- US school and hospital budget exposure: geographic and customer-type revenue tables appear only in the quarterly Form 10-Q filing.
👓 Other Themes
Tariff Refunds Boosted Reported Profit Again
Refunds of previously paid US reciprocal tariffs under the International Emergency Economic Powers Act (IEEPA) continued to separate reported results from underlying figures. Zurn Elkay recorded $1.5 million of pre-tax tariff refunds in third-quarter cost of sales, bringing the nine-month benefit to $49.1 million, and paid $8.7 million of related taxes in the quarter. The company strips both the refunds and the tax payments out of adjusted EBITDA and free cash flow.
💲 Other KPIs
Money owed by customers rose 14.0% from a year ago by our math, outpacing the 8.7% increase in net sales. From last quarter, receivables dipped 2.2% from $270.9 million. Adding Intellihot's customer balances in July explains part of the year-over-year gap, while the $76.6 million nine-month rise in receivables has been the main working-capital drag on operating cash flow.
Stock on hand grew just 2.8% from a year ago by our math, well below the 8.7% rise in sales, and fell 2.3% from $287.3 million in the second quarter. Lower tariff costs and supply-chain shifts reduced the value of inventory on the balance sheet, releasing $2.2 million of cash over the first nine months of the year.
The average number of diluted shares fell 1.3% from 170.3 million a year ago and 0.4% from 168.8 million in the second quarter. Zurn Elkay has spent $134.7 million on buybacks over the first nine months of 2026, retiring 3.3 million shares and adding about 1 percentage point to per-share profit growth.
🔮 Guidance
Unchanged. The new dollar range equates to 6.5% total sales growth at the middle of the range, or about 4.6% growth from businesses owned a year ago after subtracting roughly $7.5 million of Intellihot sales by our math. That matches the mid-single-digit underlying view given three months ago and marks a step-down from 7% in Q3 as last year's price hikes lap.
Raised. Combined with $392.1 million earned in the first nine months, the fourth-quarter target puts full-year adjusted EBITDA at $512.1 million to $515.1 million by our math, lifting the middle of the full-year plan by $5.6 million. The outlook calls for 16.7% fourth-quarter growth at the middle of the range and a 28.0% margin, up from 25.6% in the fourth quarter of 2025.
Unchanged. Keeping the full-year floor at $350 million (excluding net tariff refunds) leaves at least $85.9 million of free cash flow for the fourth quarter by our math, up 3.5% from $83.0 million a year ago. With nine-month free cash flow already up $30.0 million from last year, the company can clear the $350 million bar even if fourth-quarter cash generation barely grows.
❓ Key Questions
How much of Q3's 7% underlying growth was volume?
Last year's third and fourth quarters carried roughly 5 percentage points of tariff-related price increases. Now that Zurn Elkay is lapping those hikes, investors need to know whether unit volumes held near 5% in Q3 and what volume rate underpins the Q4 sales plan.
What did Intellihot contribute to Q3 sales and EBITDA?
The release says Intellihot added 2 percentage points to sales growth (roughly $8 million to $9 million by our math), but does not give exact revenue or profit. Tracking the five-year goal of $100 million in sales at a 30% margin requires standalone figures.
How are the new digital mixing valves priced and sold?
Chief executive Todd Adams announced an entry into digital master mixing valves that helped expand the company's served market by $400 million in 2026. Management has not yet shared the size of the mixing-valve category, when shipments begin, or whether margins match the fleet average.
Where did filtered drinking-water sales land in Q3?
Water filtration is one of the company's highest-margin growth drivers, with a stated goal of having filters on 70% of drinking-water units sold by 2027. The press release gave no update on filtration revenue or the percentage of filtered units shipped.