Zurn Elkay Water Solutions Corporation (ZWS) | The Buildout — AI Infrastructure

The Verdict

Zurn Elkay Water Solutions sells the water-carrying hardware of a building: what comes out of the tap, what keeps contaminated water from flowing back into the supply, and what carries stormwater and waste away. Its products are written into project specifications by architects and engineers, then pulled through by contractors and wholesalers — a channel that makes the installed base sticky and supports a recurring filtration consumable business on top of the hardware. The AI-infrastructure link, on this evidence, is a channel inference rather than a company claim: fire valves, backflow preventers and drainage are the kinds of items that go into a data-center job, and several of ZWS's inferred channel partners describe large data-center demand, but ZWS itself never names AI as a driver or sizes the exposure.

Earnings Beat

ZWS reported Q2 FY2026 revenue of $442.2M, roughly flat against $444.5M a year earlier, with gross margin of 49.8% — up about 430 basis points from 45.5%. On management's own adjusted basis the quarter carried a 27.7% EBITDA margin, the highest since the Zurn Elkay merger and above the 27% to 27.5% it had guided. Net income was $113.3M and free cash flow $156.0M.

Management tone: The Q1 2026 call was deliberately measured: management rejected the word 'pause' in favor of 'deliberate' and held full-year guidance rather than updating the second half early. On the Q2 2026 call the tone shifted to confident and outcome-oriented — the company raised sales, EBITDA and free cash flow guidance, delivered the raise it had said it would wait to make, and put two more executives, COO Dave Pauli and President Jeff Schoon, in front of analysts with substantive content, following through on a stated plan to broaden management exposure on calls.

Management Guidance

For FY2026, management guides adjusted EBITDA of $503M–$513M and free cash flow of at least $350M, excluding any past or future IEEPA reciprocal tariff refunds; the midpoint equates to 140 basis points of margin expansion year over year. Q3 2026 is guided to core sales growth of 6%–7% with an adjusted EBITDA margin around 28%, and Q4 2026 is a mid-single-digit 'place marker' to be updated at Q3. The outlook fully contemplates the transition from the expired Section 122 tariffs to the new Section 301 tariffs, assumes no additional price through 2026, and includes approximately $18M of Intellihot net sales for the last five months of the year. Incremental Intellihot D&A is not included, because the preliminary purchase-price allocation has not been completed.

Trajectory

Revenue has been uneven while the margin line has moved steadily. Reported quarterly revenue went from $455.4M in Q3 FY2025 to $407.2M in Q4 FY2025, $433.0M in Q1 FY2026 and $442.2M in Q2 FY2026 — leaving the year-over-year rate decelerating to roughly flat in the June quarter. Gross margin tells a different story: 40.8% in Q3 FY2025 to 49.8% in Q2 FY2026, an increase of about 900 basis points. Management attributes the margin work to continuous improvement, 80/20 pruning of the lowest-margin products, footprint consolidation and supply-chain changes, and says the growth is landing where the margin is — the fastest-growing platforms, drinking water, water safety and control, and flow systems, all operate above fleet-average margins.

The Model

The model projects FY+1 revenue of $1,853M with EBITDA of $467M, a 25.2% margin, then FY+2 revenue of $1,980M with EBITDA of $513M, a 25.9% margin. The near term rests on the mix already running through the business: management frames FY2026 growth as 3–4 points of price, 1 point of market growth and the remainder share gains and exposure to higher-growth categories, with Intellihot net sales landing in the last five months of the year. FY+2 leans on the newer pieces — the Intellihot ramp toward its stated long-term sales target, and filtration moving from more than $60M in 2026 toward an internal goal of 70% filtered units in 2027.

Projections are the median of 5 independent model runs. The model’s revenue sits 2.9% above analyst consensus.

For FY2026, management guides adjusted EBITDA of $503M–$513M and free cash flow of at least $350M, excluding any past or future IEEPA reciprocal tariff refunds; the midpoint equates to 140 basis points of margin expansion year over year. Q3 2026 is guided to core sales growth of 6%–7% with an adjusted EBITDA margin around 28%, and Q4 2026 is a mid-single-digit 'place marker' to be updated at Q3. The outlook fully contemplates the transition from the expired Section 122 tariffs to the new Section 301 tariffs, assumes no additional price through 2026, and includes approximately $18M of Intellihot net sales for the last five months of the year. Incremental Intellihot D&A is not included, because the preliminary purchase-price allocation has not been completed.

What Could Go Right — and Wrong

Looking Ahead

The next twelve months turn on two questions: whether volume holds as price normalizes, and whether the Intellihot numbers start moving. Management has Q3 2026 guided to 6%–7% core growth and an adjusted EBITDA margin around 28%, with Q4 a mid-single-digit place marker to be refreshed at Q3, and Intellihot net sales landing in the last five months of the year. Beyond that, the checkpoints are the Intellihot purchase-price allocation and D&A update on the next quarterly call, adjacency announcements in the back half of 2026 into 2027, the exit from China sourcing by the end of 2026, and the internal goal of 70% filtered units in 2027.

Financials

Annual Summary

Key Ratios (Trailing)

The Company

Zurn Elkay Water Solutions describes itself in its FY2025 10-K as 'a growth-oriented, pure-play water management business' that designs, procures, manufactures and markets what management believes is the broadest sustainable portfolio of specification-driven water management solutions. Concretely, that means four platforms: Drinking Water Products (filtered bottle filling stations, fountains, dispensers, filtered faucets); Water Safety and Control Products sold under the Zurn and Wilkins brands (backflow preventers, fire system valves, pressure reducing valves, thermostatic mixing valves); Flow Systems Products (roof and floor drains, hydrants, fixture carriers, interceptors, separators, acid neutralization and remote monitoring); and Hygienic and Environmental Products (sensor-operated flush valves, heavy-duty commercial faucets, Elkay sinks, Hadrian restroom partitions and lockers). The specification channel is the through-line — products are written into projects by architects and engineers, then pulled through by contractors and wholesalers. In late July 2026 the company added a fifth position, buying Intellihot to enter commercial tankless water heating.

ZWS reports as a single operating segment and discloses no segment revenue or margin breakout; the platform color — which platform grows fastest, which sits above fleet-average margin — comes verbally from calls. Manufacturing sits in three U.S. states per the 10-K plant table: California (2 facilities, 157,500 owned and 186,100 leased square feet), Illinois (3 facilities, 465,500 and 499,200) and North Carolina (4 facilities, 392,200 and 387,300). Q1 2026 revenue was about 92% United States, 5% Canada and 3% rest of world. Management describes consolidating the footprint, deploying lean tools into the Elkay plants, re-examining internal versus outsourced manufacturing, and moving sourcing out of China — the U.S. is already the largest source country by a decent margin.

Business Segments

Competitive Landscape

Competitive intensity varies sharply by category. ZWS leans on the specification channel as its moat — products written into projects by architects and engineers, with the Pro Filtration line adding a proprietary filter head that prevents counterfeit filters from working, converting an installed base into a captive consumable stream. Management describes leading market share positions within its core institutional and commercial non-residential construction verticals. Elsewhere the picture is thinner: Hygienic and Environmental is described as a more competitive category, and the residential sinks business the company exited had hundreds of competitors. For Intellihot, management describes the field as a combination of foreign suppliers and some domestic suppliers, and calls the business one of the last remaining around in that category with the best technology.

Supply Chain

ZWS sources mostly in the U.S., which is its largest source country by a decent margin, and is targeting a China exit down to a few points of cost of goods sold by the end of 2026. Its products reach buildings through manufacturer's reps, wholesalers, contractors and direct end users.