Zurn Elkay: Margin Machine Adds Intellihot to Expand into Commercial Water Heating

Q2 2026 beat with record EBITDA margin, new strategic adjacency in tankless water heating, and a clean balance sheet to fund the next leg of growth.

ZWS · Earnings Call · 2026-07-29

A Quarter of Records and a New Chapter

Zurn Elkay Water Solutions delivered a standout Q2 2026: sales grew 10% organically, EBITDA rose 15%, and adjusted EBITDA margin expanded 120 basis points to a record 27.7% — the highest since the Elkay merger. “Sales grew 10% organically in the second quarter, while EBITDA grew 15% as margin expanded by 120 basis points to a record 27.7%.” — Todd Adams, Chairman and Chief Executive Officer · 2026-07-29 The company also generated $112 million in free cash flow and repurchased $50 million of stock, bringing year-to-date buybacks to $100 million. But the headline was the acquisition of Intellihot, a tankless commercial water heater maker that expands Zurn's addressable market by $1.1 billion. This is a fresh, company-specific pivot — the Intellihot acquisition is a new adjacency beyond its core plumbing and drinking water portfolio. The deal economics are compelling: $109 million paid, or $100 million net of a tax asset, for a business that should generate about $37 million in sales this year with 50% gross margins. Todd Adams, CEO, laid out a clear path to growth:

We see a very clear path for a double-digit return on invested capital in 3 years. In our view, we believe that Intellihot can be a $100 million business with a 30% EBITDA margin in the next 5 years.
Todd Adams, Chairman and Chief Executive Officer · 2026-07-29

Jeff Schoon, President, explained the strategic fit: "This transaction expands our available market by $1.1 billion, within which the tankless segment represents over $200 million today," (component_hash="5126226406182889104") noting regulatory tailwinds like DOE efficiency mandates and Legionella liability concerns are driving preference toward tankless systems.

Why This Is a Different Kind of Margin Story

The margin expansion is not one-off; it's the compounding benefit of a multiyear crawl. Dave Pauli, COO, attributed the 660 basis point EBITDA margin improvement since Q1 2023 to the business system — essentially thousands of continuous improvement (#CI) ideas, a relentless 80/20 pruning of low-margin products, and a supply chain that has actively migrated sourcing out of China. This is not new rhetoric; the company has been executing this playbook for years. But what is new is the willingness to put capital behind a category adjacency. In the past, Todd often deflected on M&A timing. On the Q4 2025 call, he said, "we're optimistic, but I'm not going to predict or project either" (component_hash="1736016993502958275"). Now, the Intellihot deal signals a more aggressive posture, and management has telegraphed that more adjacencies are coming. The financials confirm the story. Gross margin has climbed to 47.5% (latest quarter), with a trend of +4pp over 12 years and +3pp over the last two — a reflection of mix and supply chain gains. 47.5% gross margin, up from ~35% a decade ago, showing the mix and productivity benefits of the business system. Free cash flow margin, while volatile by quarter, has held above 20% on a trailing basis. The balance sheet is pristine: net leverage at 0.3x, the lowest ever, giving ample firepower for more tuck-ins. “During the second quarter, we received $48 million in cash related to IEEPA and reciprocal tariff refunds, inclusive of $2 million of accrued interest.” — Daniel Klun, Chief Financial Officer · 2026-07-29 This is a one-time item, but it underscored the company's tariff management — a theme echoed across many industrial earnings this season, though Zurn's supply chain moves have made it more manageable than for peers.

Tariff Refunds and the Road Ahead

The company also updated guidance: full-year adjusted EBITDA now $503–513 million (up from prior), and free cash flow of at least $350 million (excluding any further tariff refunds). The tariff environment remains fluid — they are transitioning from the expired Section 122 tariffs to the new Section 301 tariffs, but management insists they have no need for incremental pricing beyond the normal 3–4% already embedded. On the prior call, Dave Pauli had previewed the pricing cadence: "Q4 was about 5 points of price... 2026 looks like the inverse" (component_hash="3235616203816351954"). That is exactly playing out. What changed at this company is not just the quarter but the strategic posture. The Intellihot acquisition is a genuine pivot into a faster-growing, highly specified category where Zurn already wields influence with engineers, contractors, and wholesalers. It also diversifies beyond new construction into MRO and retrofit — already half the business. With a record margin, a fortress balance sheet, and a proven playbook for scaling, Zurn Elkay is now actively shaping its own growth instead of just riding the construction cycle. The next few quarters will reveal whether the $100 million Intellihot dream becomes a compounding reality, but the ingredients are in place.