Zurn Elkay 2026 Gross Margin Drivers and Financial Outlook

Key factors influencing Zurn Elkay’s gross margin in 2026

Based on Zurn Elkay’s Q1 2026 earnings discussion, the company’s 2026 margin profile is primarily influenced by operating productivity/cost actions, product/service mix shifts toward higher-margin categories, structural actions in manufacturing/footprint, and tariff/supply-chain dynamics (including how much cost pressure is offset by product substitution and supply-chain moves). While the excerpts focus most directly on adjusted EBITDA margin (not GAAP gross margin), these drivers are the same underlying economic forces that typically move gross margin (mix and pricing/cost spreads, plus cost structure).

1) Productivity and continuous improvement (Zurn Elkay Business System) driving cost per unit down

Management attributes margin expansion to the Zurn Elkay Business System and continuous improvement (“#CI”), emphasizing that these are ongoing daily operational levers rather than one-time actions. Specifically, the company states that the “foundation of our EBITDA margin improvements all center on our Zurn Elkay Business System” and “continuous improvement” culture. ¹
They also describe that productivity initiatives and continuous improvement contributed to first-quarter profitability, citing “benefits of our productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization.” ²

Implication for 2026 gross margin: If productivity and #CI reduce manufacturing and operating costs per unit, that typically improves gross margin (or at least the gross-profit component of overall margins) as volume and mix translate into higher unit economics. ¹²

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2) Favorable mix: growth in higher-margin categories and exit of lowest-margin products

The company explicitly links margin improvement to unit volume growth in the most profitable areas and the portfolio exit of lowest-margin products. They cite growth in “Water Safety and Control, Flow Systems and Drinking Water” while “we’ve exited via 80/20, the lowest margin products within the portfolio.” ¹
They also confirm that margin expansion in Q1 was driven in part by mix, stating “and mix as our higher profit margin products are growing the fastest.” ²

Implication for 2026 gross margin: A higher share of revenue from structurally higher-margin product families (and less exposure to low-margin items) should lift gross margin versus prior-period product mixes. ¹²

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3) New product introductions replacing older products with similar or better margins

Management notes that “a lot of the new products that we're introducing come at margins replacing the old products,” and that the “new products are even better.” ³
They also add that new products “are coming to market at attractive margins,” and that this combination creates a “nice dynamic” for margins while they invest in these products. ³

Implication for 2026 gross margin: Continued product refresh cycles that improve margin per unit should support 2026 gross margin expansion or at least resilience, assuming input costs don’t worsen faster than the product margin benefit. ³

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4) Structural actions to reduce overhead and lean manufacturing (manufacturing footprint + lean tools)

Beyond continuous improvement and synergy delivery, management highlights additional structural changes tied to cost structure and manufacturing efficiency:

• “Consolidating our footprint to reduce overhead”
• “introducing and sustaining the Zurn Business System lean tools into the Elkay manufacturing facilities”
• “continuing to challenge our strategy around internal manufacturing versus sourcing” ⁴

Implication for 2026 gross margin: Footprint consolidation and lean manufacturing typically reduce fixed and variable manufacturing costs, which often improves gross margin mechanically (lower cost of goods sold per unit). ⁴

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5) Supply chain capability helping profitability during tariffs (cost absorption and pricing/cost spread)

Management calls out supply chain as a competitive advantage that improved profitability while navigating tariffs: “our supply chain has been a clear competitive advantage that has allowed us to improve profitability while successfully navigating the tariff environment.” ⁴
They also discuss the 2026 guidance framework explicitly assuming no tariff refund benefits and assuming the tariff structure remains in place, stating: “Our full year outlook does not take into account any potential tariff refund benefits and assumes that the current tariff structure in place as of today remains in place throughout 2026.” ⁴
Further, they emphasize confidence in tariff “discrete impact” remaining “price/cost positive,” without relying on refunds or future price increases. ⁴⁵

Implication for 2026 gross margin: If tariffs increase input costs, gross margin can compress—unless the company’s supply chain execution, internal manufacturing/sourcing decisions, and product substitution/insulation preserve the pricing-versus-cost spread. Management’s stated framework suggests they believe this spread remains favorable (price/cost positive) in 2026. ⁴⁵⁶

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6) 2026 margin outlook suggests continued expansion supported by the above drivers

Management guided Q2 2026 adjusted EBITDA margin to 27% to 27.5%, implying 50 to 100 bps expansion year-over-year. ⁴
They also state Q1 2026 adjusted EBITDA margin expanded 160 bps to 26.8%. ⁵²

Implication for 2026 gross margin: While not gross margin per se, the persistence of margin expansion indicates that the drivers above (product mix, productivity/lean, structural cost reductions, and tariff navigation) are expected to keep gross profitability supported through 2026. ⁴⁵²

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Bottom line

In 2026, Zurn Elkay’s margin performance (and the economic forces that influence gross margin) appears primarily driven by:

1. Productivity/#CI under the Zurn Elkay Business System reducing cost per unit. ¹²
2. Mix shift toward higher-margin categories (Water Safety and Control, Flow Systems, Drinking Water) and exiting low-margin products. ¹²
3. New products launching at attractive margins that replace older offerings with equal or higher margins. ³
4. Structural cost actions including footprint consolidation, lean manufacturing tools, and internal vs. sourcing strategy. ⁴
5. Tariff/supply chain management intended to keep 2026’s discrete tariff impact price/cost positive, without relying on refund benefits or future price increases. ⁴⁵⁶

If you want a strict “gross margin” (COGS-based) bridge rather than EBITDA-based drivers, that would require gross margin disclosures (not contained in the provided excerpts).