Zurn Elkay Water Solutions Corp

Previous wording

On October 4, 2021, the Company completed a Reverse Morris Trust tax-free spin-off transaction (the “Spin-Off Transaction”) in which (i) substantially all the assets and liabilities of the Company's Process & Motion Control ("PMC") business were transferred to a newly created subsidiary, Land Newco, Inc. (“Land”), (ii) the shares of Land were distributed to the Company's stockholders pro rata, and (iii) Land was merged with a subsidiary of Regal Rexnord Corporation (formerly known as Regal Beloit Corporation), in which the stock of Land was converted into a specified number of shares of Regal Rexnord Corporation in accordance with the exchange ratio. The operating results of PMC are reported as discontinued operations in our condensed consolidated statements of operations for all periods presented. The condensed consolidated statements of cash flows for the six months ended June 30, 2024 and June 30, 2023 have not been adjusted to separately disclose cash flows related to the discontinued operations.

Current wording

On October 4, 2021, the Company completed a Reverse Morris Trust tax-free spin-off transaction (the “Spin-Off Transaction”) in which (i) substantially all the assets and liabilities of the Company's Process & Motion Control ("PMC") business were transferred to a newly created subsidiary, Land Newco, Inc. (“Land”), (ii) the shares of Land were distributed to the Company's stockholders pro rata, and (iii) Land was merged with a subsidiary of Regal Rexnord Corporation (formerly known as Regal Beloit Corporation), in which the stock of Land was converted into a specified number of shares of Regal Rexnord Corporation in accordance with the exchange ratio. The operating results of PMC are reported as discontinued operations in our condensed consolidated statements of operations for all periods presented. The condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and September 30, 2023 have not been adjusted to separately disclose cash flows related to the discontinued operations.

Previous wording

The major components of the Income from discontinued operations, net of tax presented in the condensed consolidated statements of operations for the three and six months ended June 30, 2024 and June 30, 2023, are as follows (in millions):

Current wording

The major components of the Income from discontinued operations, net of tax presented in the condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and September 30, 2023, are as follows (in millions):

Previous wording

(1)Selling, general and administrative (expenses)/income include the reversal of certain accruals as a result of costs the Company will no longer incur related to the Spin-Off Transaction.

Current wording

(1)Selling, general and administrative income includes the reversal of certain accruals as a result of costs the Company will no longer incur related to the Spin-Off Transaction.

Previous wording

During the three and six months ended June 30, 2024, the Company continued to execute various restructuring actions. These initiatives were implemented to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of mergers and acquisitions, including Elkay, on the Company's overall manufacturing capacity and the refinement of its overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs and other facility rationalization costs. Management expects to continue executing similar initiatives to optimize its operating margin and manufacturing footprint. As such, the Company expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of assets, lease termination costs and other facility rationalization costs. For the three and six months ended June 30, 2024, restructuring charges totaled $0.7 million and $7.0 million, respectively. For the three and six months ended June 30, 2023, restructuring charges totaled $7.8 million and $9.7 million, respectively. Refer to Item 1, Note 3, Restructuring and Other Similar Charges for further information.

Current wording

During the three and nine months ended September 30, 2024, the Company continued to execute various restructuring actions. These initiatives were implemented to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of mergers and acquisitions, including Elkay, on the Company's overall manufacturing capacity and the refinement of its overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs and other facility rationalization costs. Management expects to continue executing similar initiatives to optimize the Company's operating margin and manufacturing footprint. As such, the Company expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of assets, lease termination costs and other facility rationalization costs. For the three and nine months ended September 30, 2024, restructuring charges totaled $2.7 million and $9.7 million, respectively. For the three and nine months ended September 30, 2023, restructuring charges totaled $2.2 million and $11.9 million, respectively. Refer to Item 1, Note 3, Restructuring and Other Similar Charges for further information.

Previous wording

Net sales were $412.0 million and $403.2 million during the three months ended June 30, 2024 and June 30, 2023, respectively, an increase of 2% year over year. Core sales growth of 2%, including growth across multiple product categories, was offset by a 100 basis point impact from the planned exit of certain residential sink products.

Current wording

Net sales were $410.0 million and $398.4 million during the three months ended September 30, 2024 and September 30, 2023, respectively, an increase of 3% year over year. Core sales growth of 3%, including growth in all product categories, was offset by a 100 basis point impact from the planned exit of certain residential sink products.

Previous wording

Income from operations during the six months ended June 30, 2024 was $125.1 million compared to $98.5 million during the six months ended June 30, 2023. Income from operations as a percentage of net sales increased by 320 basis points year over year due to the benefits resulting from productivity synergies and restructuring actions related to the Elkay Merger, as well as lower material and transportation costs, restructuring costs and non-cash stock-based compensation expense.

Current wording

During the three months ended September 30, 2024, income from operations was $70.2 million compared to $60.1 million during the three months ended September 30, 2023. Income from operations as a percentage of net sales increased by 200 basis points year over year due to the benefits from delivering the synergies related to the Elkay Merger, as well as lower material costs.

Previous wording

Interest expense, net was $8.5 million for the three months ended June 30, 2024, compared to $10.3 million for the three months ended June 30, 2023. The decrease in interest expense, net as compared to the prior year period is primarily due to interest earned on higher cash balances.

Current wording

Interest expense, net was $8.3 million for the three months ended September 30, 2024, compared to $9.9 million for the three months ended September 30, 2023. The decrease in interest expense, net as compared to the prior year period is due to interest earned on higher cash balances and reduced interest expense due to the prior year prepayment of $60 million.

Previous wording

Other income (expense), net for the three months ended June 30, 2024 and 2023, was $(1.6) million and $1.6 million, respectively. Other income (expense), net consists primarily of foreign currency transaction gains and losses, the non-service cost components associated with our defined benefit plans and other non-operational gains and losses. The year-over-year change is primarily driven by higher income recognized in connection with an insurance settlement in the prior year, partly offset by accruals for estimated environmental remediation costs in the prior year.

Current wording

Other expense, net for the three months ended September 30, 2024 and 2023, was $1.5 million and $2.5 million, respectively. Other expense, net consists primarily of foreign currency transaction gains and losses, the non-service cost components associated with our defined benefit plans and other non-operational gains and losses. The year-over-year change is primarily driven by lower defined benefit plan costs in the current year and increased accruals for estimated environmental remediation costs in the prior year.

Previous wording

The income tax provision was $16.5 million for the three months ended June 30, 2024, compared to $13.2 million for the three months ended June 30, 2023. The effective income tax rate for the three months ended June 30, 2024 was 26.7% versus 28.6% for the three months ended June 30, 2023. The effective income tax rate for the three months ended June 30, 2024 and the three months ended June 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments.

Current wording

The income tax provision was $16.9 million for the three months ended September 30, 2024, compared to $12.5 million for the three months ended September 30, 2023. The effective income tax rate for the three months ended September 30, 2024 was 28.0% versus 26.2% for the three months ended September 30, 2023. The effective income tax rate for the three months ended September 30, 2024 and the three months ended September 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments.

Previous wording

Net income for the three months ended June 30, 2024, was $46.0 million compared to net income of $34.6 million for the three months ended June 30, 2023. Diluted net income per share for the three months ended June 30, 2024 and June 30, 2023, was $0.27 and $0.20, respectively. The year-over-year change is the result of the factors described above. Net income from discontinued operations, net of tax, was $0.7 million for the three months ended June 30, 2024 compared to $1.7 million for the three months ended June 30, 2023. Diluted net income per share from discontinued operations for the three months ended June 30, 2024 and June 30, 2023, was $0.01 and $0.01, respectively.

Current wording

Net income for the three months ended September 30, 2024, was $43.5 million compared to net income of $41.4 million for the three months ended September 30, 2023. Diluted net income per share for the three months ended September 30, 2024 and September 30, 2023, was $0.25 and $0.24, respectively. The year-over-year change is the result of the factors described above. Net loss from discontinued operations, net of tax, was $0.0 million for the three months ended September 30, 2024 compared to net income from discontinued operations, net of tax, of $6.2 million for the three months ended September 30, 2023. Diluted net income per share from discontinued operations for the three months ended September 30, 2024 and September 30, 2023, was $0.00 and $0.04, respectively.

Previous wording

Six Months Ended June 30, 2024 compared with the Six Months Ended June 30, 2023:

Current wording

Nine Months Ended September 30, 2024 compared with the Nine Months Ended September 30, 2023:

Previous wording

Net sales were $785.8 million during the six months ended June 30, 2024, an increase of 1% year-over-year. The 1% core sales growth across nearly all product categories was offset by the 200 basis point impact from the planned exit of certain residential sink products.

Current wording

Net sales were $1,195.8 million during the nine months ended September 30, 2024, an increase of 2% year-over-year. The 2% core sales growth across nearly all product categories was offset by the 200 basis point impact from the planned exit of certain residential sink products.

Previous wording

During the three months ended June 30, 2024, income from operations was $71.9 million compared to $54.8 million during the three months ended June 30, 2023. Income from operations as a percentage of net sales increased by 390 basis points year over year due to the benefits resulting from productivity synergies and restructuring actions related to the Elkay Merger, as well as lower material costs and restructuring expense year over year.

Current wording

Income from operations during the nine months ended September 30, 2024 was $195.3 million compared to $158.6 million during the nine months ended September 30, 2023. Income from operations as a percentage of net sales increased by 280 basis points year over year due to the benefits resulting from productivity synergies and restructuring actions related to the Elkay Merger, as well as lower material and restructuring costs.

Previous wording

Interest expense, net was $17.3 million during the six months ended June 30, 2024, compared to $19.9 million during the six months ended June 30, 2023. The decrease in interest expense, net as compared to the prior year period is primarily due to interest earned on higher cash balances.

Current wording

Interest expense, net was $25.6 million during the nine months ended September 30, 2024, compared to $29.8 million during the nine months ended September 30, 2023. The decrease in interest expense, net as compared to the prior year period is due to interest earned on higher cash balances and reduced interest expense due to the prior year prepayment of $60 million.

Previous wording

Other expense, net during the six months ended June 30, 2024 was $3.0 million compared to $0.8 million during the six months ended June 30, 2023. Other expense, net consists primarily of foreign currency transaction gains and losses, the non-service cost components associated with our defined benefit plans and other non-operational gains and losses. The year-over-year change is primarily driven by higher income recognized in connection with an insurance settlement in the prior year, partly offset by accruals for estimated environmental remediation costs in the prior year.

Current wording

Other expense, net during the nine months ended September 30, 2024 was $4.5 million compared to $3.3 million during the nine months ended September 30, 2023. Other expense, net consists primarily of foreign currency transaction gains and losses, the non-service cost components associated with our defined benefit plans and other non-operational gains and losses. The year-over-year change is primarily driven by income recognized in connection with an insurance settlement in the prior year, partly offset by accruals for estimated environmental remediation costs in the prior year and lower defined benefit plan costs in the current year.

Previous wording

The income tax provision was $25.5 million for the six months ended June 30, 2024, compared to $22.3 million for the six months ended June 30, 2023. The effective income tax rate for the six months ended June 30, 2024 was 24.3% versus 28.7% for the six months ended June 30, 2023. The effective income tax rate for the six months ended June 30, 2024 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations and income tax benefits associated with share-based payments. The effective income tax rate for the six months ended June 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments.

Current wording

The income tax provision was $42.4 million for the nine months ended September 30, 2024, compared to $34.8 million for the nine months ended September 30, 2023. The effective income tax rate for the nine months ended September 30, 2024 was 25.7% versus 27.7% for the nine months ended September 30, 2023. The effective income tax rate for the nine months ended September 30, 2024 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations and income tax benefits associated with share-based payments. The effective income tax rate for the nine months ended September 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments.

Previous wording

Net income for the six months ended June 30, 2024, was $80.3 million compared to $57.4 million for the six months ended June 30, 2023. Diluted net income per share for the six months ended June 30, 2024 and June 30, 2023, was $0.46 and $0.32, respectively. Net income from discontinued operations, net of tax, was $1.0 million for the six months ended June 30, 2024 compared to $1.9 million for the six months ended June 30, 2023. Diluted net income per share from discontinued operations for the six months ended June 30, 2024 and June 30, 2023, was $0.01 and $0.01, respectively.

Current wording

Net income for the nine months ended September 30, 2024, was $123.8 million compared to $98.8 million for the nine months ended September 30, 2023. Diluted net income per share for the nine months ended September 30, 2024 and September 30, 2023, was $0.71 and $0.56, respectively. Net income from discontinued operations, net of tax, was $1.0 million for the nine months ended September 30, 2024 compared to $8.1 million for the nine months ended September 30, 2023. Diluted net income per share from discontinued operations for the nine months ended September 30, 2024 and September 30, 2023, was $0.01 and $0.05, respectively.

Previous wording

The calculation of Adjusted EBITDA under our credit agreement as of June 30, 2024, is presented in the table in the "Covenant Compliance" section below. However, the results of such calculation could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time. For the six months ended June 30, 2024, we reported net income of $80.3 million and Adjusted EBITDA for the same period of $194.3 million. See "Covenant Compliance" for a reconciliation of Adjusted EBITDA to GAAP net income.

Current wording

The calculation of Adjusted EBITDA under our credit agreement as of September 30, 2024, is presented in the table in the "Covenant Compliance" section below. However, the results of such calculation could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time. For the nine months ended September 30, 2024, we reported net income of $123.8 million and Adjusted EBITDA for the same period of $299.3 million. See "Covenant Compliance" for a reconciliation of Adjusted EBITDA to GAAP net income.

Previous wording

Our credit agreement, which governs our senior secured credit facilities, contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the credit agreement may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to meet a maximum total Net First Lien Leverage Ratio (consolidated indebtedness to Adjusted EBITDA) of 5.00 to 1.00 as of the end of each fiscal quarter. As of June 30, 2024, our Net First Lien Leverage Ratio was 0.98 to 1.00. Failure to comply with these covenants could limit our long-term growth prospects by hindering our ability to borrow under the revolver, to obtain future debt and/or to make acquisitions.

Current wording

Our credit agreement, which governs our senior secured credit facilities, contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the credit agreement may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to meet a maximum total Net First Lien Leverage Ratio (consolidated indebtedness to Adjusted EBITDA) of 5.00 to 1.00 as of the end of each fiscal quarter. As of September 30, 2024, our Net First Lien Leverage Ratio was 0.89 to 1.00. Failure to comply with these covenants could limit our long-term growth prospects by hindering our ability to borrow under the revolver, to obtain future debt and/or to make acquisitions.

Previous wording

(7)Our credit agreement defines our consolidated indebtedness as the sum of all indebtedness (other than letters of credit or bank guarantees, to the extent undrawn) consisting of indebtedness for borrowed money and capitalized lease obligations, less unrestricted cash, which was $129.3 million (as defined by the credit agreement) at June 30, 2024.

Current wording

(7)Our credit agreement defines our consolidated indebtedness as the sum of all indebtedness (other than letters of credit or bank guarantees, to the extent undrawn) consisting of indebtedness for borrowed money and capitalized lease obligations, less unrestricted cash, which was $155.1 million (as defined by the credit agreement) at September 30, 2024.

Previous wording

As of June 30, 2024, we had $162.7 million of cash and cash equivalents and $189.0 million of additional borrowing capacity. As of June 30, 2024, the available borrowings under our credit facility were reduced by $11.0 million due to outstanding letters of credit. As of December 31, 2023, we had $136.7 million of cash and cash equivalents and $189.0 million of additional borrowing capacity under our revolving credit facility. As of December 31, 2023, the available borrowings under our credit facility were reduced by $11.0 million due to outstanding letters of credit.

Current wording

As of September 30, 2024, we had $187.9 million of cash and cash equivalents and $188.7 million of additional borrowing capacity under our revolving credit facility. As of September 30, 2024, the available borrowings under our credit facility were reduced by $11.3 million due to outstanding letters of credit. As of December 31, 2023, we had $136.7 million of cash and cash equivalents and $189.0 million of additional borrowing capacity under our revolving credit facility. As of December 31, 2023, the available borrowings under our credit facility were reduced by $11.0 million due to outstanding letters of credit.

Previous wording

Net cash provided by operating activities was $139.0 million and $92.2 million during the six months ended June 30, 2024 and 2023, respectively. The change in year-over-year operating cash flows was primarily the result of an increase in net income, a lower use of cash for trade working capital, and the timing of accrued expenses during the six months ended June 30, 2024.

Current wording

Net cash provided by operating activities was $229.9 million and $195.7 million during the nine months ended September 30, 2024 and 2023, respectively. The change in year-over-year operating cash flows was primarily the result of an increase in net income, a lower use of cash for trade working capital, and the timing of accrued expenses during the nine months ended September 30, 2024.

Previous wording

Cash used for investing activities was $7.0 million during the six months ended June 30, 2024 and $1.8 million during the six months ended June 30, 2023. Investing activities during the six months ended June 30, 2024, consisted of $8.6 million of capital expenditures, which were partially offset by $1.6 million from the sale of certain long-lived assets. Investing activities during the six months ended June 30, 2023, consisted of $11.1 million of capital expenditures, which were partially offset by the receipt of $9.0 million in connection with an insurance settlement and $0.3 million from the sale of certain long-lived assets.

Current wording

Cash used for investing activities was $11.1 million during the nine months ended September 30, 2024 and $6.6 million during the nine months ended September 30, 2023. Investing activities during the nine months ended September 30, 2024, consisted of $12.7 million of capital expenditures, which were partially offset by $1.6 million from the sale of certain long-lived assets. Investing activities during the nine months ended September 30, 2023, consisted of $15.9 million of capital expenditures, which were partially offset by the receipt of $9.0 million in connection with an insurance settlement and $0.3 million from the sale of certain long-lived assets.

Previous wording

Cash used for financing activities was $104.2 million during the six months ended June 30, 2024, compared to $113.5 million during the six months ended June 30, 2023. During the six months ended June 30, 2024, we utilized $0.4 million of cash for payments on finance leases, $79.9 million to repurchase outstanding shares of our common stock, and $27.7 million for the payment of common stock dividends, which was partially offset by $3.8 million of proceeds from the exercise of stock options. During the six months ended June 30, 2023, we utilized a net $3.1 million of cash for payments on outstanding debt, $87.1 million to repurchase outstanding shares of our common stock, and $24.5 million for the payment of common stock dividends, which was partially offset by $1.2 million of proceeds from the exercise of stock options.

Current wording

Cash used for financing activities was $165.8 million during the nine months ended September 30, 2024, compared to $141.5 million during the nine months ended September 30, 2023. During the nine months ended September 30, 2024, we utilized $0.6 million of cash for payments on finance leases, $129.9 million to repurchase outstanding shares of our common stock, and $41.3 million for the payment of common stock dividends, which was partially offset by $6.0 million of proceeds from the exercise of stock options and ESPP contributions, net of taxes withheld and paid on employees' share-based awards. During the nine months ended September 30, 2023, we utilized a net $4.7 million of cash for payments on outstanding debt, $100.2 million to repurchase outstanding shares of our common stock, and $36.6 million for the payment of common stock dividends.

Previous wording

As of June 30, 2024, we had $495.5 million of total indebtedness outstanding as follows (in millions):

Current wording

As of September 30, 2024, we had $495.6 million of total indebtedness outstanding as follows (in millions):

Previous wording

(1)Includes unamortized original issue discount and debt issuance costs of $6.1 million at June 30, 2024.

Current wording

(1)Includes unamortized original issue discount and debt issuance costs of $5.7 million at September 30, 2024.