Zurn Elkay Water Solutions Corp

Previous wording

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities on the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Refer to Item 7, MD&A, of our Annual Report on Form 10-K for the year ended December 31, 2023 for information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management. Except for the items reported below, management believes that as of September 30, 2024, and during the period from January 1, 2024 through September 30, 2024, there has been no material change to this information.

Current wording

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities on the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Refer to Item 7, MD&A, of our Annual Report on Form 10-K for the year ended December 31, 2024 for information with respect to our critical accounting estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management. Except for the items reported below, management believes that as of March 31, 2025, and during the period from January 1, 2025 through March 31, 2025, there has been no material change to this information.

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 nine months ended September 30, 2024 and September 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 three months ended March 31, 2025 and March 31, 2024 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 nine months ended September 30, 2024 and September 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 months ended March 31, 2025 and March 31, 2024, are as follows (in millions):

Previous 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.

Current wording

(1)Selling, general and administrative income includes the release 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 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.

Current wording

During the three months ended March 31, 2025, 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 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 months ended March 31, 2025, restructuring charges totaled $1.7 million. For the three months ended March 31, 2024, restructuring charges totaled $6.3 million. Refer to Item 1, Note 2, Restructuring and Other Similar Charges for further information.

Previous 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.

Current wording

During the three months ended March 31, 2025, income from operations was $63.4 million compared to $53.2 million during the three months ended March 31, 2024. Income from operations as a percentage of net sales increased by 210 basis points year over year due to the benefits from our productivity initiatives and continuous improvement activities across the organization, as well as lower restructuring charges and carryover benefits of synergy actions taken in the prior year.

Previous 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.

Current wording

Interest expense, net was $7.3 million for the three months ended March 31, 2025, compared to $8.8 million for the three months ended March 31, 2024. The decrease in interest expense, net as compared to the prior year period is primarily due to reduced interest expense in the current year as a result of lower interest rates.

Previous 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.

Current wording

Other expense, net for the three months ended March 31, 2025 and 2024, was $0.0 million and $1.4 million, respectively. Other expense, net consists primarily of foreign currency transaction gains and losses, the non-service cost components associated with our defined benefit and postretirement 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 as a result of the curtailment gain of$0.7 million recognized in connection with the U.S. pension plan freeze as well as a higher expected return on plan assets.

Previous 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.

Current wording

The income tax provision was $15.1 million for the three months ended March 31, 2025, compared to $9.0 million for the three months ended March 31, 2024. The effective income tax rate for the three months ended March 31, 2025 was 26.9% versus 20.9% for the three months ended March 31, 2024. The effective income tax rate for the three months ended March 31, 2025 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. The effective income tax rate for the three months ended March 31, 2024 was slightly below the U.S. federal statutory rate of 21% as 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, was effectively 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.

Previous 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.

Current wording

Net income for the three months ended March 31, 2025, was $43.6 million compared to net income of $34.3 million for the three months ended March 31, 2024. Diluted net income per share for the three months ended March 31, 2025 and March 31, 2024, was $0.26 and $0.19, respectively. The year-over-year change is the result of the factors described above. Net income from discontinued operations, net of tax, was $2.6 million for the three months ended March 31, 2025 compared to net income from discontinued operations, net of tax, of $0.3 million for the three months ended March 31, 2024. Diluted net income per share from discontinued operations for the three months ended March 31, 2025 and March 31, 2024, was $0.02 and $0.00, respectively.

Previous wording

Core sales excludes the impact of mergers, acquisitions, divestitures and foreign currency translation. Management believes that core sales facilitates easier and more meaningful comparisons of our net sales performance with prior and future periods and to our peers. We exclude the effect of mergers, acquisitions and divestitures because the nature, size and number can vary dramatically from period to period and between us and our peers and can also obscure underlying business trends and make comparisons of long-term performance difficult. We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.

Current wording

Core sales excludes the impact of mergers and acquisitions, divestitures and foreign currency translation. Management believes that core sales facilitates easier and more meaningful comparisons of our net sales performance with prior and future periods and to our peers. We exclude the effect of mergers and acquisitions and divestitures because the nature, size and number can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult. We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.

Previous 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.

Current wording

The calculation of Adjusted EBITDA under our credit agreement as of March 31, 2025, 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 three months ended March 31, 2025, we reported net income of $43.6 million and Adjusted EBITDA for the same period of $98.0 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 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.

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 March 31, 2025, 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.

Previous wording

(6)Other, net consists of gains and losses on the disposition of long-lived assets per the credit agreement.

Current wording

(5)Other, net consists of gains and losses on the disposition of long-lived assets per the credit agreement.

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 $155.1 million (as defined by the credit agreement) at September 30, 2024.

Current wording

(6)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 $107.3 million (as defined by the credit agreement) at March 31, 2025.

Previous wording

(8)Our credit agreement defines the Net First Lien Leverage Ratio as the ratio of consolidated indebtedness (as described above) to Adjusted EBITDA for the trailing four fiscal quarters.

Current wording

(7)Our credit agreement defines the Net First Lien Leverage Ratio as the ratio of consolidated indebtedness (as described above) to Adjusted EBITDA for the trailing four fiscal quarters.

Previous 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.

Current wording

As of March 31, 2025, we had $144.7 million of cash and cash equivalents and $188.9 million of additional borrowing capacity under our revolving credit facility. As of March 31, 2025, the available borrowings under our credit facility were reduced by $11.1 million due to outstanding letters of credit. As of December 31, 2024, we had $198.0 million of cash and cash equivalents and $188.7 million of additional borrowing capacity under our revolving credit facility. As of December 31, 2024, the available borrowings under our credit facility were reduced by $11.3 million due to outstanding letters of credit.

Previous 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.

Current wording

Net cash provided by operating activities was $42.9 million and $53.9 million during the three months ended March 31, 2025 and 2024, respectively. The change in year-over-year operating cash flows was primarily the result of higher use of cash for trade working capital partially offset by an increase in net income during the three months ended March 31, 2025.

Previous 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.

Current wording

Cash used for investing activities was $4.3 million during the three months ended March 31, 2025 and $2.1 million during the three months ended March 31, 2024. Investing activities during the three months ended March 31, 2025, consisted of $4.3 million of capital expenditures. Investing activities during the three months ended March 31, 2024, consisted of $3.7 million of capital expenditures, which were partially offset by $1.6 million from the sale of certain long-lived assets.

Previous 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.

Current wording

Cash used for financing activities was $92.1 million during the three months ended March 31, 2025, compared to $30.9 million during the three months ended March 31, 2024. During the three months ended March 31, 2025, we utilized $0.2 million of cash for payments on finance leases, $77.4 million to repurchase outstanding shares of our common stock, and $15.2 million for the payment of common stock dividends, which was partially offset by $0.7 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 three months ended March 31, 2024, we utilized $0.2 million of cash for payments on finance leases, $18.9 million to repurchase outstanding shares of our common stock, and $13.9 million for the payment of common stock dividends, which was partially offset by $2.1 million of proceeds from the exercise of stock options.

Previous wording

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

Current wording

As of March 31, 2025, we had $495.8 million of total indebtedness outstanding as follows (in millions):

Previous wording

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

Current wording

(1)Includes unamortized original issue discount and debt issuance costs of $5.0 million at March 31, 2025.