[Part I FINANCIAL INFORMATION](index=4&type=section&id=Part%20I%20FINANCIAL%20INFORMATION) [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company presents its unaudited condensed consolidated financial statements for Q1 2022, including key events like the PMC spin-off [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets grew to $1,118.6 million while total liabilities decreased, resulting in higher stockholders' equity Condensed Consolidated Balance Sheet Highlights (in Millions) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total current assets** | $520.1 | $474.8 | | Inventories | $224.3 | $184.5 | | **Total assets** | **$1,118.6** | **$1,077.7** | | **Total current liabilities** | $214.5 | $240.4 | | Long-term debt | $532.9 | $533.9 | | **Total liabilities** | **$924.9** | **$951.3** | | **Total stockholders' equity** | **$193.7** | **$126.4** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Net sales increased 16.8% to $239.6 million, though net income fell due to discontinued operations from the PMC spin-off Statement of Operations Summary (in Millions, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net sales | $239.6 | $205.2 | | Gross profit | $101.9 | $88.4 | | Income from operations | $43.9 | $24.0 | | Net income from continuing operations | $29.4 | $10.0 | | Income from discontinued operations, net of tax | $0.8 | $40.0 | | **Net income attributable to Zurn common stockholders** | **$30.2** | **$50.0** | | **Diluted net income per share** | **$0.24** | **$0.40** | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating activities used $53.9 million in cash, a significant shift from the prior year due to working capital changes Cash Flow Summary (in Millions) | Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Cash (used for) provided by operating activities | $(53.9) | $71.3 | | Cash provided by (used for) investing activities | $35.5 | $(8.1) | | Cash used for financing activities | $(5.2) | $(9.4) | | **(Decrease) increase in cash** | **$(23.4)** | **$51.7** | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail the PMC spin-off, the pending Elkay merger, revenue recognition policies, and asbestos-related contingencies - On October 4, 2021, the company completed the spin-off of its Process & Motion Control (PMC) business, which is now reported as **discontinued operations**[28](index=28&type=chunk)[29](index=29&type=chunk) - On February 12, 2022, Zurn entered into a definitive agreement to combine with Elkay Manufacturing Company in a merger transaction expected to close in the **third quarter of 2022**[33](index=33&type=chunk)[34](index=34&type=chunk) - As of March 31, 2022, the company had an estimated potential liability of **$66.0 million** for asbestos-related claims, with a corresponding receivable from insurance carriers for the same amount, as the liability is expected to be covered by insurance[101](index=101&type=chunk)[103](index=103&type=chunk) Revenue by Geography (Q1 2022 vs Q1 2021, in Millions) | Geography | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | United States | $219.6 | $185.7 | | Canada | $15.1 | $14.5 | | Rest of world | $4.9 | $5.0 | | **Total** | **$239.6** | **$205.2** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management analyzes Q1 2022 performance, highlighting a 17% sales increase and the impacts of the pending Elkay merger [Results of Operations](index=25&type=section&id=Results%20of%20Operations) Net sales rose 17% to $239.6 million, driving an 82.9% increase in operating income and margin expansion - The decrease in interest expense from $9.6 million in Q1 2021 to **$4.8 million in Q1 2022** was primarily due to lower outstanding borrowings following the Spin-Off Transaction refinancing[122](index=122&type=chunk) Net Sales Comparison (in Millions) | Period | Net Sales | Change | % Change | | :--- | :--- | :--- | :--- | | Q1 2022 | $239.6 | $34.4 | 16.8% | | Q1 2021 | $205.2 | | | Income from Operations Comparison (in Millions) | Period | Income from operations | % of net sales | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Q1 2022 | $43.9 | 18.3% | $19.9 | 82.9% | | Q1 2021 | $24.0 | 11.7% | | | [Non-GAAP Financial Measures and Covenant Compliance](index=26&type=section&id=Non-GAAP%20Financial%20Measures%20and%20Covenant%20Compliance) The company reports Pro forma Adjusted EBITDA of $204.3 million and maintains a healthy net leverage ratio of 2.36 to 1.0 - As of March 31, 2022, the company's **total net leverage ratio was 2.36 to 1.0**, in compliance with the credit agreement covenant which requires a ratio below 5.00 to 1.0[132](index=132&type=chunk)[140](index=140&type=chunk) Reconciliation of Net Income to Adjusted EBITDA (Trailing Twelve Months ended March 31, 2022, in Millions) | Metric | Amount | | :--- | :--- | | Net income attributable to Zurn common stockholders | $101.1 | | Adjustments (Discontinued ops, taxes, interest, D&A, etc.) | $55.5 | | EBITDA | $156.6 | | Other Adjustments (Restructuring, stock comp, LIFO, etc.) | $46.9 | | **Adjusted EBITDA** | **$203.5** | | Pro forma adjustment for acquisitions | $0.8 | | **Pro forma Adjusted EBITDA** | **$204.3** | [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with $73.2 million in cash and $193.9 million in available credit - As of March 31, 2022, the company had **$73.2 million of cash** and cash equivalents and **$193.9 million of additional borrowing capacity** under its revolving credit facility[142](index=142&type=chunk) - The year-over-year decrease in operating cash flow was primarily due to **higher trade working capital** and the timing of payments on accounts payable and accrued expenses[145](index=145&type=chunk) - Investing activities in Q1 2022 included the receipt of **$35.0 million** from Regal Rexnord Corporation related to the final net assets transferred in the PMC Spin-Off[146](index=146&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is primarily exposed to market risks from foreign currency exchange rates and interest rate fluctuations - The company's primary market risks arise from changes in **foreign currency exchange rates and interest rates**[150](index=150&type=chunk) [Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) The CEO and CFO confirmed the effectiveness of disclosure controls and procedures with no material changes in internal controls - Management, including the CEO and CFO, concluded that the company's **disclosure controls and procedures were effective** as of March 31, 2022[152](index=152&type=chunk) - **No changes in internal control over financial reporting** occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[154](index=154&type=chunk) [Part II OTHER INFORMATION](index=32&type=section&id=Part%20II%20OTHER%20INFORMATION) [Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) The company references Note 15 for details on legal matters, particularly asbestos-related litigation - For information on legal proceedings, the report refers to Note 15, which details various claims including product liability, commercial, and environmental matters, with a significant disclosure on **asbestos litigation**[99](index=99&type=chunk)[157](index=157&type=chunk) [Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) This section updates risk factors, focusing exclusively on new risks related to the proposed merger with Elkay [Risks Related to the Merger with Elkay](index=32&type=section&id=Risks%20Related%20to%20the%20Merger%20with%20Elkay) Key risks include merger completion uncertainty, potential integration challenges, and the dilutive effect on current stockholders - There is **no assurance the merger with Elkay will be completed**, as it is subject to numerous conditions, including stockholder approvals and the absence of legal prohibitions[158](index=158&type=chunk)[159](index=159&type=chunk) - **Failure to complete the merger could adversely affect Zurn**, as it would incur significant costs without realizing any benefits, and management's time would have been diverted[165](index=165&type=chunk) - Post-merger success depends on Zurn's ability to **integrate Elkay's business**, which includes combining personnel, systems, and customer relationships, and realizing anticipated synergies[178](index=178&type=chunk) - Current Zurn stockholders will have a **reduced ownership stake of approximately 71%** post-merger, resulting in less influence over management and policies[181](index=181&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No common stock was repurchased in Q1 2022, with $162.8 million remaining under the authorized repurchase program - The Company **did not repurchase any shares** during the three months ended March 31, 2022[186](index=186&type=chunk) - A total of approximately **$162.8 million** of the existing authority remained under the Share Repurchase Program at March 31, 2022[186](index=186&type=chunk) [Exhibits](index=38&type=section&id=Item%206.%20Exhibits) This section lists filed exhibits, including Sarbanes-Oxley certifications and Inline XBRL financial data - The exhibits filed with this report include **CEO and CFO certifications** pursuant to Section 302 of the Sarbanes-Oxley Act and Section 1350 of U.S.C. Title 18, as well as Inline XBRL data files[188](index=188&type=chunk) [Signatures](index=39&type=section&id=Signatures) The report was officially signed and authorized by the Senior Vice President and Chief Financial Officer on April 27, 2022 - The report was signed on **April 27, 2022**, by Mark W. Peterson, Senior Vice President and Chief Financial Officer[193](index=193&type=chunk)

PART I [Explanatory Note Regarding the Transition Period](index=3&type=section&id=EXPLANATORY%20NOTE%20REGARDING%20THE%20TRANSITION%20PERIOD) The company transitioned its fiscal year-end from March 31 to December 31, effective after fiscal year 2020, including financial information for the nine-month transition period and comparisons for fiscal 2021 - Fiscal year-end changed from **March 31** to **December 31** after fiscal year 2020[16](index=16&type=chunk) - Report includes financial information for the transition period from April 1, 2020, through December 31, 2020[16](index=16&type=chunk) - Fiscal 2021 covers January 1, 2021, to December 31, 2021, with comparisons to the unaudited twelve-month period ended December 31, 2020[16](index=16&type=chunk) [Cautionary Notice Regarding Forward-Looking Statements](index=3&type=section&id=CAUTIONARY%20NOTICE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, which could cause actual results to differ materially - Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially[18](index=18&type=chunk) - Key risk factors include: - Competitive environment, general economic conditions, and market factors[18](index=18&type=chunk) - Increases in raw material costs, including tariffs, and inability to offset with price increases[18](index=18&type=chunk) - Effects of the COVID-19 pandemic on business, financial condition, employees, customers, distributors, and supply chain[18](index=18&type=chunk) - Performance and potential failure of information and data security systems, including cyber security threats[18](index=18&type=chunk) - Costs and uncertainties related to strategic acquisitions or divestitures and integration of acquired businesses[19](index=19&type=chunk) - Loss of any significant customer and dependence on independent distributors[19](index=19&type=chunk) - Impact of indebtedness, changes in technology, and manufacturing techniques[19](index=19&type=chunk) - Impact of weather on product demand seasonality and climate change on operations[19](index=19&type=chunk) - Costs of environmental compliance and liabilities under environmental, health, and safety laws[19](index=19&type=chunk) - Changes in governmental laws and regulations, including those addressing climate change and taxes[19](index=19&type=chunk) - Costs associated with asbestos claims and other potential product liability[19](index=19&type=chunk) - Access to available and reasonable financing, reliance on intellectual property, and work stoppages by unionized employees[19](index=19&type=chunk) - Loss of key personnel and failure to effectively manage human capital resources[19](index=19&type=chunk) - Changes in pension funding requirements and potential impairment of goodwill and intangible assets[19](index=19&type=chunk) - Terrorism, conflicts, wars, and other events outside control, including infectious disease outbreaks[19](index=19&type=chunk) [Item 1. Business](index=5&type=section&id=ITEM%201.%20BUSINESS.) Zurn Water Solutions Corporation completed a Reverse Morris Trust tax-free spin-off, divesting its Process & Motion Control business to become a pure-play water management company - On **October 4, 2021**, Zurn Water Solutions Corporation completed a Reverse Morris Trust tax-free spin-off transaction, divesting its Process & Motion Control business[20](index=20&type=chunk)[21](index=21&type=chunk) - Post-spin-off, Zurn is a growth-oriented, pure-play water management business, offering a broad portfolio of specification-driven solutions for health, safety, and environmental improvement[22](index=22&type=chunk) - The company operates under the Zurn Business System (ZBS), an operating philosophy focused on continuous improvement, superior customer satisfaction, and world-class operating performance[22](index=22&type=chunk)[28](index=28&type=chunk) [Our Company](index=5&type=section&id=Our%20Company) Zurn Water Solutions Corporation completed a tax-free spin-off, transforming into a pure-play water management business, specializing in sustainable, specification-driven solutions for commercial and institutional buildings - Zurn Water Solutions Corporation completed a Reverse Morris Trust tax-free spin-off on **October 4, 2021**, divesting its Process & Motion Control business[20](index=20&type=chunk)[21](index=21&type=chunk) - The company is now a pure-play water management business, designing, manufacturing, and marketing sustainable, specification-driven solutions for health, safety, and the environment[22](index=22&type=chunk) - Zurn's strategy focuses on end markets with sustainable growth, aiming for industry leadership, and pursuing strategic acquisitions to expand product lines and geographic presence[24](index=24&type=chunk) [ZBS (Zurn Business System)](index=6&type=section&id=ZBS) The Zurn Business System (ZBS) is the company's operating philosophy, a scalable, process-based framework centered on continuous improvement (Kaizen), aiming to drive superior customer satisfaction and financial results - ZBS is a scalable, process-based framework focused on driving superior customer satisfaction and financial results through world-class operating performance[28](index=28&type=chunk) - Principles include: - Strategy deployment, measuring performance based on 'Voice of the Customer', involvement of all associates, and a culture embracing Kaizen (continuous improvement)[28](index=28&type=chunk) - Application of ZBS has led to improvements in growth, productivity, cost reduction, and asset efficiency[28](index=28&type=chunk) [Our Business](index=6&type=section&id=Our%20Business) Zurn is a leading provider of specification-driven water management solutions, offering a broad portfolio of professional-grade products under recognized brands for institutional, commercial, waterworks, and multi-family residential construction markets - Zurn designs, manufactures, and markets a broad portfolio of specification-driven water management solutions to improve health, human safety, and the environment[29](index=29&type=chunk) - Products are sold under widely recognized brand names including Zurn®, Wilkins®, Green Turtle®, World Dryer®, StainlessDrains.com™, JUST®, Hadrian® and Wade®[29](index=29&type=chunk) - Demand is primarily driven by new commercial and institutional building construction, retrofits for energy/water efficiency, and, to a lesser extent, new waterworks and multi-family residential construction[30](index=30&type=chunk) [Our Markets](index=6&type=section&id=Our%20Markets) Zurn operates in fragmented, highly competitive markets, focusing on segments requiring product quality, reliability, and innovation, with significant long-term growth potential in commercial, institutional, and waterworks construction - Zurn operates in relatively fragmented and highly competitive markets, avoiding commoditized segments[34](index=34&type=chunk) - The company believes its served markets, including commercial, institutional, and waterworks construction, have solid long-term growth characteristics, potentially exceeding overall U.S. industrial production growth[33](index=33&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) - Success in these specification-driven markets relies on strong relationships with engineers, architects, contractors, and builders, and continuous product innovation[37](index=37&type=chunk) [Our Products](index=7&type=section&id=Our%20Products) Zurn's products are project-critical, highly-engineered, and high value-add, typically representing a low percentage of overall project cost, meeting stringent regulatory and code requirements - Zurn's products are project-critical, highly-engineered, and high value-add, typically a low percentage of overall project cost, leading to high end-user loyalty[38](index=38&type=chunk) - Products must meet stringent regulatory, building, and plumbing code requirements from bodies like IAPMO, NSF, UL, FM, PDI, and AWWA[38](index=38&type=chunk) [Water Safety and Control Products](index=7&type=section&id=Water%20Safety%20and%20Control%20Products) Zurn's Water Safety and Control products, under Zurn and Wilkins brands, include highly engineered valves and water distribution controls that protect potable and emergency water supplies for various applications - Water safety and control products, under Zurn and Wilkins brands, include valves (backflow preventers, fire system valves, pressure reducing valves, thermostatic mixing valves) and water distribution control products (PEX piping, fittings, tools)[39](index=39&type=chunk)[40](index=40&type=chunk) - These products are highly specified, engineered flow control devices designed to meet stringent requirements from independent test labs (IAPMO, NSF, UL, FM)[39](index=39&type=chunk)[40](index=40&type=chunk) - They are sold into commercial, institutional, industrial new construction and retrofit, as well as fire protection, municipal water/wastewater, and irrigation markets[39](index=39&type=chunk) [Flow Systems Products](index=7&type=section&id=Flow%20Systems%20Products) Flow systems products manage storm and wastewater within buildings and sites, including drains, hydrants, and pre-treatment solutions, with recent acquisitions expanding the portfolio - Flow systems products manage storm and wastewater, including point drains, hydrants, fixture carrier systems, and chemical drainage systems[41](index=41&type=chunk) - Wastewater pre-treatment products include oil and grease interceptors and separators, acid neutralization systems, and remote monitoring systems, marketed under Zurn® and Green Turtle® brands[41](index=41&type=chunk) - Acquisitions in fiscal 2020 and 2021, such as StainlessDrains.com, ATS GREASEwatch, and Wade Drains, expanded the flow systems portfolio with specialized stainless steel drains, remote tank monitoring, and additional drainage products[42](index=42&type=chunk)[43](index=43&type=chunk)[44](index=44&type=chunk) [Hygienic and Environmental Products](index=8&type=section&id=Hygienic%20and%20Environmental%20Products) Hygienic and environmental products, installed in later construction stages, include sensor-operated flush valves, heavy-duty commercial faucets, and water-conserving fixtures, with acquisitions broadening the comprehensive offerings - Hygienic and environmental products include sensor-operated flush valves (Aquaflush®, AquaSense®, AquaVantage®) and heavy-duty commercial faucets (AquaSpec®)[45](index=45&type=chunk) - Innovative water-conserving fixtures (EcoVantage®, Zurn One®) provide complete, customizable plumbing systems, promoting water efficiency and cost savings[45](index=45&type=chunk) - Acquisitions of Just Manufacturing (stainless steel sinks) and Hadrian (restroom partitions) in fiscal 2020 expanded the hygienic and environmental product portfolio[46](index=46&type=chunk) [Acquisitions](index=8&type=section&id=Acquisitions) Acquisitions are a critical part of Zurn's growth strategy, focusing on leading companies in attractive markets that can benefit from the ZBS, expanding product portfolio and market presence - Acquisitions are a critical part of Zurn's growth strategy, targeting leading companies in attractive markets that can benefit from the ZBS to increase customer satisfaction, revenue growth, and operating margins[47](index=47&type=chunk) Recent Acquisitions (FY2019-FY2021) | Date | Acquired Company | Product Line/Market | Cash Purchase Price (Millions) | | :--- | :--- | :--- | :--- | | Nov 17, 2021 | Wade Drains | Commercial flow systems | $13.7 | | Apr 16, 2021 | ATS GREASEwatch | Remote tank monitoring devices | $4.5 | | Dec 11, 2020 | Hadrian | Washroom partitions and lockers | $101.3 | | Jan 28, 2020 | Just Manufacturing | Stainless steel sinks and plumbing fixtures | $59.4 | | May 10, 2019 | StainlessDrains.com | Stainless steel drains, grates, accessories | $24.8 | [Customers](index=9&type=section&id=Customers) Zurn's water management products are sold for new construction, remodeling, and retrofit applications to commercial, institutional, waterworks, and multi-family residential markets through a network of independent sales representatives and distribution centers - Products are sold to commercial, institutional, waterworks, and multi-family residential end markets for new construction, remodeling, and retrofit applications[50](index=50&type=chunk) - Distribution network includes approximately **1,600** independent sales representatives and regional distribution centers, providing same-day service and quick response times[50](index=50&type=chunk) - Strong brand recognition for Zurn® and Wilkins® and a propensity for 'like-for-like' product replacement contribute to end-user loyalty[50](index=50&type=chunk) [Product Development](index=9&type=section&id=Product%20Development) Zurn's product development is driven by its "Voice of the Customer" philosophy, supported by a team of approximately **90** engineers, holding numerous patents, and leveraging a digital strategy for real-time insights - New product development is primarily driven by the 'Voice of the Customer' operating philosophy, supported by a team of approximately **90** engineers[52](index=52&type=chunk) - Zurn holds approximately **150 U.S. patents** and **70 foreign patents**, with product innovation being crucial for meeting specifications and regulatory demands[53](index=53&type=chunk) - The digital strategy includes the plumbSMART™ platform, integrating IIoT and e-commerce for real-time insights from Zurn Connected Products, enhancing customer productivity and safety[54](index=54&type=chunk) [Suppliers and Raw Materials](index=9&type=section&id=Suppliers%20and%20Raw%20Materials) Zurn's manufacturing relies on commodities and components from numerous sources, including brass, castings, copper, zinc, and engineered plastics, with a global sourcing strategy to ensure alternate supply and prevent dependence on a single supplier - Principal materials include brass, castings, copper, zinc, forgings, plate steel, high-performance engineered plastic, and resin[55](index=55&type=chunk) - Global sourcing strategy maintains alternate supply sources to avoid dependence on a single source for significant raw materials or components[56](index=56&type=chunk) - The company has not experienced significant material shortages and does not historically engage in hedging transactions for commodity supplies[56](index=56&type=chunk) [Backlog](index=9&type=section&id=Backlog) Zurn's backlog of unshipped orders significantly increased from **$36 million** in 2020 to **$70 million** in 2021, with all of the 2021 backlog expected to ship during the year ending December 31, 2022 Backlog of Unshipped Orders | As of December 31, | Amount (Millions) | | :--- | :--- | | 2021 | $70 | | 2020 | $36 | - All backlog as of December 31, 2021, is expected to ship during the year ending December 31, 2022[57](index=57&type=chunk) [Seasonality](index=9&type=section&id=Seasonality) Demand for Zurn's products is influenced by commercial and institutional building activity, remodeling, retrofit opportunities, and new home starts, making weather a significant variable, with sales generally decreasing slightly in the third and fourth calendar quarters - Demand for products is primarily driven by commercial and institutional building activity, remodeling, retrofit, and new home starts, making weather an important variable[58](index=58&type=chunk) - Sales generally decrease slightly in the third and fourth calendar quarters due to the main construction season occurring in spring and summer in the U.S. and Canada[59](index=59&type=chunk) - Operating results are susceptible to general economic conditions and market factors, particularly in cyclical industries[60](index=60&type=chunk) [Human Capital Management](index=10&type=section&id=Human%20Capital%20Management) As of December 31, 2021, Zurn had approximately **1,300 employees**, with **900 in the United States** and **110 U.S. employees are unionized**, prioritizing talent development, diversity, and health and safety - As of December 31, 2021, Zurn had approximately **1,300 employees**, with **900 in the United States**; **110 U.S. employees are unionized**[61](index=61&type=chunk) - Committed to fostering diversity and inclusion, recognizing unique perspectives from various backgrounds[62](index=62&type=chunk) - Invests in training and talent development, conducting employee surveys and providing competitive compensation and benefits[63](index=63&type=chunk) - Prioritizes health and safety, reducing Total Recordable Incident Rate (TRIR) by **over 60%** from 2017 to 2021, achieving a TRIR of **0.96 per 100 full-time workers**, which is better than best-in-class benchmarks[64](index=64&type=chunk)[65](index=65&type=chunk) [Compliance with Laws and Regulations](index=10&type=section&id=Compliance%20with%20Laws%20and%20Regulations) Zurn's operations are subject to extensive environmental, health, and safety laws and regulations globally, with non-compliance potentially leading to significant fines, penalties, and liabilities for contamination - Operations are subject to extensive laws and regulations related to pollution, environmental protection, health, and safety[66](index=66&type=chunk) - Non-compliance could result in civil/criminal fines, penalties, enforcement actions, third-party claims, and orders to curtail operations or perform remediation[66](index=66&type=chunk) - The company may incur liabilities for investigating and remediating contamination as a present/former owner or a potentially responsible party (PRP), with liability potentially being joint and several[67](index=67&type=chunk) [Additional Information](index=11&type=section&id=Additional%20Information) Zurn's principal executive office is in Milwaukee, Wisconsin, and the company makes its SEC filings and corporate governance documents available free of charge on its website and through the SEC's website - Principal executive office: 511 West Freshwater Way, Milwaukee, Wisconsin 53204[69](index=69&type=chunk) - SEC filings (10-K, 10-Q, 8-K, proxy statements) are available free on the company's website (www.zurnwatersolutions.com) and the SEC's website (www.sec.gov)[69](index=69&type=chunk) - Website also includes charters for Board committees, Corporate Governance Guidelines, and the Code of Business Conduct and Ethics[69](index=69&type=chunk) [Item 1A. Risk Factors](index=12&type=section&id=ITEM%201A.%20RISK%20FACTORS.) This section outlines various risks that could materially and adversely affect Zurn's business, financial condition, or results of operations, categorized into strategic, operational, financial, legal and compliance, and those related to the Spin-Off Transaction [Strategic Risks](index=12&type=section&id=Strategic%20Risks) Strategic risks include the adverse effects of the COVID-19 pandemic, intense market competition, inability to manage technological changes, economic weaknesses, challenges in integrating acquisitions, and loss of significant customers or distributors - COVID-19 pandemic continues to adversely affect business, operations, suppliers, and customers, causing supply chain disruptions and potential increased compensation expenses[72](index=72&type=chunk) - Highly competitive markets may lead to downward pressure on product pricing and profit margins[74](index=74&type=chunk) - Inability to manage changing technology, product innovation, and new manufacturing techniques could result in a competitive disadvantage[76](index=76&type=chunk) - Economic and financial market weakness, especially in cyclical industries like construction, can reduce demand and profitability[78](index=78&type=chunk) - Failure to effectively integrate acquisitions could adversely affect business, financial condition, and results of operations[82](index=82&type=chunk) - Loss or financial instability of significant customers (top five accounted for **41% of net sales** in 2021, one customer **23%**) or key independent distributors (top three accounted for **35% of net sales** in 2021, largest **23%**) could have a material adverse effect[84](index=84&type=chunk)[87](index=87&type=chunk) - Inability to adequately protect intellectual property or defend against infringement claims could harm the business[89](index=89&type=chunk) - Failure to realize intended benefits from Supply Chain Optimization, Footprint Repositioning, restructuring, and divestiture efforts could hurt profitability[91](index=91&type=chunk) - Terrorism, conflicts, wars, and weather events may disrupt operations and decrease product demand[94](index=94&type=chunk) [Operational Risks](index=15&type=section&id=Operational%20Risks) Operational risks include increased costs or unavailability of raw materials, failures in ERP systems or data security, inability to attract and retain key personnel, and disruptions from adverse weather or long-term climate change effects - Increases in the cost or unavailability of raw materials (e.g., bar steel, brass, copper, zinc) due to tariffs, trade wars, or infectious diseases could adversely affect profitability[95](index=95&type=chunk) - Ongoing updates to Enterprise Resource Planning (ERP) systems, failures of data security, or cyber security breaches could cause substantial business interruptions and reputational damage[97](index=97&type=chunk)[98](index=98&type=chunk) - Inability to attract and retain key personnel or effectively manage human capital resources in a highly competitive industry may adversely affect the business[101](index=101&type=chunk) - Increased frequency of weather events could disrupt construction activity and adversely affect product demand[102](index=102&type=chunk) - Long-term effects of climate change, such as changes in rainfall and water availability, could decrease demand for certain products or alter product sales mix, reducing margins[103](index=103&type=chunk) - Potential physical impacts of climate change (e.g., extreme weather) could disrupt infrastructure, supply chains, and business operations[104](index=104&type=chunk) [Financial Risks](index=16&type=section&id=Financial%20Risks) Financial risks stem from Zurn's debt levels, fluctuating interest rates, restrictive covenants, potential impairment of goodwill and intangible assets, and increased cash contributions to pension plans - High debt levels could adversely affect the ability to raise additional capital, react to economic changes, make beneficial acquisitions, implement capital allocation strategy, and make debt service payments[105](index=105&type=chunk)[107](index=107&type=chunk)[108](index=108&type=chunk) - Indebtedness bears interest at variable rates (e.g., LIBOR), and the transition to alternative rates like SOFR could lead to increased interest expenses and limited access to capital[109](index=109&type=chunk)[110](index=110&type=chunk) - Agreements governing financing arrangements impose operating and financial restrictions (e.g., limits on debt, dividends, acquisitions), and failure to comply could result in default[112](index=112&type=chunk) - Goodwill and intangible assets (**$254.1 million** and **$179.1 million**, respectively, as of December 31, 2021) are high relative to total assets and subject to impairment, which would negatively affect results of operations[114](index=114&type=chunk) - Required cash contributions to pension plans may increase due to factors like asset returns, market interest rates, or legislative changes, potentially reducing cash available for other obligations[116](index=116&type=chunk)[117](index=117&type=chunk) [Legal and Compliance Risks](index=19&type=section&id=Legal%20and%20Compliance%20Risks) Legal and compliance risks include adverse effects from failing to meet regulations, evolving climate change laws, changes in tax laws, significant environmental compliance and remediation costs, and ongoing asbestos and product liability claims - Failure to comply with government regulations, third-party certification requirements, and customer-driven social responsibility standards could adversely affect reputation, business, and results of operations[118](index=118&type=chunk) - Regulatory and legislative developments related to climate change may impose significant costs on Zurn and its suppliers, impacting financial condition and competitiveness[120](index=120&type=chunk) - Changes in legislative, regulatory, and legal developments involving taxes could result in substantially higher taxes[121](index=121&type=chunk) - Significant costs may be incurred for environmental compliance and to address liabilities under environmental laws and regulations, including remediation of contaminated sites, with potential for joint and several liability[123](index=123&type=chunk)[124](index=124&type=chunk) - Certain subsidiaries are subject to litigation, including numerous asbestos and product liability claims, which could adversely affect business, reputation, financial condition, results of operations, or cash flows. As of December 31, 2021, Zurn was a defendant in approximately **6,000 asbestos-related lawsuits**[126](index=126&type=chunk)[127](index=127&type=chunk) [Risks Related to the Spin-Off Transaction](index=21&type=section&id=Risks%20Related%20to%20the%20Spin-Off%20Transaction) Risks related to the Spin-Off Transaction include potential substantial additional taxes if the transaction does not qualify as tax-free, limitations on company actions to maintain tax-free status, and the possibility that intended benefits may not be achieved - If the Spin-Off Transaction does not qualify as a tax-free reorganization, Zurn may be subject to substantial additional U.S. federal and state income taxes[129](index=129&type=chunk) - Zurn is subject to certain limitations on company actions for two years post-spin-off, including business combinations, to preserve the tax-free status, which might prevent advantageous opportunities[130](index=130&type=chunk)[131](index=131&type=chunk) - The Spin-Off Transaction may not achieve its intended benefits and could expose Zurn to potential risks and liabilities, such as post-closing adjustments and indemnities[132](index=132&type=chunk) [Item 1B. Unresolved Staff Comments](index=21&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS.) There are no unresolved staff comments to report [Item 2. Properties](index=22&type=section&id=ITEM%202.%20PROPERTIES.) As of December 31, 2021, Zurn operated 20 principal manufacturing and warehouse facilities, primarily in North America, which are a mix of owned and leased properties, deemed suitable and sufficient for current and future needs - As of December 31, 2021, Zurn had 20 principal manufacturing and warehouse facilities[135](index=135&type=chunk) Principal Manufacturing and Warehouse Facilities (as of Dec 31, 2021) | Location | Number of Facilities | Owned (Sq. Ft.) | Leased (Sq. Ft.) | | :--- | :--- | :--- | :--- | | USA | 12 | 575,000 | 820,000 | | Canada | 4 | 73,000 | 197,000 | | United Arab Emirates | 1 | — | 6,000 | | **Total** | **17** | **648,000** | **1,023,000** | - The company believes its facilities are suitable and provide sufficient capacity for current and future anticipated needs[135](index=135&type=chunk) [Item 3. Legal Proceedings](index=22&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS.) Information regarding Zurn's legal proceedings is detailed in Item 8, Note 18, Commitments and Contingencies - Legal proceedings information is contained in Item 8, Note 18, Commitments and Contingencies[136](index=136&type=chunk) [Item 4. Mine Safety Disclosure](index=22&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURE.) This item is not applicable to Zurn Water Solutions Corporation [Information about our Executive Officers](index=23&type=section&id=Information%20about%20our%20Executive%20Officers) This section provides a list of Zurn's executive officers as of the report date, including their age, current positions, and the year they assumed those roles, along with a brief overview of their business experience Executive Officers (as of Feb 4, 2022) | Name | Age | Position(s) | In Current Position(s) since | | :--- | :--- | :--- | :--- | | Todd A. Adams | 51 | Chair of the Board and Chief Executive Officer | 2020 | | Mark W. Peterson | 50 | Senior Vice President and Chief Financial Officer | 2011 | | Sudhanshu Chhabra | 55 | Vice President - Zurn Business Systems | 2018 | | Rodney Jackson | 52 | Senior Vice President - Business and Corporate Development | 2014 | | Jeffrey J. LaValle | 43 | Vice President, General Counsel and Secretary | 2022 | | Michael D. Troutman | 55 | Chief Information Officer | 2007 | | Craig G. Wehr | 57 | President - Zurn | 2013 | - Executive officers' business experience for at least the past five fiscal years is provided[140](index=140&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY,%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES.) Following the Spin-Off Transaction, Zurn Water Solutions Corporation's common stock trades on the NYSE under 'ZWS', with the Board declaring a quarterly cash dividend of **$0.03 per share** and a stock repurchase program with approximately **$162.8 million** of authority remaining - Zurn Water Solutions Corporation's common stock trades on the New York Stock Exchange under the ticker symbol 'ZWS' following the Spin-Off Transaction[148](index=148&type=chunk) - The Board of Directors declared a quarterly cash dividend of **$0.03 per share** on October 21, 2021, paid on December 7, 2021[149](index=149&type=chunk) Stock Repurchase Program Activity | Period | Repurchases (Millions) | Remaining Authority (Millions) | | :--- | :--- | :--- | | FY2021 (12 months) | $0.9 | $162.8 (as of Dec 31, 2021) | | FY2020 (3 months ended Dec 31) | $0.0 | - | [Dividend Policy](index=24&type=section&id=Dividend%20Policy) After the Spin-Off Transaction, Zurn's Board of Directors declared a quarterly cash dividend of **$0.03 per share** in October 2021, with future decisions based on financial condition, results of operations, business conditions, and contractual agreements - Following the Spin-Off Transaction, the Board of Directors declared a quarterly cash dividend of **$0.03 per share** on common stock, paid on December 7, 2021[149](index=149&type=chunk) - Future dividend payments will be determined by the Board based on existing conditions, including results of operations, financial condition, business conditions, and borrowing agreements[149](index=149&type=chunk) [Issuer Purchases of Equity Securities](index=24&type=section&id=Issuer%20Purchases%20of%20Equity%20Securities) Zurn has a stock repurchase program, initially approved for **$200 million** in fiscal 2015 and increased to **$300 million** in January 2020, with approximately **$0.9 million** repurchased in 2021 and **$162.8 million** of authority remaining - The Board of Directors approved a stock repurchase program in fiscal 2015, authorizing up to **$200.0 million**, which was increased to **$300.0 million** on January 27, 2020[150](index=150&type=chunk) Common Stock Repurchases | Period | Repurchases (Millions) | Shares Repurchased | | :--- | :--- | :--- | | 12 months ended Dec 31, 2021 | $0.9 | - | | 3 months ended Dec 31, 2021 | $0.0 | - | - Approximately **$162.8 million** of repurchase authority remained under the program as of December 31, 2021[150](index=150&type=chunk) [Performance Graph](index=25&type=section&id=Performance%20Graph) The performance graph compares Zurn's common stock cumulative total shareholder return against the S&P 500 and S&P 1500 Industrials indices from March 31, 2016, to December 31, 2021, showing Zurn significantly outperformed both - The performance graph compares Zurn's common stock cumulative total shareholder return with the S&P 500 Index and the S&P 1500 Industrials Index[152](index=152&type=chunk) Cumulative Total Shareholder Return (Indexed to $100 at 3/31/2016) | Date | Zurn Water Solutions Corporation | S&P 500 Index | S&P 1500 Industrials Index | | :--- | :--- | :--- | :--- | | 3/31/2016 | $100.00 | $100.00 | $100.00 | | 12/31/2021 | $366.24 | $231.40 | $191.90 | - Zurn's historical prices were adjusted to reflect the impact of the Spin-Off Transaction completed on October 4, 2021[153](index=153&type=chunk) [Item 6. [Reserved]](index=25&type=section&id=ITEM%206.%20%5BReserved%5D) This item is reserved and contains no information [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS.) This section provides a comprehensive analysis of Zurn's financial condition and results of operations, focusing on the Zurn business post-spin-off of the Process & Motion Control platform - The discussion focuses on the Zurn business, excluding the Process & Motion Control platform, which was reclassified to discontinued operations following the October 4, 2021 spin-off[157](index=157&type=chunk) - The report includes financial information for the transition period from April 1, 2020, to December 31, 2020, and compares fiscal 2021 (January 1, 2021, to December 31, 2021) with the twelve-month period ended December 31, 2020 (unaudited)[158](index=158&type=chunk)[163](index=163&type=chunk) - Key areas covered include company overview, financial statement presentation, critical accounting estimates, recent accounting pronouncements, recent developments (COVID-19, discontinued operations, restructuring), results of operations, non-GAAP financial measures, covenant compliance, liquidity and capital resources, and contractual obligations[160](index=160&type=chunk)[161](index=161&type=chunk)[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk)[165](index=165&type=chunk)[166](index=166&type=chunk) [Company Overview](index=26&type=section&id=Company%20Overview) Post-Spin-Off, Zurn Water Solutions Corporation is a pure-play water management business, specializing in sustainable, specification-driven solutions for health, safety, and the environment, operating under the Zurn Business System (ZBS) - After the Spin-Off Transaction, Zurn is a growth-oriented, pure-play water management business[167](index=167&type=chunk) - The company designs, procures, manufactures, and markets a broad sustainable product portfolio of specification-driven water management solutions[167](index=167&type=chunk) - The Zurn Business System (ZBS) is the operating philosophy, focused on continuous improvement to drive superior customer satisfaction and financial results[167](index=167&type=chunk) [Financial Statement Presentation](index=27&type=section&id=Financial%20Statement%20Presentation) This section briefly describes key financial statement items and accounting policies, noting that net sales are gross sales less deductions, cost of sales includes all manufacturing costs (with materials being **34% of net sales** in 2021), and SG&A covers sales, marketing, finance, and engineering - Net sales represent gross sales less deductions for returns, allowances, and incentive rebate programs[169](index=169&type=chunk) - Cost of sales includes direct/indirect materials, labor, benefits, supplies, utilities, depreciation, freight, and other manufacturing costs[170](index=170&type=chunk) - Cost of materials was approximately **34% of net sales in 2021**, with a strategic sourcing program in place to reduce costs[171](index=171&type=chunk) - Selling, General and Administrative expenses primarily include sales, marketing, finance, administration, engineering, technical services, and warehousing costs[172](index=172&type=chunk) [Critical Accounting Estimates](index=27&type=section&id=Critical%20Accounting%20Estimates) Zurn's financial statements rely on critical accounting estimates requiring significant judgment, including revenue recognition, receivables, inventory valuation, purchase accounting, impairment of assets, retirement benefits, income taxes, and commitments and contingencies - Revenue recognition: Point-in-time recognition upon product shipment, with estimates for returns and rebates[176](index=176&type=chunk) - Receivables: Net of allowances for doubtful accounts, assessed based on creditworthiness, payment history, aging, and historical write-offs[177](index=177&type=chunk) - Inventory: Stated at lower of cost or market (LIFO for **84%** in 2021, FIFO for remainder), with write-downs for excess or obsolete inventory[179](index=179&type=chunk)[180](index=180&type=chunk) - Purchase accounting and business combinations: Assets acquired and liabilities assumed recognized at fair value, with goodwill as the excess consideration[181](index=181&type=chunk) - Impairment of intangible assets and tangible fixed assets: Evaluated when circumstances indicate non-recoverability, comparing projected undiscounted cash flows to carrying value[182](index=182&type=chunk) - Goodwill, trademarks, and certain tradenames: Tested annually for impairment using qualitative or quantitative assessments (discounted cash flow, market value approach)[183](index=183&type=chunk) - Retirement benefits: Significant pension and post-retirement benefit income/expense and assets/liabilities derived from actuarial valuations using key assumptions (discount rates, asset returns, mortality)[185](index=185&type=chunk)[187](index=187&type=chunk) - Income taxes: Significant judgment in determining worldwide provision, deferred tax assets/liabilities, valuation allowances, and unrecognized tax benefits[189](index=189&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk) - Commitments and Contingencies: Accruals for legal actions, product warranties, and asbestos claims based on probability and estimable costs, with insurance recovery for asbestos claims[193](index=193&type=chunk)[194](index=194&type=chunk)[195](index=195&type=chunk)[196](index=196&type=chunk) [Recent Accounting Pronouncements](index=27&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Item 8, Note 2, Significant Accounting Policies for details on new or revised accounting pronouncements and standards - Refer to Item 8, Note 2, Significant Accounting Policies for discussion of new or revised accounting pronouncements and standards[162](index=162&type=chunk) [Overview of Recent Developments](index=30&type=section&id=Overview%20of%20Recent%20Developments) Recent developments include the ongoing management of the unpredictable COVID-19 pandemic, the spin-off of the Process & Motion Control (PMC) platform with approximately **$60 million** in separation costs, and continued restructuring actions incurring **$3.7 million** in charges in 2021 - Ongoing management of the COVID-19 pandemic, which has caused global supply chain disruptions and impacted sales and operating results[198](index=198&type=chunk) - Completed the spin-off of the Process & Motion Control (PMC) platform during 2021, reclassifying its operating results to discontinued operations[200](index=200&type=chunk) - Incurred approximately **$60 million** in separation costs related to the PMC spin-off in 2021, primarily for professional fees[368](index=368&type=chunk) - Continued execution of restructuring actions to drive efficiencies and reduce operating costs, incurring **$3.7 million** in charges in 2021[206](index=206&type=chunk)[374](index=374&type=chunk)[375](index=375&type=chunk) [COVID-19 pandemic](index=30&type=section&id=COVID-19%20pandemic) Zurn continues to navigate the unpredictable COVID-19 pandemic, which has led to global supply chain disruptions, product shortages, and potential delays, while focusing on employee health and safety - The COVID-19 pandemic continues to impact global economic activity, causing supply chain disruptions, shortages, and potential delays in product receipt[198](index=198&type=chunk) - Zurn is focused on employee health and well-being, implementing measures to minimize the spread of COVID-19 in offices and manufacturing sites[198](index=198&type=chunk) - The duration and severity of the pandemic's impact on operations, financial condition, and cash flows remain unpredictable[199](index=199&type=chunk) [Discontinued Operations](index=30&type=section&id=Discontinued%20Operations) During 2021, Zurn completed the spin-off of its Process & Motion Control (PMC) platform, reclassifying its operating results to discontinued operations and incurring approximately **$60 million** in separation costs, while also receiving a final **$4.2 million** contingent cash payment for the VAG business - The spin-off of the PMC platform was completed in 2021, with its operating results reported as discontinued operations for all periods presented due to a strategic shift[200](index=200&type=chunk) - Approximately **$60 million** in separation costs related to the Spin-Off Transaction were incurred and recognized within income from discontinued operations, net of tax, in 2021[368](index=368&type=chunk) Income from Discontinued Operations, Net of Tax (Millions) | Component | Year Ended Dec 31, 2021 (1) | Nine Month Transition Period Ended Dec 31, 2020 | Year Ended Mar 31, 2020 | | :--- | :--- | :--- | :--- | | Net sales | $973.0 | $870.4 | $1,358.2 | | Income from discontinued operations before income tax | $99.1 | $109.2 | $211.1 | | Income from discontinued operations, net of tax | $71.2 | $83.2 | $161.1 | (1) Reflects period from Jan 1, 2021 through Oct 4, 2021. - Received a **$4.2 million** cash payment in 2021 from the VAG business (sold in fiscal 2019) as a final contingent consideration payment[204](index=204&type=chunk)[373](index=373&type=chunk) [Restructuring and Other Similar Costs](index=31&type=section&id=Restructuring%20and%20Other%20Similar%20Costs) Zurn continued restructuring actions in 2021 to enhance efficiencies and reduce operating costs, resulting in **$3.7 million** in charges primarily for workforce reductions, lease terminations, and facility rationalization - Zurn continued various restructuring actions in 2021 to drive efficiencies, reduce operating costs, and modify its footprint[206](index=206&type=chunk)[374](index=374&type=chunk) - These actions primarily resulted in workforce reductions, lease termination costs, and other facility rationalization costs[206](index=206&type=chunk)[374](index=374&type=chunk) Restructuring and Other Similar Charges (Millions) | Category | Year Ended Dec 31, 2021 | Nine Month Transition Period Ended Dec 31, 2020 | Fiscal Year Ended Mar 31, 2020 | | :--- | :--- | :--- | :--- | | Employee termination benefits | $3.7 | $1.8 | $0.6 | | Contract termination and other associated costs | $0.0 | $(0.1) | $0.6 | | **Total** | **$3.7** | **$1.7** | **$1.2** | [Results of Operations](index=32&type=section&id=Results%20of%20Operations) Zurn's results of operations show a significant increase in net sales for the year ended December 31, 2021, driven by core growth and acquisitions, despite a slight decrease in income from operations as a percentage of net sales due to LIFO adjustments, stock-based compensation, and acquisition mix [Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020](index=32&type=section&id=Year%20Ended%20December%2031,%202021%20Compared%20with%20the%20Year%20Ended%20December%2031,%202020) For the year ended December 31, 2021, Zurn's net sales increased by **22.1%** to **$910.9 million**, with income from operations stable at **$107.0 million** but its percentage of net sales decreasing to **11.7%**, while net income from continuing operations increased to **$49.7 million** Key Financial Highlights (Year Ended December 31) | Metric | 2021 (Millions) | 2020 (Millions) | Change (Millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $910.9 | $746.1 | $164.8 | 22.1% | | Income from operations | $107.0 | $107.7 | $(0.7) | (0.6)% | | Income from operations (% of net sales) | 11.7% | 14.4% | (2.7)% | - | | Interest expense, net | $34.7 | $45.9 | $(11.2) | (24.4)% | | Loss on extinguishment of debt | $20.4 | $0.0 | $20.4 | - | | Actuarial (gain) loss on pension | $(1.2) | $21.2 | $(22.4) | (105.7)% | | Provision for income taxes | $2.7 | $9.5 | $(6.8) | (71.6)% | | Net income from continuing operations | $49.7 | $28.6 | $21.1 | 73.8% | | Diluted EPS from continuing operations | $0.40 | $0.23 | $0.17 | 73.9% | | Net income attributable to Zurn common stockholders | $120.9 | $146.7 | $(25.8) | (17.6)% | | Diluted EPS attributable to Zurn common stockholders | $0.97 | $1.19 | $(0.22) | (18.5)% | | Income from discontinued operations, net of tax | $71.2 | $118.1 | $(46.9) | (39.7)% | - Core net sales increased **13%** year-over-year, excluding **1%** foreign currency translation and **8%** from acquisitions (Hadrian, Wade)[208](index=208&type=chunk)[209](index=209&type=chunk) - Decrease in income from operations as a percentage of net sales was due to LIFO adjustment changes, higher stock-based compensation, Hadrian acquisition mix, and prior-year temporary COVID-19 cost reductions[209](index=209&type=chunk) - Actuarial gain on pension obligations was primarily due to an increase in discount rates[212](index=212&type=chunk) - Net income attributable to Zurn common stockholders was impacted by **$71.2 million** from discontinued operations, which included approximately **$60.0 million** in Spin-Off Transaction costs[216](index=216&type=chunk) [Nine Months Ended December 31, 2020 Compared with the Nine Months Ended December 31, 2019](index=34&type=section&id=Nine%20Months%20Ended%20December%2031,%202020%20Compared%20with%20the%20Nine%20Months%20Ended%20December%2031,%202019) For the nine months ended December 31, 2020, net sales increased by **6.8%** to **$562.7 million**, driven by **3%** core growth and **4%** from acquisitions, with income from operations increasing to **$81.0 million** but its percentage of net sales slightly decreasing to **14.4%** Key Financial Highlights (Nine Months Ended December 31) | Metric | 2020 (Millions) | 2019 (Millions) | Change (Millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $562.7 | $526.7 | $36.0 | 6.8% | | Income from operations | $81.0 | $77.4 | $3.6 | 4.7% | | Income from operations (% of net sales) | 14.4% | 14.7% | (0.3)% | - | | Interest expense, net | $33.3 | $44.0 | $(10.7) | (24.3)% | | Loss on extinguishment of debt | $0.0 | $2.0 | $(2.0) | (100.0)% | | Actuarial loss on pension | $0.3 | $0.0 | $0.3 | - | | Provision for income taxes | $10.5 | $5.4 | $5.1 | 94.4% | | Net income from continuing operations | $35.0 | $25.4 | $9.6 | 37.8% | | Diluted EPS from continuing operations | $0.28 | $0.10 | $0.18 | 180.0% | | Net income attributable to Zurn common stockholders | $118.2 | $137.2 | $(19.0) | (13.8)% | | Diluted EPS attributable to Zurn common stockholders | $0.96 | $1.24 | $(0.28) | (22.6)% | | Income from discontinued operations, net of tax | $83.2 | $126.2 | $(43.0) | (34.1)% | - Core net sales increased **3%** year-over-year, excluding **4%** from acquisitions (Just Manufacturing, Hadrian), driven by demand for touchless and hygienic solutions[217](index=217&type=chunk)[218](index=218&type=chunk) - Decrease in income from operations as a percentage of net sales was due to incremental restructuring costs, purchase accounting fair value adjustments, and non-cash stock option expense[218](index=218&type=chunk)[219](index=219&type=chunk) - Interest expense decreased due to lower outstanding borrowings and average interest rates following a **$100.0 million** voluntary prepayment and refinancing in 2019[219](index=219&type=chunk) - Net income attributable to Zurn common stockholders was primarily impacted by lower income from discontinued operations, partially offset by reduced preferred stock dividends[226](index=226&type=chunk) [Non-GAAP Financial Measures](index=36&type=section&id=Non-GAAP%20Financial%20Measures) This section defines Zurn's non-GAAP financial measures: Core sales, EBITDA, and Adjusted EBITDA, which are used for performance evaluation, comparability, and assessing compliance with debt covenants - **Core sales**: Excludes the impact of acquisitions, divestitures, and foreign currency translation to facilitate meaningful comparisons of net sales performance[229](index=229&type=chunk) - **EBITDA**: Represents earnings before interest, taxes, depreciation, and amortization; used as a supplemental measure of performance and to evaluate debt service obligations[230](index=230&type=chunk) - **Adjusted EBITDA**: EBITDA adjusted for specific items as defined in the credit agreement (e.g., restructuring, stock-based compensation, LIFO adjustments, acquisition-related fair value adjustments); important for assessing compliance with debt covenants and understanding unleveraged, pre-tax operating results[231](index=231&type=chunk)[234](index=234&type=chunk) [Covenant Compliance](index=36&type=section&id=Covenant%20Compliance) Zurn's credit agreement includes restrictive covenants, such as a maximum total net leverage ratio of **5.00 to 1.0**, with the company in compliance at **2.3 to 1.0** as of December 31, 2021, using Adjusted EBITDA as a critical measure - The credit agreement contains restrictive covenants, including a maximum total net leverage ratio of **5.00 to 1.0**, which affects Zurn's ability to incur debt, make payments/distributions, and pursue acquisitions[232](index=232&type=chunk) - As of December 31, 2021, Zurn's total net leverage ratio was **2.3 to 1.0**, indicating compliance with covenants[232](index=232&type=chunk)[239](index=239&type=chunk) - Adjusted EBITDA is a key measure for covenant compliance, showing unleveraged, pre-tax operating results by excluding non-operational, non-cash, or non-recurring losses or gains[234](index=234&type=chunk) Adjusted EBITDA Reconciliation (Year Ended Dec 31, 2021) | Metric | Amount (Millions) | | :--- | :--- | | Net income attributable to Zurn common stockholders | $120.9 | | Income from discontinued operations, net of tax | $(71.2) | | Provision for income taxes | $2.7 | | Actuarial gain on pension and postretirement benefit obligations | $(1.2) | | Other expense, net | $0.7 | | Loss on the extinguishment of debt | $20.4 | | Interest expense, net | $34.7 | | Depreciation and amortization | $32.7 | | **EBITDA** | **$139.7** | | Adjustments to EBITDA: | | | Restructuring and other similar charges | $3.7 | | Stock-based compensation expense | $37.5 | | LIFO adjustments | $14.1 | | Acquisition-related fair value adjustment | $0.8 | | **Subtotal of adjustments to EBITDA** | **$56.1** | | **Adjusted EBITDA** | **$195.8** | | Pro forma adjustment for acquisitions | $1.0 | | **Pro forma Adjusted EBITDA** | **$196.8** | | Consolidated indebtedness | $459.7 | | **Total net leverage ratio** | **2.3** | [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) Zurn's primary liquidity sources are cash, cash equivalents, cash flow from operations, and a **$200.0 million** revolving credit facility, with **$96.6 million** in cash and **$193.9 million** in available borrowing capacity as of December 31, 2021 - Primary liquidity sources are available cash and cash equivalents, cash flow from operations, and a **$200.0 million** revolving credit facility[240](index=240&type=chunk) Liquidity Position (Millions) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $96.6 | $255.6 | | Additional borrowing capacity (revolving credit facility) | $193.9 | $339.2 | | Available borrowings reduced by outstanding letters of credit | $6.1 | $10.5 | - The revolving credit facility is deemed adequate for expected working capital, capital expenditures, and general corporate purposes[242](index=242&type=chunk) [Cash Flows](index=39&type=section&id=Cash%20Flows) In 2021, net cash provided by operating activities decreased to **$223.6 million** from **$320.2 million**, cash used for investing activities significantly decreased to **$21.9 million** from **$196.6 million**, and cash used for financing activities substantially increased to **$356.2 million** from **$156.2 million**, primarily due to the PMC spin-off Cash Flow Summary (Millions) | Activity | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $223.6 | $320.2 | | Cash used for investing activities | $21.9 | $196.6 | | Cash used for financing activities | $356.2 | $156.2 | - Operating cash flow decrease in 2021 was due to lower net income from the Spin-Off Transaction and investments in working capital[244](index=244&type=chunk) - Investing cash flow decrease in 2021 was due to lower net cash used for acquisitions (**$17.1 million** in 2021 vs. **$161.4 million** in 2020) and capital expenditures (**$23.3 million** in 2021 vs. **$44.2 million** in 2020)[245](index=245&type=chunk) - Financing cash flow increase in cash used in 2021 was primarily due to **$311.5 million** net cash related to the PMC Spin-Off Transaction and debt repayments[246](index=246&type=chunk) [Tabular Disclosure of Contractual Obligations](index=40&type=section&id=Tabular%20Disclosure%20of%20Contractual%20Obligations) As of December 31, 2021, Zurn's total contractual obligations amounted to **$907.5 million**, with **$241.8 million** due within one year, including term loans, interest on long-term debt, purchase commitments, and operating lease obligations Contractual Obligations (as of Dec 31, 2021, in Millions) | Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Term loans | $550.0 | $5.5 | $11.0 | $11.0 | $522.5 | | Interest on long-term debt obligations | $99.0 | $15.1 | $29.7 | $29.1 | $25.1 | | Purchase commitments | $215.6 | $211.8 | $3.3 | $0.5 | $0.0 | | Operating lease obligations | $15.9 | $6.6 | $8.1 | $1.2 | $0.0 | | Pension and post-retirement plans | $27.0 | $2.8 | $11.4 | $12.8 | See note (4) | | **Totals** | **$907.5** | **$241.8** | **$63.5** | **$54.6** | **$547.6** | - Excludes unamortized debt issuance costs of **$10.8 million**[250](index=250&type=chunk) - Interest on long-term debt obligations uses a LIBOR-based forecast[251](index=251&type=chunk) - Pension and post-retirement contributions and benefit payments beyond fiscal 2027 cannot be reasonably estimated[253](index=253&type=chunk) - Unrecognized tax benefits (**$5.9 million**) and deferred compensation liability (**$16.3 million**) are excluded due to uncertainty of timing for cash settlement[254](index=254&type=chunk) [Indebtedness](index=40&type=section&id=Indebtedness) As of December 31, 2021, Zurn's total outstanding indebtedness was **$539.5 million**, a significant reduction from **$1,118.3 million** at December 31, 2020, primarily due to debt refinancing associated with the Spin-Off Transaction Long-Term Debt (Millions) | Debt Type | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Term loan (1) | $539.2 | $621.5 | | 4.875% Senior Notes due 2025 (2) | $0.0 | $496.3 | | Finance leases and other subsidiary debt (3) | $0.3 | $0.5 | | **Total** | **$539.5** | **$1,118.3** | | Less current maturities | $5.6 | $0.3 | | **Long-term debt** | **$533.9** | **$1,118.0** | (1) Includes unamortized debt issuance costs of $10.8 million and $3.5 million at December 31, 2021 and December 31, 2020, respectively. (2) Includes unamortized debt issuance costs of $0.0 million and $3.7 million at December 31, 2021 and December 31, 2020, respectively. (3) Consists of finance lease obligations. - Total indebtedness decreased significantly from **$1,118.3 million** in 2020 to **$539.5 million** in 2021, primarily due to the refinancing associated with the Spin-Off Transaction[256](index=256&type=chunk) [Off-Balance Sheet Arrangements](index=40&type=section&id=Off-Balance%20Sheet%20Arrangements) Zurn Water Solutions Corporation does not have any off-balance sheet or non-consolidated special-purpose entities - The company does not have any off-balance sheet or non-consolidated special-purpose entities[259](index=259&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=41&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Zurn is exposed to market risks from foreign currency exchange rates and interest rates, managed through operating activities, financing, and sometimes derivative instruments - Zurn is exposed to market risk from changes in foreign currency exchange rates and interest rates, managed through operating activities, financing, and derivative financial instruments[260](index=260&type=chunk) [Foreign Currency Exchange Rate Risk](index=41&type=section&id=Foreign%20Currency%20Exchange%20Rate%20Risk) Zurn's foreign currency exchange rate exposure primarily stems from its Canadian operations, impacting reported earnings and stockholders' equity, with approximately **13% of sales** originating outside the U.S. in 2021 - Foreign currency exchange rate exposure primarily relates to Canadian operations, impacting USD value of reported earnings, investments, and intercompany transactions[261](index=261&type=chunk) - Approximately **13% of sales** originated outside the United States in 2021[262](index=262&type=chunk) - A **10% strengthening of the USD** as of December 31, 2021, would have decreased stockholders' equity by approximately **$11.2 million**[262](index=262&type=chunk) - As of December 31, 2021, Zurn had not entered into foreign currency forward contracts[263](index=263&type=chunk) [Interest Rate Risk](index=41&type=section&id=Interest%20Rate%20Risk) Zurn's indebtedness under its senior secured credit facilities bears interest at variable rates, primarily LIBOR (subject to a **0.5% floor**), with a **100 basis point increase** in LIBOR potentially increasing annual interest expense by approximately **$5.5 million** - Indebtedness under senior secured credit facilities bears interest at rates fluctuating with short-term prevailing interest rates, primarily LIBOR[264](index=264&type=chunk) - As of December 31, 2021, outstanding term loan borrowings were **$539.2 million** with an effective interest rate of **2.75%** (LIBOR + 2.25% margin, subject to **0.5% floor**)[264](index=264&type=chunk) - A **100 basis point increase** in LIBOR above the **0.5% floor** would increase annual interest expense under the term loan facility by approximately **$5.5 million**[265](index=265&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=42&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA.) This section presents Zurn Water Solutions Corporation's consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with the independent auditor's report and detailed notes - Includes consolidated financial statements: Balance Sheets, Statements of Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows[269](index=269&type=chunk)[290](index=290&type=chunk)[292](index=292&type=chunk)[294](index=294&type=chunk)[297](index=297&type=chunk)[303](index=303&type=chunk) - Features the Report of Independent Registered Public Accounting Firm by Ernst & Young LLP, expressing an unqualified opinion on the financial statements and internal control over financial reporting[271](index=271&type=chunk)[272](index=272&type=chunk)[273](index=273&type=chunk) - Detailed notes to consolidated financial statements provide additional information on accounting policies, acquisitions, discontinued operations, debt, and other financial matters[307](index=307&type=chunk) [Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm](index=43&type=section&id=Reports%20of%20Ernst%20%26%20Young%20LLP,%20Independent%20Registered%20Public%20Accounting%20Firm) Ernst & Young LLP provided an unqualified opinion on Zurn's consolidated financial statements and the effectiveness of its internal control over financial reporting, identifying valuation allowances for deferred tax assets as a critical audit matter - Ernst & Young LLP issued an unqualified opinion on Zurn's consolidated financial statements for the periods presented[272](index=272&type=chunk) - An unqualified opinion was also expressed on the effectiveness of Zurn's internal control over financial reporting as of December 31, 2021[273](index=273&type=chunk)[283](index=283&type=chunk) - The critical audit matter identified was the valuation allowances for deferred tax assets, which involved significant judgments regarding anticipated future earnings and tax planning strategies[278](index=278&type=chunk)[279](index=279&type=chunk) [Consolidated Balance Sheets](index=46&type=section&id=Consolidated%20Balance%20Sheets) Zurn's consolidated balance sheets show total assets decreased from **$3,401.1 million** in 2020 to **$1,077.7 million** in 2021, primarily due to the spin-off of discontinued operations, with corresponding decreases in liabilities and stockholders' equity Consolidated Balance Sheet Highlights (Millions) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total assets | $1,077.7 | $3,401.1 | | Current assets | $474.8 | $907.7 | | Property, plant and equipment, net | $64.4 | $69.6 | | Intangible assets, net | $179.1 | $200.3 | | Goodwill | $254.1 | $244.8 | | Total liabilities | $951.3 | $1,961.8 | | Current liabilities | $240.4 | $317.5 | | Long-term debt | $533.9 | $1,118.0 | | Total stockholders' equity | $126.4 | $1,439.3 | - Significant decreases in total assets, current assets, total liabilities, and total stockholders' equity from 2020 to 2021 are primarily due to the reclassification and distribution of assets and liabilities of discontinued operations (PMC spin-off)[291](index=291&type=chunk) [Consolidated Statements of Operations](index=47&type=section&id=Consolidated%20Statements%20of%20Operations) For the year ended December 31, 2021, Zurn reported net sales of **$910.9 million** and gross profit of **$373.2 million**, with income from continuing operations increasing to **$49.7 million**, while net income attributable to common stockholders decreased to **$120.9 million** due to discontinued operations Consolidated Statements of Operations Highlights (Millions, except per share) | Metric | Year Ended Dec 31, 2021 | Nine Month Transition Period Ended Dec 31, 2020 | Year Ended Mar 31, 2020 | | :--- | :--- | :--- | :--- | | Net sales | $910.9 | $562.7 | $710.1 | | Gross profit | $373.2 | $253.3 | $322.6 | | Income from operations | $107.0 | $81.0 | $104.1 | | Net income from continuing operations | $49.7 | $35.0 | $19.0 | | Income from discontinued operations, net of tax | $71.2 | $83.2 | $161.1 | | Net income attributable to Zurn common stockholders | $120.9 | $118.2 | $165.7 | | Diluted net income per share (Continuing operations) | $0.40 | $0.28 | $0.04 | | Diluted net income per share (Discontinued operations) | $0.57 | $0.68 | $1.41 | | Diluted net income per share (Total) | $0.97 | $0.96 | $1.45 | - Net income from continuing operations increased significantly in 2021, while total net income attributable to common stockholders decreased due to lower income from discontinued operations, which included spin-off related costs[293](index=293&type=chunk) [Consolidated Statements of Comprehensive Income](index=48&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Zurn's total comprehensive income for the year ended December 31, 2021, was **$135.1 million**, including net income attributable to Zurn of **$120.9 million** and other comprehensive income, net of tax, of **$14.2 million**, primarily from pension and postretirement defined benefit plans Consolidated Statements of Comprehensive Income (Millions) | Metric | Year Ended Dec 31, 2021 | Nine Month Transition Period Ended Dec 31, 2020 | Year Ended Mar 31, 2020 | | :--- | :--- | :--- | :--- | | Net income attributable to Zurn | $120.9 | $118.2 | $180.1 | | Other comprehensive income (loss), net of tax | $14.2 | $50.6 | $(27.8) | | **Total comprehensive income** | **$135.1** | **$168.

Financial Data and Key Metrics Changes - Consolidated sales declined 4% year-over-year to $526 million, with a 200 basis point benefit from foreign currency translation and a 300 basis point positive contribution from acquisitions offset by an 8% decline in core sales [17] - Adjusted EBITDA was $120 million, with an adjusted EBITDA margin expanding 10 basis points year-over-year to 22.8% despite the overall decline in sales [18] Business Line Data and Key Metrics Changes - Water Management sales increased 12% year-over-year, driven by acquisitions contributing 8 points of growth and core business generating 4 points of growth [19] - PMC sales declined 12%, with a core sales decline of 13% impacted by product line simplification actions [21] Market Data and Key Metrics Changes - Aerospace operations saw a 46% year-over-year sales decrease, but demand improved significantly from the previous nine months [22] - North American distribution channel sell-through improved each month, indicating positive demand trends in non-aerospace end markets [23] Company Strategy and Development Direction - The company is focused on the upcoming RMT transaction with Regal Beloit, tracking towards completion in the fourth quarter of 2021 [13] - Plans for a stand-alone pure-play water business are in place, with a focus on eliminating stranded corporate costs and enhancing operational efficiency [14] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the second quarter and full year 2021, citing strong demand across various platforms and improved backlog [10] - The company anticipates core revenue in the Water Management platform to increase by a high-teens percentage year-over-year, while PMC platform revenue is expected to increase by mid- to high-teens percentage [25][26] Other Important Information - The company reported a reduction in net debt leverage to 2x, remaining at the low end of the targeted leverage range of 2 to 3x [24] - The sustainability report highlighted progress in environmental initiatives and the company's commitment to greenhouse gas emissions reduction [15] Q&A Session Summary Question: What is the expectation for Zurn's new construction market? - Management noted early indicators of improvement in new construction and renovation activity, suggesting a positive setup for growth in the second half of 2021 [42] Question: How should Zurn's margin progression be viewed? - Management indicated that margins would not match last year's levels but would improve over time, with expectations for Hadrian's margins to reach the high teens by the end of 2022 [44][46] Question: What is the outlook for PMC incrementals? - Management expects mid-30s incrementals in Q2, with potential for improvement in the second half of the year as aerospace growth resumes [50] Question: How is the company managing inflation and supply chain issues? - Management stated that they are effectively managing inflation and supply chain challenges, with no significant issues anticipated [52][53] Question: How will government spending on water infrastructure impact Zurn? - Management highlighted that increased funding for schools and general stimulus funding would provide tailwinds for the Water Management platform [79] Question: What is the long-term growth outlook for Zurn? - Management expressed confidence in achieving 5% to 6% compounded core growth over the next few years, with potential for better performance due to favorable market conditions [59] Question: Is there potential for Zurn to expand globally? - Management acknowledged opportunities for inorganic growth both in North America and selectively outside of it, indicating a potential for a more global business in the next five years [65]

Sustainably Inspired | --- | --- | --- | --- | --- | --- | |------------------|-------|-------|-------|-------|-------| | | | | | | | | February 2, 2022 | | | | | | CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT Forward-Looking Statements This presentation contains "forward-looking statements" that are subject to Cautionary Statement on Forward-Looking Statements contained in the press release we issued on February 1, 2022 and which is available on our website. The forward-looking s ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _________________________________________________ FORM 10-Q (Mark one) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 the quarter ended September 30, 2021 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ☐ the transition period from to Commission File Number: 001-35475 ZURN WATER SOLUTIONS CORPORATION (Exact name of registrant as specified ...

REXINORD SECOND QUARTER 2021 FINANCIAL RESULTS July 21, 2021 CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT Forward-Looking Statements This presentation and discussion contains certain "forward-looking statements" that are subject to the Safe Harbor and Cautionary language contained in the press release we issued on July 20, 2021, as well as other factors that could cause actual results to differ materially from those discussed and that are disclosed in our filings with the Securiti ...

Rexnord Corporation (RXN) Q2 2021 Earnings Conference Call July 21, 2021 8:00 AM ET Company Participants Dave Pauli - Vice President and Corporate Controller Todd Adams - Chairman and Chief Executive Officer Mark Peterson - Senior Vice President and Chief Financial Officer Conference Call Participants Jeff Hammond - KeyBanc Capital Markets Bryan Blair - Oppenheimer Mig Dobre - Baird Emily Shu - Bank of America Joe Ritchie - Goldman Sachs Operator Good morning and welcome to the Rexnord Second Quarter 2021 E ...

Part I [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Rexnord Corporation's unaudited condensed consolidated financial statements, including balance sheets, operations, and cash flows, as of June 30, 2021 [Condensed Consolidated Financial Statements](index=4&type=section&id=Condensed%20Consolidated%20Financial%20Statements) The company's financial position strengthened, performance improved significantly, and operating cash flow decreased Condensed Consolidated Balance Sheet Highlights (in Millions) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $390.7 | $255.6 | | Total current assets | $1,144.9 | $907.7 | | Total assets | $3,602.3 | $3,401.1 | | Total current liabilities | $382.7 | $317.5 | | Long-term debt | $1,189.5 | $1,189.2 | | Total liabilities | $2,014.8 | $1,961.8 | | Total stockholders' equity | $1,587.5 | $1,439.3 | Condensed Consolidated Statement of Operations Highlights (in Millions, except per share data) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $568.3 | $449.1 | $1,094.4 | $996.1 | | Gross profit | $235.8 | $176.9 | $443.7 | $393.4 | | Income from operations | $103.6 | $66.0 | $182.2 | $154.0 | | Net income attributable to Rexnord | $73.2 | $35.6 | $123.2 | $64.1 | | Diluted EPS | $0.59 | $0.29 | $0.99 | $0.52 | Condensed Consolidated Statement of Cash Flows Highlights (in Millions) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Cash provided by operating activities | $145.0 | $171.5 | | Cash used for investing activities | $(4.4) | $(81.7) | | Cash used for financing activities | $(5.6) | $(9.6) | | Increase in cash | $135.1 | $76.4 | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail significant corporate events, accounting policies, backlog, tax rates, and legal contingencies - Rexnord agreed to separate its Process & Motion Control (PMC) segment via a **tax-free spin-off** and combine it with Regal Beloit Corporation in a **Reverse Morris Trust (RMT) transaction**, expected to close in the **second half of 2021**[31](index=31&type=chunk) - The company acquired **ATS GREASEwatch** for **$4.5 million** in cash to enhance its Water Management platform's technology offerings on April 16, 2021[36](index=36&type=chunk) - As of June 30, 2021, the company's order backlog was **$435.2 million**, with approximately **83%** expected to be recognized as revenue in the remainder of 2021[60](index=60&type=chunk) Revenue by Business Segment (in Millions) | Segment | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Process & Motion Control | $324.6 | $274.4 | $645.5 | $638.0 | | Water Management | $243.7 | $174.7 | $448.9 | $358.1 | - The company estimates a potential **$59.0 million** liability for asbestos-related claims over the next ten years, largely covered by a corresponding **$59.0 million** receivable from insurance carriers[107](index=107&type=chunk)[109](index=109&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=36&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, liquidity, cash flows, and non-GAAP measures, emphasizing segment growth and the PMC spin-off [Results of Operations](index=38&type=section&id=Results%20of%20Operations) Consolidated net sales and operating income significantly increased, driven by strong demand in Water Management and non-aerospace markets Q2 2021 vs Q2 2020 Net Sales (in Millions) | Segment | Q2 2021 | Q2 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Process & Motion Control | $324.6 | $274.4 | $50.2 | 18.3% | | Water Management | $243.7 | $174.7 | $69.0 | 39.5% | | **Consolidated** | **$568.3** | **$449.1** | **$119.2** | **26.5%** | Q2 2021 vs Q2 2020 Income from Operations (in Millions) | Segment | Q2 2021 | Q2 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Process & Motion Control | $66.8 | $39.6 | $27.2 | 68.7% | | Water Management | $52.8 | $40.1 | $12.7 | 31.7% | | **Consolidated** | **$103.6** | **$66.0** | **$37.6** | **57.0%** | - Process & Motion Control core sales increased **16%** in Q2, driven by **21% growth** in non-aerospace markets, partially offset by a **15% decline** in aerospace markets[144](index=144&type=chunk) - Water Management core sales increased **29%** in Q2, driven by increased demand across all product categories[145](index=145&type=chunk) [Non-GAAP Financial Measures](index=42&type=section&id=Non-GAAP%20Financial%20Measures) This section defines and reconciles non-GAAP metrics, including Core Sales and Adjusted EBITDA, used for performance evaluation and debt covenant compliance Reconciliation of Net Income to Adjusted EBITDA (LTM ended June 30, 2021, in Millions) | Metric | Amount | | :--- | :--- | | Net income attributable to Rexnord | $205.8 | | Income tax provision | $56.8 | | Interest expense, net | $45.9 | | Depreciation and amortization | $91.9 | | **EBITDA** | **$396.5** | | Adjustments (Restructuring, Stock Comp, etc.) | $61.5 | | **Adjusted EBITDA** | **$458.0** | | Pro forma adjustment for acquisitions | $3.4 | | **Pro forma Adjusted EBITDA** | **$461.4** | - The company's total net leverage ratio was **1.9 to 1.0** as of June 30, 2021, well below the maximum permitted ratio of **6.75 to 1.0**[174](index=174&type=chunk)[182](index=182&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is supported by cash, operating cash flow, and credit facilities, with debt commitments secured for the proposed transaction - As of June 30, 2021, the company had **$390.7 million** in cash and cash equivalents and **$255.8 million** in additional borrowing capacity under its credit facility[184](index=184&type=chunk) - Total outstanding indebtedness was **$1,191.9 million** as of June 30, 2021, primarily consisting of a term loan and senior notes[190](index=190&type=chunk) - The company secured **debt commitment letters** for term loans, revolving credit facilities, and a delayed draw term loan facility for the proposed Regal transaction[186](index=186&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to foreign currency and interest rate risks, managed through operations and derivatives, with no material changes since the last 10-K - The company's market risk exposure, primarily from foreign currency and interest rate changes, has **not materially changed** from its last Form 10-K disclosures[192](index=192&type=chunk) [Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were **effective** as of June 30, 2021[195](index=195&type=chunk) - **No changes occurred** in the last fiscal quarter that have **not materially affected** the company's internal control over financial reporting[197](index=197&type=chunk) Part II [Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 14 for details on legal proceedings, including product liability, asbestos claims, and environmental matters - For details on legal proceedings, the report refers to **Note 14**, "Commitments and Contingencies," in the financial statements[200](index=200&type=chunk) [Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) This section updates risk factors, focusing on new risks related to the planned PMC segment spin-off, including transaction completion, costs, and tax implications - The transaction with Regal is subject to numerous conditions, including approvals, and there is **no assurance it will be completed**[201](index=201&type=chunk) - The company expects to incur **significant one-time costs** related to the transaction, with a potential **$150 million** termination fee payable to Regal[203](index=203&type=chunk) - There is a **significant risk** that the spin-off may **not qualify as tax-free**, potentially resulting in **substantial tax liabilities** for the company and its stockholders[207](index=207&type=chunk)[208](index=208&type=chunk) - The pendency of the transaction could **adversely affect business**, as customers or vendors may delay decisions, and the company faces **restrictions on its business conduct** until closing[205](index=205&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=51&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section discusses the company's stock repurchase program, noting no repurchases in Q2 2021 and the remaining repurchase authority - The company **did not repurchase any** of its common stock during the three months ended June 30, 2021[215](index=215&type=chunk) - As of June 30, 2021, approximately **$162.8 million** of authority remained under the company's stock repurchase program[215](index=215&type=chunk) [Exhibits](index=52&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications, XBRL data, and the incorporated Credit Agreement - Exhibits filed include **CEO/CFO certifications** (31.1, 31.2, 32.1) and **XBRL data files**[217](index=217&type=chunk) [Signatures](index=53&type=section&id=Signatures) The report is signed on July 20, 2021, by Mark W. Peterson, Senior Vice President and Chief Financial Officer of Rexnord Corporation

FIRST QUARTER 2021 FINANCIAL RESULTS April 28, 2021 CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT Forward-Looking Statements This presentation and discussion contains certain "forward-looking statements" that are subject to the Safe Harbor and Cautionary language contained in the press release we issued on April 27, 2021, as well as other factors that could cause actual results to differ materially from those discussed and that are disclosed in our filings with the Securities and E ...

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=Part%20I%20FINANCIAL%20INFORMATION) This section presents Rexnord Corporation's unaudited condensed consolidated financial information, including statements, notes, and management's discussion, for the quarter ended March 31, 2021 [ITEM 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Rexnord Corporation's unaudited condensed consolidated financial statements for the quarter ended March 31, 2021, including balance sheets, statements of operations, comprehensive income, and cash flows, along with detailed notes explaining accounting policies, acquisitions, debt, and segment information. The company transitioned to a December 31 fiscal year-end, impacting comparative reporting periods [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This table presents Rexnord's financial position, detailing assets, liabilities, and equity as of March 31, 2021, and December 31, 2020 | Metric | March 31, 2021 (Millions) | December 31, 2020 (Millions) | | :-------------------------------- | :-------------------------- | :--------------------------- | | **Assets** | | | | Cash and cash equivalents | $307.3 | $255.6 | | Total current assets | $1,013.0 | $907.7 | | Total assets | $3,487.3 | $3,401.1 | | **Liabilities & Equity** | | | | Total current liabilities | $356.3 | $317.5 | | Long-term debt | $1,189.3 | $1,189.2 | | Total liabilities | $1,994.4 | $1,961.8 | | Total stockholders' equity | $1,492.9 | $1,439.3 | - Total assets increased by **$86.2 million** from December 31, 2020, to March 31, 2021, primarily driven by an increase in cash and cash equivalents and receivables[14](index=14&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement outlines Rexnord's financial performance, including net sales, gross profit, operating income, and net income for the three months ended March 31, 2021 and 2020 | Metric | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | YoY Change (Millions) | YoY Change (%) | | :----------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------------- | | Net sales | $526.1 | $547.0 | $(20.9) | (3.8)% | | Gross profit | $207.9 | $216.5 | $(8.6) | (4.0)% | | Income from operations | $78.6 | $88.0 | $(9.4) | (10.7)% | | Net income attributable to Rexnord | $50.0 | $28.5 | $21.5 | 75.4% | | Basic EPS | $0.42 | $0.23 | $0.19 | 82.6% | | Diluted EPS | $0.40 | $0.23 | $0.17 | 73.9% | - Net income attributable to Rexnord significantly increased by **75.4% year-over-year**, primarily due to the absence of a **$35.8 million** actuarial loss on pension and postretirement benefit obligations recognized in the prior year[16](index=16&type=chunk)[148](index=148&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This statement details Rexnord's total comprehensive income, including net income and other comprehensive loss components, for the three months ended March 31, 2021 and 2020 | Metric | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | | :----------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net income attributable to Rexnord | $50.0 | $28.5 | | Other comprehensive loss, net of tax | $(1.8) | $(20.0) | | Total comprehensive income | $48.3 | $8.6 | - Total comprehensive income increased substantially from **$8.6 million** in Q1 2020 to **$48.3 million** in Q1 2021, driven by higher net income and a significant reduction in other comprehensive loss, primarily foreign currency translation adjustments[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement summarizes Rexnord's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2021 and 2020 | Activity | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | | :-------------------------- | :----------------------------------------- | :----------------------------------------- | | Operating activities | $71.3 | $123.9 | | Investing activities | $(8.1) | $(74.1) | | Financing activities | $(9.4) | $253.4 | | Net increase in cash | $51.7 | $296.4 | - Cash provided by operating activities decreased by **$52.6 million** year-over-year, mainly due to higher trade working capital and timing of accrued expense payments[22](index=22&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) - Cash used for investing activities significantly decreased due to lower capital expenditures and no major acquisitions in Q1 2021 compared to the prior year[22](index=22&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) - Cash used for financing activities in Q1 2021 contrasts sharply with cash provided in Q1 2020, primarily due to significant debt borrowings and common stock repurchases in the prior year period[22](index=22&type=chunk)[174](index=174&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations of Rexnord's accounting policies, significant transactions, and financial statement line items for the reported periods [1. Basis of Presentation and Significant Accounting Policies](index=8&type=section&id=1.%20Basis%20of%20Presentation%20and%20Significant%20Accounting%20Policies) This note describes Rexnord's business, fiscal year transition, and the planned tax-free spin-off of its Process & Motion Control segment - Rexnord Corporation is a growth-oriented, multi-platform industrial company with leading market shares in Process & Motion Control and Water Management segments[27](index=27&type=chunk) - The company transitioned its fiscal year-end from March 31 to December 31, with fiscal year 2021 commencing on January 1, 2021[10](index=10&type=chunk)[26](index=26&type=chunk) - Rexnord plans to separate its Process & Motion Control segment via a tax-free spin-off and immediately combine it with Regal Beloit Corporation in a Reverse Morris Trust transaction, expected to close in Q4 2021[30](index=30&type=chunk) [2. Acquisitions and Divestiture](index=10&type=section&id=2.%20Acquisitions%20and%20Divestiture) This note details Rexnord's recent acquisitions, primarily strengthening Water Management, and the divestiture of a gearbox product line - Acquired Hadrian Manufacturing Inc. in December 2020 for **$101.3 million**, enhancing the Water Management platform with washroom partitions and lockers[35](index=35&type=chunk) - Sold the gearbox product line in China (Process & Motion Control) for **$5.8 million** in October 2020[37](index=37&type=chunk) - Acquired Just Manufacturing Company in January 2020 for **$59.4 million** and StainlessDrains.com in May 2019 for **$24.8 million**, both strengthening the Water Management platform[40](index=40&type=chunk)[41](index=41&type=chunk) [3. Restructuring and Other Similar Charges](index=11&type=section&id=3.%20Restructuring%20and%20Other%20Similar%20Charges) This note outlines the restructuring charges incurred, reflecting efforts to optimize operations and manufacturing footprint | Category | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | | :--------------------------------- | :----------------------------------------- | :----------------------------------------- | | Employee termination benefits | $0.5 | $5.5 | | Contract termination and other costs | $0.1 | $1.1 | | Total restructuring charges | $0.6 | $6.6 | - Restructuring charges significantly decreased to **$0.6 million** in Q1 2021 from **$6.6 million** in Q1 2020, reflecting ongoing initiatives to drive efficiencies and optimize manufacturing footprint[46](index=46&type=chunk)[47](index=47&type=chunk) [4. Revenue Recognition](index=12&type=section&id=4.%20Revenue%20Recognition) This note provides disaggregated revenue by customer type and geography, along with information on the company's total backlog Revenue Disaggregated by Customer Type (Millions) | Customer Type | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | **Process & Motion Control** | | | | Original equipment manufacturers/end users | $180.3 | $216.6 | | Maintenance, repair, and operations | $140.6 | $147.0 | | Total Process & Motion Control | $320.9 | $363.6 | | **Water Management** | | | | Water safety, quality, flow control and conservation | $189.8 | $170.9 | | Water infrastructure | $15.4 | $12.5 | | Total Water Management | $205.2 | $183.4 | Revenue Disaggregated by Originating Geography (Millions) | Geography | Process & Motion Control (Q1 2021) | Water Management (Q1 2021) | Process & Motion Control (Q1 2020) | Water Management (Q1 2020) | | :-------------------- | :--------------------------------- | :------------------------- | :--------------------------------- | :------------------------- | | United States and Canada | $190.9 | $203.8 | $232.3 | $179.4 | | Europe | $79.6 | — | $82.3 | — | | Rest of world | $50.4 | $1.4 | $49.1 | $4.0 | | Total | $320.9 | $205.2 | $363.6 | $183.4 | - Total backlog as of March 31, 2021, was **$373.4 million**, with approximately **88%** expected to be recognized as revenue in the remaining nine months of 2021[59](index=59&type=chunk) [5. Income Taxes](index=14&type=section&id=5.%20Income%20Taxes) This note details the income tax provision, effective tax rate, and liabilities for unrecognized tax benefits | Metric | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | | :-------------------- | :----------------------------------------- | :----------------------------------------- | | Income tax provision | $17.2 | $6.4 | | Effective income tax rate | 25.6% | 18.2% | - The effective income tax rate increased to **25.6%** in Q1 2021 from **18.2%** in Q1 2020, primarily due to higher foreign income taxes, accrual of unrecognized income tax benefits, and compensation deduction limitations, partially offset by foreign financing-related benefits and FDII[66](index=66&type=chunk) - Total liability for net unrecognized tax benefits was **$18.5 million** as of March 31, 2021, including **$1.6 million** of accrued interest and penalties[67](index=67&type=chunk) [6. Earnings per Share](index=15&type=section&id=6.%20Earnings%20per%20Share) This note presents the calculation of basic and diluted earnings per share, reflecting net income and weighted-average shares outstanding | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Basic Net Income per Share | $0.42 | $0.23 | | Diluted Net Income per Share | $0.40 | $0.23 | | Weighted-average shares outstanding (Basic, in thousands) | 119,808 | 121,783 | | Weighted-average shares outstanding (Diluted, in thousands) | 123,637 | 124,345 | - Diluted EPS increased from **$0.23** in Q1 2020 to **$0.40** in Q1 2021, reflecting higher net income attributable to Rexnord[16](index=16&type=chunk)[152](index=152&type=chunk) [7. Stockholders' Equity](index=16&type=section&id=7.%20Stockholders'%20Equity) This note details changes in stockholders' equity, including comprehensive income, stock-based compensation, and share repurchases Changes in Stockholders' Equity (Millions) | Metric | Balance at Dec 31, 2020 | Total Comprehensive Income (Loss) | Stock-based Compensation | Stock Option Proceeds | Stock Repurchase | Dividends Paid | Balance at Mar 31, 2021 | | :-------------------------------- | :---------------------- | :-------------------------------- | :----------------------- | :-------------------- | :--------------- | :------------- | :---------------------- | | Common stock | $1.2 | — | — | — | — | — | $1.2 | | Additional paid-in capital | $1,392.9 | — | $14.2 | $2.8 | — | — | $1,409.9 | | Retained earnings | $116.0 | $50.0 | — | — | $(0.9) | $(10.8) | $154.3 | | Accumulated other comprehensive loss | $(73.8) | $(1.8) | — | — | — | — | $(75.6) | | Non-controlling interest | $3.0 | $0.1 | — | — | — | — | $3.1 | | Total stockholders' equity | $1,439.3 | $48.3 | $14.2 | $2.8 | $(0.9) | $(10.8) | $1,492.9 | - The company repurchased **22,300 shares** of common stock for **$0.9 million** in Q1 2021, with approximately **$162.8 million** remaining under the repurchase program[71](index=71&type=chunk) [8. Accumulated Other Comprehensive Loss](index=17&type=section&id=8.%20Accumulated%20Other%20Comprehensive%20Loss) This note breaks down the components of accumulated other comprehensive loss, including foreign currency translation and pension adjustments | Category | Balance at Dec 31, 2020 (Millions) | Other Comprehensive Loss before Reclassifications (Millions) | Amounts Reclassified to Net Income (Millions) | Balance at Mar 31, 2021 (Millions) | | :--------------------------------- | :--------------------------------- | :------------------------------------------------------- | :------------------------------------------ | :--------------------------------- | | Foreign Currency Translation | $(46.0) | $(1.7) | — | $(47.7) | | Pension and Postretirement Plans | $(27.8) | — | $(0.1) | $(27.9) | | Total | $(73.8) | $(1.7) | $(0.1) | $(75.6) | [9. Inventories](index=17&type=section&id=9.%20Inventories) This note provides a breakdown of inventories by class, including finished goods, work in progress, and raw materials | Inventory Class | March 31, 2021 (Millions) | December 31, 2020 (Millions) | | :-------------------- | :-------------------------- | :--------------------------- | | Finished goods | $173.7 | $164.6 | | Work in progress | $39.7 | $38.6 | | Purchased components | $73.4 | $70.6 | | Raw materials | $60.6 | $53.4 | | Total Inventories | $348.4 | $330.1 | - Total inventories increased by **$18.3 million** from December 31, 2020, to March 31, 2021, with increases across all major classes[74](index=74&type=chunk) [10. Goodwill and Intangible Assets](index=17&type=section&id=10.%20Goodwill%20and%20Intangible%20Assets) This note details goodwill by operating segment and the net carrying amounts of various intangible assets, along with amortization expense Goodwill by Operating Segment (Millions) | Segment | Net Carrying Amount as of Dec 31, 2020 | Currency Translation Adjustments | Purchase Accounting Adjustments | Net Carrying Amount as of Mar 31, 2021 | | :-------------------- | :------------------------------------- | :------------------------------- | :------------------------------ | :------------------------------------- | | Process & Motion Control | $1,125.3 | $0.2 | — | $1,125.5 | | Water Management | $244.8 | $0.9 | $0.2 | $245.9 | | Consolidated | $1,370.1 | $1.1 | $0.2 | $1,371.4 | Intangible Assets, Net (Millions) | Intangible Asset Class | March 31, 2021 | December 31, 2020 | | :----------------------------------- | :------------- | :---------------- | | Patents | $9.6 | $9.8 | | Customer relationships | $199.3 | $206.9 | | Tradenames (subject to amortization) | $26.2 | $27.0 | | Tradenames (not subject to amortization) | $280.9 | $280.9 | | Total intangible assets, net | $516.0 | $524.6 | - Intangible asset amortization expense was **$9.4 million** for Q1 2021, with expected amortization of **$36.7 million** for the full year 2021[76](index=76&type=chunk)[77](index=77&type=chunk) [11. Other Current Liabilities](index=18&type=section&id=11.%20Other%20Current%20Liabilities) This note itemizes other current liabilities, including contract liabilities, sales rebates, and income tax payable | Category | March 31, 2021 (Millions) | December 31, 2020 (Millions) | | :--------------------------------- | :-------------------------- | :--------------------------- | | Contract liabilities | $3.4 | $4.0 | | Sales rebates | $27.3 | $35.7 | | Restructuring and other similar charges | $4.0 | $6.8 | | Product warranty | $8.5 | $8.9 | | Income tax payable | $20.3 | $14.5 | | Total other current liabilities | $129.8 | $125.6 | - Other current liabilities increased by **$4.2 million** from December 31, 2020, to March 31, 2021, primarily due to higher income tax payable and interest payable, partially offset by decreases in sales rebates and restructuring accruals[78](index=78&type=chunk) [12. Long-Term Debt](index=19&type=section&id=12.%20Long-Term%20Debt) This note details Rexnord's long-term debt, leverage ratio, new debt commitments for the spin-off, and the termination of a securitization program | Debt Type | March 31, 2021 (Millions) | December 31, 2020 (Millions) | | :--------------------------------- | :-------------------------- | :--------------------------- | | Term loan | $621.7 | $621.5 | | 4.875% Senior Notes due 2025 | $496.5 | $496.3 | | Finance leases and other subsidiary debt | $73.6 | $73.8 | | Total long-term debt | $1,189.3 | $1,189.2 | - The company's total net leverage ratio was **2.2 to 1.0** as of March 31, 2021, well within the maximum permitted ratio of **6.75 to 1.0** under its credit agreement[82](index=82&type=chunk) - Rexnord entered into debt commitment letters for up to **$708.0 million** in senior term loans and **$200.0 million** in revolving loans, and Land Newco, Inc. for up to **$486.8 million** in bridge loans, in connection with the proposed spin-off and combination with Regal[92](index=92&type=chunk)[93](index=93&type=chunk) - The accounts receivable securitization program, with a borrowing capacity of **$100.0 million**, was terminated effective May 17, 2021[89](index=89&type=chunk)[90](index=90&type=chunk) [13. Fair Value Measurements](index=20&type=section&id=13.%20Fair%20Value%20Measurements) This note provides fair value measurements for financial instruments and explains the classification hierarchy used Fair Value of Financial Instruments (Millions) | Instrument | March 31, 2021 | December 31, 2020 | | :-------------------------- | :------------- | :---------------- | | Deferred compensation assets | $13.3 | $11.7 | | Deferred compensation liabilities | $13.7 | $11.9 | | Fair value of long-term debt | $1,209.7 | $1,209.3 | - Fair value measurements are classified into Level 1 (quoted prices in active markets), Level 2 (observable market-based inputs), and Level 3 (significant unobservable inputs)[99](index=99&type=chunk) [14. Commitments and Contingencies](index=22&type=section&id=14.%20Commitments%20and%20Contingencies) This note outlines product warranty liabilities, ongoing legal actions, environmental matters, and potential asbestos-related claims Product Warranty Liability (Millions) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Balance at beginning of period | $8.9 | $6.3 | | Charged to operations | $0.6 | $1.2 | | Claims settled | $(1.3) | $(0.8) | | Balance at end of period | $8.5 | $6.7 | - The company is involved in various legal actions, including environmental matters (Ellsworth Industrial Park Site) and asbestos claims, with indemnification from prior owners (Invensys, Hamilton Sundstrand) and insurance coverage[101](index=101&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk)[104](index=104&type=chunk)[105](index=105&type=chunk) - Estimated potential liability for asbestos-related claims is **$59.0 million**, with **$42.0 million** expected to be covered by insurance in the next ten years[106](index=106&type=chunk)[107](index=107&type=chunk)[108](index=108&type=chunk) [15. Retirement Benefits](index=24&type=section&id=15.%20Retirement%20Benefits) This note details the net periodic benefit cost for pension and other postretirement plans, highlighting the impact of actuarial losses Net Periodic Benefit Cost (Millions) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | **Pension Benefits** | | | | Service cost | $0.1 | $0.1 | | Interest cost | $3.7 | $5.4 | | Expected return on plan assets | $(4.9) | $(5.5) | | Recognition of actuarial losses | — | $35.9 | | Net periodic benefit cost | $(1.1) | $35.9 | | **Other Postretirement Benefits** | | | | Interest cost | $0.1 | $0.2 | | Amortization of prior service credit | $(0.1) | $(0.1) | | Recognition of actuarial gains | — | $(0.1) | | Net periodic benefit cost | — | — | - Net periodic pension benefit cost significantly decreased to a gain of **$1.1 million** in Q1 2021 from a cost of **$35.9 million** in Q1 2020, primarily due to the absence of a **$35.8 million** non-cash actuarial loss recognized in the prior year[111](index=111&type=chunk)[148](index=148&type=chunk) [16. Stock-Based Compensation](index=24&type=section&id=16.%20Stock-Based%20Compensation) This note presents the stock-based compensation expense, reflecting grants of various equity awards Stock-Based Compensation Expense (Millions) | Period | Expense | | :--------------------------------- | :------ | | Three Months Ended March 31, 2021 | $14.8 | | Three Months Ended March 31, 2020 | $8.2 | - Stock-based compensation expense increased by **$6.6 million** year-over-year, reflecting grants of stock options, restricted stock units, performance stock units, and common stock[113](index=113&type=chunk)[114](index=114&type=chunk) [17. Business Segment Information](index=25&type=section&id=17.%20Business%20Segment%20Information) This note provides financial performance data for Rexnord's Process & Motion Control and Water Management segments Segment Performance (Millions) | Metric | Process & Motion Control (Q1 2021) | Water Management (Q1 2021) | Process & Motion Control (Q1 2020) | Water Management (Q1 2020) | | :-------------------------- | :--------------------------------- | :------------------------- | :--------------------------------- | :------------------------- | | Net sales | $320.9 | $205.2 | $363.6 | $183.4 | | Income from operations | $55.0 | $40.6 | $61.4 | $41.8 | | Depreciation and amortization | $15.2 | $8.3 | $15.1 | $7.0 | | Capital expenditures | $8.2 | $1.0 | $14.6 | $1.3 | - Process & Motion Control net sales decreased by **12%** year-over-year, primarily due to a **13% core sales decline** driven by lower order backlog and COVID-19 impacts, especially in aerospace markets[115](index=115&type=chunk)[141](index=141&type=chunk) - Water Management net sales increased by **12%** year-over-year, with **4% core sales growth** driven by increased demand in hygienic and environmental solutions, and an **8%** increase from prior-year acquisitions[115](index=115&type=chunk)[142](index=142&type=chunk) [18. Guarantor Subsidiaries](index=26&type=section&id=18.%20Guarantor%20Subsidiaries) This note provides condensed consolidating financial information for Rexnord's guarantor and non-guarantor subsidiaries - This section provides condensed consolidating financial information for Rexnord Corporation (Parent), Issuers of notes, Guarantor Subsidiaries, and Non-Guarantor Subsidiaries[116](index=116&type=chunk) - The financial statements of Guarantor Subsidiaries are not presented separately as their guarantees of senior notes are full, unconditional, and joint and several[116](index=116&type=chunk) [19. Subsequent Events](index=31&type=section&id=19.%20Subsequent%20Events) This note details subsequent events, including the acquisition of ATS GREASEwatch to enhance the Water Management platform - On April 16, 2021, Rexnord acquired ATS GREASEwatch for approximately **$4.5 million**, which develops remote tank monitoring devices and software, enhancing the Water Management platform's Zurn Environmental Solution[124](index=124&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Rexnord's financial condition and operational results for the three months ended March 31, 2021, compared to the prior year. It covers key financial metrics, the impact of the COVID-19 pandemic, recent acquisitions and divestitures, restructuring efforts, and the planned spin-off of the Process & Motion Control segment. It also includes non-GAAP financial measures and liquidity analysis [General Overview](index=32&type=section&id=General%20Overview) This section provides a general overview of Rexnord's business model and the recent fiscal year-end transition - Rexnord is a growth-oriented, multi-platform industrial company with leading market shares and trusted brands, operating under the Rexnord Business System (RBS) for continuous improvement[125](index=125&type=chunk) - The company transitioned its fiscal year-end to December 31, with the current reporting period covering January 1 to March 31, 2021[127](index=127&type=chunk) [Expected Spin-Off of Process & Motion Control Segment](index=32&type=section&id=Expected%20Spin-Off%20of%20Process%20%26%20Motion%20Control%20Segment) This section details the planned tax-free spin-off of the Process & Motion Control segment and its combination with Regal Beloit - Rexnord plans a tax-free spin-off of its Process & Motion Control segment, immediately combining it with Regal Beloit Corporation in a Reverse Morris Trust transaction, anticipated to close in Q4 2021[128](index=128&type=chunk) [COVID-19 Pandemic Impact](index=32&type=section&id=COVID-19%20Pandemic%20Impact) This section discusses the operational and financial impacts of the COVID-19 pandemic and the company's mitigation strategies - The COVID-19 pandemic caused disruptions in manufacturing, distribution, and supply chains, but as of March 31, 2021, most global facilities were operating with only intermittent interruptions[131](index=131&type=chunk) - Workforce reductions and non-essential spending cuts were implemented in 2020 to control cash outflows and mitigate financial risks[132](index=132&type=chunk) [Acquisitions and Divestiture](index=33&type=section&id=Acquisitions%20and%20Divestiture) This section summarizes recent acquisitions strengthening Water Management and the divestiture of a gearbox product line - Recent acquisitions include Hadrian (Dec 2020, **$101.3 million**) and Just Manufacturing (Jan 2020, **$59.4 million**), both strengthening the Water Management platform[133](index=133&type=chunk)[136](index=136&type=chunk) - The company divested its gearbox product line in China for **$5.8 million** in October 2020[135](index=135&type=chunk) [Restructuring](index=33&type=section&id=Restructuring) This section highlights the significant decrease in restructuring charges due to ongoing operational optimization efforts - Restructuring charges for Q1 2021 totaled **$0.6 million**, a significant decrease from **$6.6 million** in Q1 2020, reflecting ongoing efforts to optimize operating margin and manufacturing footprint[138](index=138&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) This section analyzes Rexnord's consolidated and segment-level operational results, including sales, income, and key drivers of change Consolidated Results of Operations (Millions) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | :--------- | | Net sales | $526.1 | $547.0 | $(20.9) | (3.8)% | | Income from operations | $78.6 | $88.0 | $(9.4) | (10.7)% | | Net income | $50.1 | $28.6 | $21.5 | 75.2% | - Process & Motion Control net sales decreased by **12%** due to a **13% core sales decline**, while Water Management net sales increased by **12%** with **4% core sales growth**[141](index=141&type=chunk)[142](index=142&type=chunk) - Consolidated income from operations decreased by **10.7%**, but net income increased by **75.2%** primarily due to the absence of a **$35.8 million** actuarial loss on pension and postretirement benefit obligations in Q1 2021[143](index=143&type=chunk)[148](index=148&type=chunk)[152](index=152&type=chunk) - Interest expense, net, decreased to **$11.0 million** from **$13.4 million**, driven by lower outstanding borrowings and average interest rates[147](index=147&type=chunk) [Non-GAAP Financial Measures](index=36&type=section&id=Non-GAAP%20Financial%20Measures) This section defines and reconciles non-GAAP financial measures like core sales, EBITDA, and Adjusted EBITDA, and presents the net leverage ratio - Core sales, EBITDA, and Adjusted EBITDA are presented as non-GAAP financial measures to provide additional insights into performance, excluding impacts of acquisitions, divestitures, and foreign currency translation[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk) Adjusted EBITDA Reconciliation (Millions) | Metric | Nine months ended Dec 31, 2020 | Three months ended Mar 31, 2021 | Twelve months ended Mar 31, 2021 | | :----------------------------------- | :----------------------------- | :------------------------------ | :----------------------------- | | Net income attributable to Rexnord | $118.2 | $50.0 | $168.2 | | EBITDA | $255.4 | $102.1 | $357.5 | | Adjustments to EBITDA | $52.1 | $18.1 | $70.2 | | Adjusted EBITDA | $307.5 | $120.2 | $427.7 | | Pro forma adjustment for acquisitions | — | — | $5.1 | | Pro forma Adjusted EBITDA | — | — | $432.8 | - The total net leverage ratio as of March 31, 2021, was **2.2 to 1.0**, calculated as consolidated indebtedness (**$957.6 million**) to Adjusted EBITDA for the trailing four fiscal quarters (**$432.8 million**)[167](index=167&type=chunk) [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses Rexnord's liquidity sources, total indebtedness, and changes in cash flow from operating activities - Primary liquidity sources include cash and cash equivalents (**$307.3 million** at March 31, 2021), cash flow from operations, and borrowing availability under the revolving credit facility (**$264.0 million**)[168](index=168&type=chunk)[169](index=169&type=chunk) - Total indebtedness outstanding was **$1,191.8 million** as of March 31, 2021, comprising term loans, senior notes, and finance leases[175](index=175&type=chunk) - Cash provided by operating activities decreased to **$71.3 million** in Q1 2021 from **$123.9 million** in Q1 2020, mainly due to higher trade working capital[172](index=172&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section addresses Rexnord's exposure to market risks, specifically from changes in foreign currency exchange rates and interest rates. The company manages these risks through operational activities and derivative financial instruments - Rexnord is exposed to market risks from foreign currency exchange rates and interest rates, which are managed using foreign currency forward contracts, interest rate swaps, and interest rate caps[176](index=176&type=chunk) - There have been no material changes in market risk from the information previously provided in the Transition Report on Form 10-K for the period ended December 31, 2020[176](index=176&type=chunk) [ITEM 4. Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the effectiveness of Rexnord's disclosure controls and procedures and internal control over financial reporting. Management, including the CEO and CFO, concluded that disclosure controls were effective as of March 31, 2021 - The CEO and CFO concluded that Rexnord's disclosure controls and procedures were adequate and effective as of March 31, 2021, ensuring timely and accurate reporting[179](index=179&type=chunk) - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[181](index=181&type=chunk) [PART II - OTHER INFORMATION](index=42&type=section&id=Part%20II%20OTHER%20INFORMATION) This section provides additional information on legal proceedings, risk factors, equity security sales, and exhibits related to Rexnord's operations [ITEM 1. Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to the detailed information on legal proceedings, commitments, and contingencies provided in Note 14 to the condensed consolidated financial statements - Legal proceedings are incorporated by reference from Note 14, 'Commitments and Contingencies,' in Part I, Item 1 of this report[184](index=184&type=chunk) [ITEM 1A. Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) This section outlines risks primarily related to the proposed spin-off of the Process & Motion Control segment and its combination with Regal Beloit Corporation. Key risks include the inability to complete the transaction, significant associated costs, potential adverse effects on business operations during the pendency, and tax implications if the transaction does not qualify as tax-free - The consummation of the spin-off and related transactions with Regal Beloit is subject to numerous conditions, including regulatory and stockholder approvals, with no assurance of completion on contemplated terms or timeline[185](index=185&type=chunk) - Rexnord expects to incur significant one-time costs related to the transactions, including financing and integration costs, which could adversely affect liquidity, cash flows, and operating results[188](index=188&type=chunk) - The transactions could be taxable if the spin-off does not qualify as tax-free under IRS regulations, potentially leading to substantial U.S. federal income taxes for stockholders and indemnification obligations for Land (guaranteed by Regal)[192](index=192&type=chunk)[193](index=193&type=chunk)[194](index=194&type=chunk)[195](index=195&type=chunk) - The pendency of the transactions may adversely affect business operations by delaying customer/vendor decisions and imposing restrictions on corporate actions, potentially impacting revenues, earnings, and cash flows[190](index=190&type=chunk)[191](index=191&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=45&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's common stock repurchase program, including the number of shares repurchased and the remaining authorization - During Q1 2021, Rexnord repurchased **22,300 shares** of common stock for **$0.9 million** at a weighted average price of **$39.27 per share**[200](index=200&type=chunk)[202](index=202&type=chunk) - Approximately **$162.8 million** of the existing share repurchase authority remained under the program as of March 31, 2021[200](index=200&type=chunk)[202](index=202&type=chunk) [ITEM 6. Exhibits](index=46&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including agreements related to the Regal Beloit transaction, certifications, and XBRL data - Key exhibits include the Agreement and Plan of Merger, Separation and Distribution Agreement, Tax Matters Agreement, and various commitment letters related to the Regal Beloit transaction[204](index=204&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act are also included[204](index=204&type=chunk) [Signatures](index=47&type=section&id=Signatures) This section contains the official signature of Rexnord Corporation, duly authorized, for the Form 10-Q filing - The report was signed on April 27, 2021, by Mark W. Peterson, Senior Vice President and Chief Financial Officer of Rexnord Corporation[208](index=208&type=chunk)