Zurn Elkay Water Solutions Corporation (NYSE:ZWS) Q3 2022 Earnings Conference Call October 26, 2022 8:30 AM ET Company Participants Dave Pauli - VP of IR Todd Adams - Chairman and CEO Mark Peterson - SVP and CFO Conference Call Participants Bryan Blair - Oppenheimer Mike Halloran - Baird Jeff Hammond - Keybanc Capital Markets Nathan Jones - Stifel Vivek Srivastava - Goldman Sachs Brett Linzey - Mizuho Operator Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Third Quarter 2022 Earning ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _________________________________________________ FORM 10-Q Table of Contents (Mark one) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2022 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35475 _________________________________________________ ZURN ELKAY WATER ...

Financial Data and Key Metrics Changes - The second quarter sales increased by 17% year-over-year to $284 million, with core business growth contributing 15% and the Wade Drains acquisition accounting for 2% [15] - Adjusted EBITDA was $71 million, with an adjusted EBITDA margin of 25.1%, reflecting a 60 basis point improvement sequentially from the first quarter of 2022 [15][11] - Free cash flow for the quarter was reported at $41 million, with net debt leverage at 1.9 times [11][16] Business Line Data and Key Metrics Changes - Core sales growth was balanced across water safety and control, hygienic and environmental, and flow control product categories [15] - The company experienced significant share gains in water safety and control, with a focus on backflow prevention and pressure relief valves [19] - The hygienic and environmental sector is seeing strong demand for touch sensor products and solutions for commercial restrooms [20] Market Data and Key Metrics Changes - Over 70% of revenues are derived from institutional and commercial markets, with healthcare and education being the largest segments [22] - The Dodge Momentum Index, an indicator of non-residential construction strength, reached a 14-year high, suggesting robust market conditions despite economic uncertainties [22] Company Strategy and Development Direction - The merger with Elkay is expected to create significant operational and commercial synergies, with a target of $50 million in savings across SG&A, manufacturing, and supply chain [25][26] - The company aims to be the leading pure-play water solutions business, focusing on sustainability and water stewardship [27][28] - The integration of sales and marketing organizations is a priority to present a unified front to the marketplace [25] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to continue growing despite recession fears, citing a strong demand creation process [50] - The company anticipates Elkay-related sales to be between $145 million and $155 million in the third quarter, with adjusted EBITDA margins expected to expand [31] - Supply chain conditions are normalizing, with expectations for inventory reduction and improved cost environments in the second half of the year [12][13] Other Important Information - The Elkay transaction closed on July 1, 2022, and the combined results will be reported starting in the third quarter [5] - The company has implemented a common business system to enhance operational efficiency and performance [27] Q&A Session Summary Question: Can you provide insights on core growth and any outperforming end-markets? - Management noted strong order rates across all sectors, with no specific outlier, and indicated a consistent high single-digit price growth expectation [45][46] Question: What are the growth dynamics for the drinking water side versus sinks and faucets? - Management highlighted that both categories faced challenges, particularly in lead times for drinking water products, but overall growth remains meaningful [47] Question: Are there concerns about a pullback in business due to recession fears? - Management remains optimistic, citing a strong track record of growth and the potential for double-digit growth in 2023 [50] Question: What is the expected EBITDA run rate for Elkay in the second half? - Management indicated an EBITDA run rate of $85 million to $90 million for Elkay, with adjustments for backlog reductions [56][58] Question: What are the opportunities for free cash flow improvement in Elkay? - Management identified working capital management and capital intensity reduction as key areas for cash flow improvement [91] Question: How is the supply chain evolving, particularly regarding regional concentration? - Management noted a shift away from reliance on China, with plans to continue diversifying supply chain sources [99][100]

| --- | --- | --- | --- | --- | --- | |----------------------------------------|-------|-------|-------|-------|-------| | | | | | | | | Second Quarter 2022 Financial Results | | | | | | | JULY 26, 2022 | | | | | | | | | | | | | CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT Forward-Looking Statements This presentation includes "forward-looking statements" within the meaning of the federal securities laws that involve risks and uncertainties. Forward-looking statements include state ...

Part I [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited condensed consolidated financial statements, including Balance Sheets, Statements of Operations, and Cash Flows, are presented, noting the Elkay merger and PMC spin-off Condensed Consolidated Balance Sheet Highlights (Unaudited) | (in Millions) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Total current assets | $588.4 | $474.8 | | Total assets | $1,176.3 | $1,077.7 | | **Liabilities & Equity** | | | | Total current liabilities | $241.2 | $240.4 | | Long-term debt | $531.9 | $533.9 | | Total liabilities | $946.9 | $951.3 | | Total stockholders' equity | $229.4 | $126.4 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | (in Millions, except per share data) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $284.2 | $243.7 | $523.8 | $448.9 | | Gross profit | $113.8 | $103.8 | $215.7 | $192.2 | | Income from operations | $53.5 | $37.3 | $97.4 | $61.3 | | Net income from continuing operations | $36.4 | $20.6 | $65.8 | $30.6 | | Net income attributable to Zurn Elkay | $36.4 | $73.2 | $66.6 | $123.2 | | Diluted EPS (Net income) | $0.28 | $0.59 | $0.52 | $0.99 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | (in Millions) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Cash (used for) provided by operating activities | $(12.0) | $145.0 | | Cash provided by (used for) investing activities | $35.4 | $(4.4) | | Cash used for financing activities | $(9.3) | $(5.6) | | Increase in cash, cash equivalents and restricted cash | $13.8 | $135.1 | - On July 1, 2022, subsequent to the reporting period, the company completed its merger with Elkay Manufacturing Company and changed its name to **Zurn Elkay Water Solutions Corporation**, with Elkay's results included from **Q3 2022** onwards[11](index=11&type=chunk)[28](index=28&type=chunk)[106](index=106&type=chunk) - The Process & Motion Control (PMC) business, spun-off in October 2021, is reported as discontinued operations, with the company receiving a **$35.0 million** payment in H1 2022 related to final working capital adjustments from the spin-off[30](index=30&type=chunk)[40](index=40&type=chunk)[116](index=116&type=chunk) Revenue by Customer Type and Geography (Six Months Ended June 30) | (in Millions) | 2022 | 2021 | | :--- | :--- | :--- | | **Customer Type** | | | | Institutional | $196.4 | $169.1 | | Commercial | $159.8 | $137.8 | | All other | $167.6 | $142.0 | | **Geography** | | | | United States | $477.1 | $405.2 | | Canada | $35.6 | $32.8 | | Rest of world | $11.1 | $10.9 | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 and H1 2022 financial results, highlighting growth in net sales and operating income, the Elkay merger, PMC spin-off, and non-GAAP measures for performance [Results of Operations](index=25&type=section&id=2.1%20Results%20of%20Operations) Q2 and H1 2022 saw strong year-over-year growth in net sales and operating income, driven by core sales and price realization Q2 2022 vs. Q2 2021 Performance | (in Millions) | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $284.2 | $243.7 | 16.6% | | Income from operations | $53.5 | $37.3 | 43.4% | | Operating Margin | 18.8% | 15.3% | +350 bps | H1 2022 vs. H1 2021 Performance | (in Millions) | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $523.8 | $448.9 | 16.7% | | Income from operations | $97.4 | $61.3 | 58.9% | | Operating Margin | 18.6% | 13.7% | +490 bps | - Core sales, excluding acquisitions and currency effects, increased by **15%** year-over-year for both the three and six-month periods, with growth across nearly all product categories[119](index=119&type=chunk)[127](index=127&type=chunk) - Interest expense **decreased significantly** year-over-year due to lower outstanding debt following the PMC Spin-Off Transaction refinancing[122](index=122&type=chunk)[129](index=129&type=chunk) [Non-GAAP Financial Measures and Covenant Compliance](index=28&type=section&id=2.2%20Non-GAAP%20Financial%20Measures%20and%20Covenant%20Compliance) Non-GAAP measures like Adjusted EBITDA are used for performance and debt covenant compliance, with a **2.08:1** net leverage ratio well within the **5.00:1** maximum Reconciliation to Adjusted EBITDA (Trailing Twelve Months) | (in Millions) | Twelve months ended June 30, 2022 | | :--- | :--- | | Net income attributable to Zurn Elkay common stockholders | $64.3 | | Adjustments (Discontinued ops, taxes, interest, D&A, etc.) | $148.0 | | Pro forma adjustment for acquisitions | $0.5 | | **Pro forma Adjusted EBITDA** | **$212.8** | - As of June 30, 2022, the company's total net leverage ratio was **2.08 to 1.00**, **comfortably in compliance** with the credit agreement's maximum covenant of **5.00 to 1.00**[138](index=138&type=chunk)[147](index=147&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=2.3%20Liquidity%20and%20Capital%20Resources) Primary liquidity sources include cash, operating cash flow, and a revolving credit facility, with **$110.4 million** cash and **$193.9 million** available borrowing capacity, despite negative H1 2022 operating cash flow - As of June 30, 2022, the company had **$110.4 million** of cash and cash equivalents and **$193.9 million** of additional borrowing capacity under its revolving credit facility[149](index=149&type=chunk) - Cash used for operating activities was **$12.0 million** for the six months ended June 30, 2022, a **significant decrease** from the **$145.0 million** provided in the prior-year period, mainly due to higher trade working capital investment[152](index=152&type=chunk) - Cash provided by investing activities was **$35.4 million**, primarily due to the receipt of **$35.0 million** related to the finalization of the PMC spin-off transaction[153](index=153&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company discloses exposure to market risks from foreign currency and interest rate changes, managed through operating activities and derivative instruments - The company is exposed to **market risk** from changes in **foreign currency exchange rates** and **interest rates**[157](index=157&type=chunk) - Management uses **operating activities** and sometimes **derivative instruments**, such as **foreign currency forward contracts**, to manage these risks[157](index=157&type=chunk) [Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including CEO and CFO, concluded disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of June 30, 2022[159](index=159&type=chunk) - There were **no changes** in internal control over financial reporting during the last fiscal quarter that have **materially affected**, or are reasonably likely to materially affect, internal controls[161](index=161&type=chunk) Part II [Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) The company details legal proceedings, including ordinary course litigation and asbestos claims, with established reserves and believed adequate insurance coverage - The company is involved in **various legal actions** in the ordinary course of business, for which it establishes **accruals** when liability is **probable and reasonably estimable**[95](index=95&type=chunk)[164](index=164&type=chunk) - As of June 30, 2022, the company faces approximately **6,000 asbestos-related lawsuits**, with an estimated potential liability of **$66.0 million**, which is **fully reserved for** and **matched by a corresponding insurance receivable**, as management believes the liability is **covered by insurance**[96](index=96&type=chunk)[98](index=98&type=chunk)[100](index=100&type=chunk) [Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) Updated risk factors focus on the Elkay merger, including integration challenges, expanded operations, goodwill impairment, and potential stock price depression from former Elkay stockholder sales - The company may be **unable to successfully integrate** Elkay's business and realize anticipated benefits and cost savings due to **challenges in combining operations, personnel, and systems**[167](index=167&type=chunk) - The merger will result in **significant goodwill and intangible assets** on the balance sheet, which could become **impaired** in the future, leading to **material non-cash charges** to earnings[165](index=165&type=chunk)[166](index=166&type=chunk) - Sales of stock by former Elkay shareholders, who received approximately **51.6 million shares** and own about **29%** of the combined company, could **adversely affect the trading price** of Zurn Elkay's common stock[106](index=106&type=chunk)[172](index=172&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) An update on the stock repurchase program indicates no shares were repurchased in Q2 2022, with **$162.8 million** remaining authorized for future repurchases - The company **did not repurchase any** of its common stock during the three months ended June 30, 2022[175](index=175&type=chunk) - As of June 30, 2022, approximately **$162.8 million** of the existing authority remained under the company's share repurchase program[67](index=67&type=chunk)[175](index=175&type=chunk) [Exhibits](index=37&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the 10-Q report, including corporate documents, CEO/CFO certifications, and XBRL data files - Key exhibits filed include the **Amended and Restated Certificate of Incorporation and Bylaws**, **CEO and CFO certifications** under Section 302 of the Sarbanes-Oxley Act, and **Inline XBRL documents**[177](index=177&type=chunk)

ER SOLUTIONS First Quarter 2022 Financial Results April 27, 2022 CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT 2 Forward-Looking Statements This presentation includes "forward-looking statements" within the meaning of the federal securities laws that involve risks and uncertainties. Forward-looking statements include statements we make concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other ...

Zurn Water Solutions Corporation (NYSE:ZWS) Q1 2022 Earnings Conference Call April 27, 2022 8:30 AM ET Company Participants Todd Adams – Chairman and Chief Executive Officer Mark Peterson – Senior Vice President and Chief Financial Officer Dave Pauli – Vice President of Investor Relations Conference Call Participants Jeff Hammond – Keybanc Capital Markets Bryan Blair – Oppenheimer Joe Ritchie – Goldman Sachs Brett Linzey – Mizuho Operator Good morning and welcome to Zurn Water Solutions Corporation, First Q ...

[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]