Zurn Elkay Water Solutions (ZWS) - 2022 Q1 - Quarterly Report

Part I FINANCIAL INFORMATION Financial Statements The company presents its unaudited condensed consolidated financial statements for Q1 2022, including key events like the PMC spin-off Condensed Consolidated Balance Sheets 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 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 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 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][29] - 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][34] - 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][103] 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 Management analyzes Q1 2022 performance, highlighting a 17% sales increase and the impacts of the pending Elkay merger Results of Operations 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] 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 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][140] 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 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] - 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] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] Controls and Procedures 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] - 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] Part II OTHER INFORMATION Legal Proceedings 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][157] Risk Factors This section updates risk factors, focusing exclusively on new risks related to the proposed merger with Elkay Risks Related to the Merger with Elkay 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][159] - 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] - 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] - Current Zurn stockholders will have a reduced ownership stake of approximately 71% post-merger, resulting in less influence over management and policies[181] Unregistered Sales of Equity Securities and Use of Proceeds 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] - A total of approximately $162.8 million of the existing authority remained under the Share Repurchase Program at March 31, 2022[186] Exhibits 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] 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]