Zurn Elkay Water Solutions (ZWS) - 2022 Q2 - Quarterly Report

Part I Financial Statements 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][28][106] - 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][40][116] 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) 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 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][127] - Interest expense decreased significantly year-over-year due to lower outstanding debt following the PMC Spin-Off Transaction refinancing[122][129] Non-GAAP Financial Measures and Covenant Compliance 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][147] Liquidity and Capital Resources 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] - 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] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] - Management uses operating activities and sometimes derivative instruments, such as foreign currency forward contracts, to manage these risks[157] Controls and Procedures 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] - 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] Part II Legal Proceedings 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][164] - 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][98][100] Risk Factors 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] - 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][166] - 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][172] Unregistered Sales of Equity Securities and Use of Proceeds 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] - As of June 30, 2022, approximately $162.8 million of the existing authority remained under the company's share repurchase program[67][175] Exhibits 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]