Zurn Elkay Water Solutions Corp 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of results of operations and financial condition includes periods prior to the acquisitions of the assets of East Creek Corporation ("StainlessDrains.com"), Just Manufacturing Company ("Just Manufacturing"), Hadrian Manufacturing Inc., as well as the stock of Hadrian Inc. (Hadrian Inc. and Hadrian Manufacturing Inc. are collectively referred to as "Hadrian"), the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch") and Wade Drains ("Wade"). Our financial performance includes the Stainlessdrains.com business subsequent to May 10, 2019, the Just Manufacturing business subsequent to January 28, 2020, and the Hadrian business subsequent to December 11, 2020, the ATS GREASEwatch business subsequent to April 16, 2021 and the Wade Drains business subsequent to November 17, 2021, the respective dates of their acquisitions. Accordingly, the discussion and analysis does not reflect any impact of Stainlessdrains.com, Just Manufacturing, Hadrian, ATS GREASEwatch or Wade Drains transactions prior to the respective closing dates. We completed the spin-off of our Process & Motion Control platform ("PMC") on October 4, 2021 in the Spin-Off Transaction, and, accordingly, the results of operations and financial condition associated with PMC have been reclassified to discontinued operations for all periods presented. As a result, the following discussion of results of operations and financial condition is centered on the Zurn business excluding PMC. The consolidated statements of cash flows for the year ended December 31, 2021, the nine month Transition Period ended December 31, 2021 and the fiscal year ended March 31, 2020 have not been adjusted to separately disclose cash flows related to the discontinued operations. See Item 8, Note 4, Discontinued Operations for additional information on cash flows associated with the discontinued operations. You should read the following discussion of our financial condition and results of operations together with Item 8, Financial Statements and Supplementary Data. Following the end of our fiscal year ended March 31, 2020, we transitioned to a December 31 fiscal year-end. The nine-month period from April 1, 2020, to December 31, 2020 is referred to as the Transition Period. Fiscal years prior to and including fiscal year 2020 ended on March 31 of each calendar year. For example, our fiscal year 2020, or fiscal 2020, means the period from April 1, 2019 to March 31, 2020. Our fiscal year 2021 commenced on January 1, 2021. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" in Item 1A of this report. Actual results may differ materially from those contained in any forward-looking statements. See also "Cautionary Notice Regarding Forward-Looking Statements" found elsewhere in this report. The information contained in this section is provided as a supplement to the consolidated financial statements and the related notes included elsewhere in this report to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. This section is organized as follows: Company Overview . This section provides a general description of our business. Financial Statement Presentation . This section provides a brief description of certain items and accounting policies that appear in our financial statements and general factors that impact these items. Critical Accounting Estimates . This section discusses the accounting policies and estimates that we consider to be important to our financial condition and results of operations and that require significant judgment and estimates by management in their application. Recent Accounting Pronouncements . This section cites to the discussion of new or revised accounting pronouncements and standards in Item 8, Note 2, Significant Accounting Policies of our consolidated financial statements. Overview of Recent Developments . This section provides a description of the recent events impacting our results of operations. Results of Operations . This section provides an analysis of our results of operations. As noted above, following the end of fiscal 2020, we transitioned to a December 31 fiscal year-end and accordingly we reported the nine-month period from April 1, 2020, to December 31, 2020 as a Transition Period. In providing analysis of the results of our operations, we have provided a comparison of our year ended December 31, 2021 to the twelve month period ended December 31, 2020, along with a comparison of the nine months ended December 31, 2020 included in the Transition Period to the nine month period ended December 31, 2019. Non-GAAP Financial Measures . This section provides an explanation of certain financial measures we use that are not in accordance with U.S. generally accepted accounting principles ("GAAP"). Covenant Compliance . This section provides a discussion of certain restrictive covenants in our credit agreement. 26 Liquidity and Capital Resources . This section provides an analysis of our cash flows for our years ended December 31, 2021 and 2020, and nine months ended December 31, 2020 and 2019, as well as a discussion of our indebtedness and its potential effects on our liquidity. Tabular Disclosure of Contractual Obligations . This section provides a discussion of our commitments as of December 31, 2021. Quantitative and Qualitative Disclosures about Market Risk . This section discusses our exposure to potential losses arising from adverse changes in interest rates and foreign exchange rates. Company Overview After completion of the Spin-Off Transaction, we are a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets what we believe is the broadest sustainable product portfolio of specification-driven water management solutions to improve health, human safety and the environment. Our product portfolio includes professional grade water safety and control, flow systems and hygienic and environmental products for public and private spaces that deliver superior value to building owners, positively impact the environment and human hygiene and reduce product installation time. Zurn's heritage of innovation and specification have allowed us to provide highly-engineered, mission-critical solutions to customers for decades and affords us the privilege of having long-term, valued relationships with market leaders. We operate in a disciplined way and the Zurn Business System (“ZBS”) is our operating philosophy. Grounded in the spirit of continuous improvement, ZBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of our business. Refer to Item 1, Business for additional information. Financial Statement Presentation The following paragraphs provide a brief description of certain items and accounting policies that appear in our financial statements and general factors that impact these items. Net Sales. Net sales represent gross sales less deductions taken for sales returns and allowances and incentive rebate programs. Cost of Sales. Cost of sales includes all costs of manufacturing required to bring a product to a ready for sale condition. Such costs include direct and indirect materials, direct and indirect labor costs, including fringe benefits, supplies, utilities, depreciation, freight and shipping, insurance, pension and postretirement benefits, information technology costs and other manufacturing related costs. The largest component of our cost of sales is cost of materials, which represented approximately 34% of net sales in the year ended December 31, 2021. We purchase a broad range of materials and components throughout the world in connection with our manufacturing activities. Major raw materials and components include brass, castings, copper, zinc, forgings, plate steel, high-performance engineered plastic and resin. We have a strategic sourcing program that is designed to significantly reduce the number of direct and indirect suppliers we use and to lower the cost of purchased materials. Selling, General and Administrative Expenses. Selling, General and Administrative expenses primarily includes sales and marketing, finance and administration, engineering and technical services and warehousing. Our major cost elements include salary and wages, fringe benefits, insurance, depreciation, advertising, travel and information technology costs. Critical Accounting Estimates The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely event that would result in materially different amounts being reported. We believe the following accounting policies are the most critical to us in that they are important to our financial statements and they require difficult, subjective and/or complex judgments in the preparation of our consolidated financial statements. For additional information, see Item 8, Note 2, Significant Accounting Policies to our consolidated financial statements. 27 Revenue recognition. Under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), a performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when obligations under the terms of a contract with the customer are satisfied. For our product sales, revenue is recognized at a point-in-time when control of the product is transferred to the customer, which generally occurs when the product is shipped from our manufacturing facility to the customer. When contracts include multiple products to be delivered to the customer, generally each product is separately priced and is determined to be distinct within the context of the contract. Other than a standard assurance-type warranty that the product will conform to agreed-upon specifications, there are generally no other significant post-shipment obligations. The expected costs associated with standard warranties continues is recognized as an expense when the products are sold. When the contract provides the customer the right to return eligible products or when the customer is part of a sales rebate program, we reduce revenue at the point of sale using current facts and historical experience by using an estimate for expected product returns and rebates associated with the transaction. These estimates are adjusted at the earlier of when the most likely amount of consideration that is expected to be received changes or when the consideration becomes fixed. Accordingly, an increase or decrease to revenue is recognized at that time. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost for freight and shipping when control of products has transferred to the customer as a component of cost of sales in the consolidated statements of operations. We classify shipping and handling fees billed to our customers as net sales and the corresponding costs are classified as cost of sales in the consolidated statements of operations. Receivables. Receivables are stated net of allowances for doubtful accounts of $1.2 million at December 31, 2021 and $0.8 million at December 31, 2020. We assesses the collectability of customer receivables based on the credit worthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for doubtful accounts, we also consider various factors including the aging of customer accounts and historical write-offs. In addition, we monitor other risk factors, including forward-looking information when establishing adequate allowances for doubtful accounts, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. Generally, advance payment is not required. Allowances for doubtful accounts established are recorded within selling, general and administrative expenses within the consolidated statements of operations. Inventory. Inventories are stated at the lower of cost or market. Market is determined based on estimated net realizable values. Approximately 84% and 75% of our total inventories as of December 31, 2021 and December 31, 2020, respectively, were valued using the "last-in, first-out" (LIFO) method. All remaining inventories are valued using the "first-in, first-out" (FIFO) method. In some cases we have determined a certain portion of our inventories are excess or obsolete. In those cases we write down the value of those inventories to their net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The total write-down of inventories charged to expense was $0.9 million, $1.5 million and $2.2 million, during the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, respectively. Purchase accounting and business combinations. Assets acquired and the liabilities assumed as part of a business combination are recognized separately from goodwill at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. We review and consider input from outside specialists, if and when appropriate to develop discount rates, and use estimates and assumptions about the future performance of the business to accurately value assets acquired and liabilities assumed at the acquisition date. We may refine these estimates during the measurement period, which may be up to one year from the acquisition date. As a result, during the measurement period, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset recorded to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our consolidated statements of operations. Impairment of intangible assets and tangible fixed assets. The carrying value of long-lived assets, including amortizable intangible assets and tangible fixed assets, are evaluated for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment of amortizable intangible assets and tangible fixed assets is generally determined by comparing projected undiscounted cash flows to be generated by the asset, or group of assets, to its carrying value. If impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted. Determination of the fair value requires various estimates including internal cash flow estimates generated from the asset, quoted market prices and appraisals as appropriate to determine fair 28 value. Actual results could vary from these estimates. During the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, no impairment losses were recognized. Goodwill, trademarks and certain tradenames have indefinite lives and are not amortized. However, the goodwill and intangible assets are tested annually for impairment, and may be tested more frequently if any triggering events occur that would reduce the recoverability of the asset. In conducting the annual impairment test for goodwill, we have the option to first assess qualitative factors to determine whether it is more likely than not (> 50% likelihood) the fair value of any reporting unit is less than its carrying amount. If a qualitative assessment determines an impairment is more likely than not, we are required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, we may elect to proceed directly to the quantitative impairment test. In conducting a qualitative assessment, we use a discounted cash flow methodology based on future business projections and a market value approach (guideline public company comparables). We perform our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value up to the amount of the recorded goodwill. During the fourth quarter of the year ended December 31, 2021, we completed our annual goodwill impairment test and elected to perform a qualitative assessment. No goodwill impairment charges were recorded during the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020. Retirement benefits. We have significant pension and post-retirement benefit income and expense and assets/liabilities that are developed from actuarial valuations. These valuations include key assumptions regarding discount rates, expected return on plan assets, mortality rates and the current health care cost trend rate. We consider current market conditions in selecting these assumptions. Changes in the related pension and post-retirement benefit income/costs or assets/liabilities may occur in the future due to changes in the assumptions and changes in asset values. We recognize the net actuarial gains or losses in excess of unrecognized gain or loss exceeding 10 percent of the greater of the market-related value of plan assets or the plan's projected benefit obligation at re-measurement (the "corridor") in the Corporate segment operating results during the fourth quarter of each fiscal year (or upon any re-measurement date). During the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, we recognized non-cash actuarial gain (loss) from continuing operations of $1.2 million, $(0.3) million and $(20.9) million, respectively, in connection with re-measurements of the plans. Net periodic benefit costs recorded on a quarterly basis are primarily comprised of service and interest cost, amortization of unrecognized prior service cost and the expected return on plan assets. See Item 8, Note 16, Retirement Benefits for additional information. The obligation for postretirement benefits other than pension also is actuarially determined and is affected by assumptions including the discount rate and expected future increase in per capita costs of covered postretirement health care benefits. Changes in the discount rate and differences between actual and assumed per capita health care costs may affect the recorded amount of the expense in future periods. Income taxes. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related deferred tax assets and liabilities. We assess our income tax positions and record tax liabilities for all years subject to examination based upon management’s evaluation of the facts and circumstances and information available at the reporting dates. For those income tax positions where it is more-likely-than-not, based on technical merits, that a tax benefit will be sustained upon the conclusion of an examination, we have recorded the largest amount of tax benefit having a cumulatively greater than 50% likelihood of being realized upon ultimate settlement with the applicable taxing authority, assuming that it has full knowledge of all relevant information. For those tax positions which do not meet the more-likely-than-not threshold regarding the ultimate realization of the related tax benefit, no tax benefit has been recorded in the financial statements. In addition, we provide for interest and penalties, as applicable, and record such amounts as a component of the overall income tax provision. As of December 31, 2021 and 2020, our liability for unrecognized tax benefits was $5.9 million and $4.7 million, respectively. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, net operating losses (“NOL’s”), tax credit and other carryforwards. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, we established a full valuation allowance against U.S. federal and state capital loss carryforwards, as well as certain state tax credit carryforwards, and continue to maintain a partial valuation allowance against certain foreign NOL carryforwards and other related deferred tax assets, as well as certain U.S. state NOL carryforwards. As of December 31, 2021 and 2020, valuation allowances of $35.1 million and $36.8 million, respectively, were recorded against our deferred tax assets. See Item 8 Note 17, Income Taxes for additional information. 29 Commitments and Contingencies. We are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. We determine the amount of accruals needed, if any, for each individual issue based on our professional knowledge and experience and discussions with legal counsel. The required accruals may change in the future due to new developments in each matter, the ultimate resolution of each matter or changes in approach, such as change in strategy. Accruals are recorded on our consolidated balance sheets to reflect our contractual liabilities relating to warranty commitments to our customers. We provide warranty coverage at various lengths and terms to our customers depending on standard offerings and negotiated contractual agreements. We accrue an estimate for warranty expense at the time of sale based on historical warranty return rates and repair costs. Should future warranty experience differ materially from our historical experience, we may be required to record additional warranty accruals which could have a material adverse effect on our results of operations in the period in which these additional accruals are required. As noted in Item 8, Note 18, Commitments and Contingencies, certain subsidiaries are subject to asbestos litigation. As a result, we have recorded a liability for pending and potential future asbestos claims, as well as a receivable for insurance coverage of such liability. The valuation of our potential asbestos liability was based on the number and severity of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives. We estimate that our available insurance to cover our potential asbestos liability as of December 31, 2021, is greater than our potential asbestos liability. This conclusion was reached after considering our experience in asbestos litigation, the insurance payments made to date by our insurance carriers, existing insurance policies, the industry ratings of the insurers and the advice of insurance coverage counsel with respect to applicable insurance coverage law relating to the terms and conditions of those policies. We used these same considerations when evaluating the recoverability of our receivable for insurance coverage of potential asbestos claims. Recent Accounting Pronouncements See Item 8, Note 2, Significant Accounting Policies regarding recent accounting pronouncements. Overview of Recent Developments COVID-19 pandemic We continue to manage through the ongoing and unpredictable Covid-19 pandemic, which continues to impact countries in which we do business and worldwide economic activity. O ur suppliers, business partners and customers have at times experienced negative impacts from the Covid-19 pandemic. Global supply chains have been disrupted, causing shortages and at times delays in receipt of product. This disruption of our employees, distributors, suppliers and customers has historically impacted and may continue to impact our sales and future operating results. We remain focused on the health and well-being of our employees and have undertaken numerous actions within our offices and manufacturing sites that are intended to minimize the spread of COVID-19. While the duration of the COVID-19 pandemic is currently unknown and it is not possible at this time to estimate the scope and severity of the impact that the pandemic could have on our operations, the measures taken, and those that may be taken in the future, by the governments of countries affected, actions taken to protect employees, changes in customer buying patterns and the impact of the pandemic on various business activities in affected countries and the economy generally, it could adversely affect our financial condition, results of operations and cash flows. Discontinued Operations During the year ended December 31, 2021, we completed the spin-off of our PMC platform. The operating results of PMC are reported as discontinued operations in our consolidated statements of operations for all periods presented, as the Spin-Off Transaction represented a strategic shift that had a major impact on our operations and financial results. The terms of the operative agreements governing the Spin-Off Transaction included targeted working capital and cash balances at closing of the transaction, which are subject to adjustment after determining final working capital and cash balances held by PMC on that date. As of the date of this filing, no such adjustments have been made or asserted. 30 The major components of the Income from discontinued operations, net of tax presented in the consolidated statements of operations during the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020 are included in the table below (in millions): Year Ended (1) Nine Month Transition Period Ended Year Ended December 31, 2021 December 31, 2020 March 31, 2020 Net sales $ 973.0 $ 870.4 $ 1,358.2 Cost of sales 598.6 572.0 862.8 Selling, general and administrative expenses 260.2 168.0 236.4 Restructuring and other similar charges 1.9 12.9 14.3 Amortization of intangible assets 9.9 10.1 14.5 Interest expense, net 4.1 3.3 2.0 Gain on extinguishment of debt — — (3.0) Actuarial loss on pension and postretirement benefit obligations 4.8 1.3 15.7 Other non-operating (income) expenses, net (5.6) (6.4) 4.4 Income from discontinued operations before income tax 99.1 109.2 211.1 Income tax provision (28.0) (25.8) (49.7) Equity method investment income 0.3 0.2 — Non-controlling interest income (0.2) (0.4) (0.3) Income from discontinued operations, net of tax $ 71.2 $ 83.2 $ 161.1 ____________________ (1) Results of operations during the year ended December 31, 2021 reflect the period from January 1, 2021 through October 4, 2021, the date on which the Spin-Off Transaction of PMC was completed. During the year ended March 31, 2019, we completed the sale of the VAG business, which was previously included within the Water Management platform. The operating results of the VAG business are reported as discontinued operations in the consolidated statements of operations for all periods presented, as the sale of VAG represented a strategic shift that had a major impact on operations and financial results. The sale price was subject to customary working capital and cash balance adjustments, which were finalized in the year ended March 31, 2020. As a result of these adjustments and other related costs, we recognized an additional $1.8 million loss on the sale of discontinued operations for the year ended March 31, 2020. The terms of the sale agreement provided the opportunity to receive contingent consideration, based on, and subject to, the VAG business attainment of Earn-out EBITDA, as defined in the sale agreement. During the year ended December 31, 2021, we received a $4.2 million cash payment as a result of the VAG businesses performance in its fiscal year ended March 31, 2021, which represented the final period of the Earn-out, and was recorded within income from discontinued operations, net of tax in its consolidated statements of operations. See Item 8, Note 4, Discontinued Operations for more information. Restructuring and Other Similar Costs During the year ended December 31, 2021, we continued to execute various restructuring actions. These initiatives were intended to drive efficiencies and reduce operating costs while also modifying our footprint to reflect changes in the markets we serve, the impact of acquisitions on our overall manufacturing capacity and the refinement of our overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs, and other facility rationalization costs. We expect to continue executing similar initiatives to optimize our operating margin and manufacturing footprint. As such, we expect further expenses related to workforce reductions, potential impairment of assets, lease termination costs, and other facility rationalization costs. We recorded restructuring charges of $3.7 million, $1.7 million and $1.2 million for the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, respectively. See Item 8, Note 5, Restructuring and Other Similar Costs for more information. 31 Results of Operations Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020 Net sales (Dollars in Millions) Year Ended December 31, 2021 December 31, 2020 Change % Change Net sales $ 910.9 $ 746.1 $ 164.8 22.1 % Net sales were $910.9 million for the year ended December 31, 2021, a 22.1% increase year over year. Excluding a 1% increase to net sales associated with foreign currency translation and an 8% increase in net sales resulting from our prior-year acquisition of Hadrian and the 2021 acquisition of Wade, core net sales increased 13% year over year. The increase in core net sales was driven by increased demand across the majority of our product categories. Income from operations (Dollars in Millions) Year Ended December 31, 2021 December 31, 2020 Change % Change Income from operations $ 107.0 $ 107.7 $ (0.7) (0.6) % % of net sales 11.7 % 14.4 % (2.7) % Income from operations was $107.0 million for the year ended December 31, 2021, or 11.7% of net sales, compared to income from operations of $107.7 million, or 14.4% of net sales, for the year ended December 31, 2020. Income from operations as a percentage of net sales decreased 270 basis points year-over-year as the favorable impact of sales year over year was more than offset by the year-over-year change in the adjustment to state inventories at last-in-first-out cost, higher year-over-year non-cash stock based compensation expense, the mix impact of the Hadrian acquisition and the benefit of temporary cost reduction actions in the prior year in response to the COVID-19 pandemic. Interest expense, net Interest expense, net was $34.7 million during the year ended December 31, 2021 compared to $45.9 million during the year ended December 31, 2020, primarily due to lower outstanding borrowings following the Spin-Off Transaction refinancing. See Item 8, Note 11 Long-Term Debt for more information. Loss on extinguishment of debt During the year ended December 31, 2021, we recognized a $20.4 million loss on the extinguishment of debt in connection with the refinancing of our debt in connection with the Spin-Off Transaction. The loss on extinguishment of debt was comprised of $16.2 million of refinancing related costs, as well as a non-cash write-off of unamortized debt issuance costs associated with the previously outstanding debt of $4.2 million. See Item 8, Note 11 Long-Term Debt for more information. There was no loss on the extinguishment of debt recognized during the year ended December 31, 2020. Actuarial (gain) loss on pension and postretirement benefit obligations Actuarial gain on pension and postretirement benefit obligations for the year ended December 31, 2021, was $(1.2) million compared to a loss of $21.2 million for the year ended December 31, 2020. The non-cash actuarial gain recognized for the year ended December 31, 2021, was primarily due to a year over year increase in discount rates assumptions utilized in performing the annual remeasurement of our defined benefit plans. The non-cash actuarial loss recognized for the year ended December 31, 2020, was primarily due to favorable asset performance and contributions made to the plan partially offset by decreases in the year over year discount rate assumptions utilized within the annual remeasurement of our defined benefit plans. See Item 8, Note 16 Retirement Benefits for more information. Other expense, net Other expense, net for the year ended December 31, 2021, was $0.7 million compared to other expense, net of $2.5 million for the year ended December 31, 2020. Other expense, net consists primarily of gains and losses from foreign currency transactions and the non-service cost components of net periodic benefit costs associated with our defined benefit plans. The year-over-year change is primarily driven by changes in foreign currency rates and lower interest cost within the non-service cost components of our defined benefit plans. 32 Provision for income taxes The income tax provision for the year ended December 31, 2021 was $2.7 million, or an effective tax rate of 5.2%. The effective income tax rate for the year ended December 31, 2021 was below the U.S. federal statutory rate of 21% primarily due to the recognition of income tax benefits associated with share-based payments partially offset by the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the increase in the valuation allowance associated with certain state net operating loss carryforwards, the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not and the accrual of various state income taxes. The income tax provision for the year ended December 31, 2020 was $9.5 million, or an effective tax rate of 24.9%. The effective income tax rate for the year ended December 31, 2020 was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments. Net income from continuing operations Our net income from continuing operations for the year ended December 31, 2021, was $49.7 million, compared to net income from continuing operations of $28.6 million for the year ended December 31, 2020, as a result of the factors described above. Diluted net income per share from continuing operations was $0.40 for the year ended December 31, 2021, as compared to $0.23 per share for the year ended December 31, 2020. Net income attributable to Zurn common stockholders Our net income attributable to Zurn common stockholders for the year ended December 31, 2021, was $120.9 million compared to $146.7 million for the year ended December 31, 2020. Diluted net income per share attributable to Zurn common stockholders was $0.97 for the year ended December 31, 2021, compared to $1.19 for the year ended December 31, 2020. The income from discontinued operations, net of tax, was $71.2 million for the year ended December 31, 2021 compared to $118.1 million for the year ended December 31, 2020. The year-over-year change in net income from discontinued operations, net of tax, is due to the PMC results for the year ended December 31, 2021 only representing activity through the Spin-Off Transaction date and the recognition of approximately $60.0 million in costs associated with completing the Spin-Off Transaction. The year-over-year change in net income attributable to Zurn common stockholders is primarily the result of the factors described above. 33 Nine Months Ended December 31, 2020 Compared with the Nine Months Ended December 31, 2019 Net sales (Dollars in Millions) Nine Months Ended December 31, 2020 December 31, 2019 Change % Change Net sales $ 562.7 $ 526.7 $ 36.0 6.8 % Net sales were $562.7 million for the nine months ended December 31, 2020, a 6.8% increase year over year. Excluding a 4% increase in net sales associated with our acquisitions of Just Manufacturing and Hadrian, core net sales increased 3% year over year. The increase in core net sales was primarily the result of increased demand for our touchless and hygienic solutions partially offset by reduced overall market demand resulting from the COVID-19 pandemic. Income (loss) from operations (Dollars in Millions) Nine Months Ended December 31, 2020 December 31, 2019 Change % Change Income from operations $ 81.0 $ 77.4 $ 3.6 4.7 % % of net sales 14.4 % 14.7 % (0.3) % Income from operations was $81.0 million for the nine months ended December 31, 2020, or 14.4% of net sales, compared to income from operations of $77.4 million, or 14.7% of net sales, for the nine months ended December 31, 2019. Income from operations as a percentage of net sales decreased 30 basis points year-over-year as incremental restructuring costs, purchase accounting fair value adjustments and non-cash stock option expense more than offset the incremental profit generated on higher sales and benefits associated with our ongoing cost reduction and productivity initiatives. Interest expense, net Interest expense, net was $33.3 million during the nine months ended December 31, 2020 compared to $44.0 million in during the nine months ended December 31, 2019. The decrease in interest expense as compared to the prior year's period is primarily a result of the impact of lower outstanding borrowings and lower average interest rates following the $100.0 million voluntary prepayment and refinancing of our term loan in 2019. See Item 8, Note 11 Long-Term Debt for more information. Loss on extinguishment of debt During the nine months ended December 31, 2019, we recognized a $2.0 million loss on the extinguishment of debt in connection with the refinancing of our term loan and a $100.0 million voluntary prepayment made on our term loan during the period. There were no gains or losses on debt extinguishment recognized during the nine month ended December 31, 2020. Actuarial loss on pension and postretirement benefit obligations Actuarial loss on pension and postretirement benefit obligations for the nine months ended December 31, 2020 was $0.3 million. There were no gains or losses on pension and postretirement benefits during the nine months ended December 31, 2019. The non-cash actuarial loss recognized for the nine months ended December 31, 2020, was primarily due to favorable asset performance and contributions made to the plan partially offset by decreases in the discount rate assumptions utilized within the annual remeasurement of our defined benefit plans. See Item 8, Note 16 Retirement Benefits for more information. Other expense, net Other expense, net for the nine months ended December 31, 2020 was $1.9 million compared to other expense, net of $0.6 million for the nine months ended December 31, 2019. Other expense, net consists primarily of gains and losses from foreign currency transactions and the non-service cost components of net periodic benefit costs associated with our defined benefit plans. Provision for income taxes The income tax provision for the nine months ended December 31, 2020 was $10.5 million, or an effective tax rate of 23.1%. The effective income tax rate for the nine months ended December 31, 2020 was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue 34 Code and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments and the reduction of the valuation allowance associated with certain state net operating loss carryforwards. The income tax provision for the nine months ended December 31, 2019 was $5.4 million, or an effective tax rate of 17.5%. The effective income tax rate for the nine months ended December 31, 2019 was below the U.S. federal statutory rate of 21% primarily due to the recognition of certain previously unrecognized tax benefits generally due to the lapse of the applicable statutes of limitations and the recognition of income tax benefits associated with share-based payments, partially offset by the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code and the accrual of various state income taxes. Net income from continuing operations Our net income from continuing operations for the nine months ended December 31, 2020 was $35.0 million, compared to net income from continuing operations of $25.4 million for the nine months ended December 31, 2019, as a result of the factors described above. Diluted net income per share from continuing operations was $0.28 for the nine months ended December 31, 2020, as compared to $0.10 per share for the nine months ended December 31, 2019. Net income attributable to Zurn common stockholders Our net income attributable to Zurn common stockholders for the nine months ended December 31, 2020, was $118.2 million compared to $137.2 million for the nine months ended December 31, 2019. Diluted net income per share attributable to Zurn common stockholders was $0.96 for the nine months ended December 31, 2020, compared to $1.24 for the nine months ended December 31, 2019. The income from discontinued operations, net of tax, was $83.2 million for the nine months ended December 31, 2020 compared to $126.2 million for the nine months ended December 31, 2019. The year-over-year change in net income attributable to Zurn common stockholders is primarily the result of the factors described above, partially offset by the reduction of dividends paid on shares of preferred stock, which were converted to common stock during the nine months ended December 31, 2019. 35 Non-GAAP Financial Measures Non-GAAP financial measures are intended to supplement and not replace financial measures prepared in accordance with GAAP. Core sales Core sales excludes the impact of acquisitions (such as the Hadrian, Just Manufacturing, Stainlessdrains.com, and World Dryer acquisitions), divestitures (such as PMC) and foreign currency translation. Management believes that core sales facilitates easier and more meaningful comparisons of our net sales performance with prior and future periods and to our peers. We exclude the effect of acquisitions and divestitures because the nature, size and number of acquisitions and divestitures can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult. We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control. EBITDA EBITDA represents earnings before interest and other debt related activities, taxes, depreciation and amortization. EBITDA is presented because it is an important supplemental measure of performance and it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA is also presented and compared by analysts and investors in evaluating our ability to meet debt service obligations. Other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with U.S. GAAP. Because EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business. Adjusted EBITDA Adjusted EBITDA (as described below in "Covenant Compliance") is an important measure because, under our credit agreement, our ability to incur certain types of acquisition debt and certain types of subordinated debt, make certain types of acquisitions or asset exchanges, operate our business and make dividends or other distributions, all of which will impact our financial performance, is impacted by our Adjusted EBITDA, as our lenders measure our performance with a net first lien leverage ratio by comparing our senior secured bank indebtedness to our Adjusted EBITDA (see "Covenant Compliance" for additional discussion of this ratio, including a reconciliation to our net income). We reported net income available to Zurn common stockholders in the year ended December 31, 2021, of $120.9 million and Adjusted EBITDA for the same period of $195.8 million. See "Covenant Compliance" for a reconciliation of Adjusted EBITDA to GAAP net income. Covenant Compliance Our credit agreement, which governs our senior secured credit facilities, contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the credit agreement may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to meet a maximum total net leverage ratio of 5.00 to 1.0 as of the end of each fiscal quarter (it was 2.3 to 1.0 at December 31, 2021). Failure to comply with these covenants could limit our long-term growth prospects by hindering our ability to borrow under the revolver, to obtain future debt and/or to make acquisitions. 36 "Adjusted EBITDA" is the term we use to describe EBITDA as defined and adjusted in our credit agreement, which is net income, adjusted for the items summarized in the table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. In view of our debt level, it is also provided to aid investors in understanding our compliance with our debt covenants. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; or (f) the impact of earnings or charges resulting from matters that we and the lenders under our credit agreement may not consider indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA allows us to add back certain non-cash, non-operating or non-recurring charges that are deducted in calculating net income, even though these are expenses that may recur, vary greatly and are difficult to predict and can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes. Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times allow us to add estimated cost savings and operating synergies related to operational changes ranging from acquisitions or dispositions to restructuring, and/or exclude one-time transition expenditures that we anticipate we will need to incur to realize cost savings before such savings have occurred. The calculation of Adjusted EBITDA under our credit agreement as of December 31, 2021, is presented in the table below. However, the results of such calculation could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time. 37 Set forth below is a reconciliation of net income attributable to Zurn common stockholders to Adjusted EBITDA for the year ended December 31, 2021. (in millions) Year Ended December 31, 2021 Net income attributable to Zurn common stockholders $ 120.9 Income from discontinued operations, net of tax (1) (71.2) Provision for income taxes 2.7 Actuarial gain on pension and postretirement benefit obligations (1.2) Other expense, net (2) 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) 3.7 Stock-based compensation expense 37.5 LIFO adjustments (4) 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 (5) 1.0 Pro forma Adjusted EBITDA 196.8 Consolidated indebtedness (6) $ 459.7 Total net leverage ratio (7) 2.3 ____________________ (1) Income from discontinued operations, net of tax is not included in Adjusted EBITDA in accordance with the terms of our credit agreement. (2) Other expense, net for the periods indicated, consists primarily of gains and losses from foreign currency transactions and the non-service cost components of net periodic benefit costs associated with our defined benefit plans. (3) Restructuring and other similar charges is comprised of costs associated with workforce reductions, lease termination costs, and other facility rationalization costs. See Item 8, Note 5, Restructuring and Other Similar Charges for more information. (4) Last-in first-out (LIFO) inventory adjustments are excluded in calculating Adjusted EBITDA as defined in our credit agreement. (5) Represents a pro forma adjustment to include Adjusted EBITDA related to the acquisition of Wade Drains, which was permitted by our credit agreement. The pro forma adjustment includes the period from January 1, 2021, through the date of the Wade Drains acquisition. See Item 8, Note 3, Acquisitions for more information. (6) Our credit agreement defines our consolidated indebtedness as the sum of all indebtedness (other than letters of credit or bank guarantees, to the extent undrawn) consisting of indebtedness for borrowed money and capitalized lease obligations, less unrestricted cash, which was $79.5 million (as defined by the credit agreement) at December 31, 2021. (7) Our credit agreement defines the total net leverage ratio as the ratio of consolidated indebtedness (as described above) to Adjusted EBITDA for the trailing four fiscal quarters. Liquidity and Capital Resources Our primary sources of liquidity are available cash and cash equivalents, cash flow from operations, and borrowing availability under our $200.0 million revolving credit facility. As of December 31, 2021, we had $96.6 million of cash and cash equivalents and $193.9 million of additional borrowing capacity under our revolving credit facility. As of December 31, 2021, the available borrowings under our credit facility were reduced by $6.1 million due to outstanding letters of credit. As of December 31, 2020, we had $255.6 million of cash and cash equivalents (inclusive of $193.3 million of cash and cash equivalents from the discontinued operation) and $339.2 million of additional borrowing capacity ($261.0 million of available borrowings under our prior revolving credit facility and $78.2 million available under our prior accounts receivable securitization program). As of December 31, 2020, the available borrowings under our prior credit facility and accounts receivable securitization were reduced by $3.0 million and $7.5 million, respectively, due to outstanding letters of credit. Our revolving credit facility is available to fund our working capital requirements, capital expenditures and other general corporate purposes. We believe this resource is adequate for expected needs. 38 Cash Flows Amounts below include amounts attributable to our discontinued operations, unless otherwise noted. In addition, cash flows for the year ended December 31, 2020 include our continuing operations and discontinued operations for the entire period, while the year ended December 31, 2021 only includes the cash flows associated with our PMC platform for the period from January 1, 2021 to October 4, 2021, the date the Spin-Off Transaction was completed. Refer to Item 8, Note 4 Discontinued Operations for further information. Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020 Net cash provided by operating activities in the year ended December 31, 2021, was $223.6 million compared to $320.2 million in the year ended December 31, 2020 due to lower net income as a result of the Spin-Off Transaction and investments in working capital. Cash used for investing activities was $21.9 million in the year ended December 31, 2021 compared to $196.6 million in the year ended December 31, 2020. Investing activities in the year ended December 31, 2021, included $17.1 million of net cash used to fund the acquisitions of Wade Drains and ATS GREASEwatch, whereas the year ended December 31, 2020, included $161.4 million of net cash used in connection with acquisitions of Hadrian, Just Manufacturing and the remaining non-controlling interest in a PMC joint venture. We invested $23.3 million in capital expenditures in the year ended December 31, 2021, compared to $44.2 million in the year ended December 31, 2020. We also received $14.3 million in connection with the disposition of certain long-lived assets in the year ended December 31, 2021, compared to $9.0 million in the year ended December 31, 2020. Cash used for financing activities was $356.2 million in the year ended December 31, 2021 compared to cash used for financing activities of $156.2 million in the year ended December 31, 2020. During the year ended December 31, 2021, we utilized a net $311.5 million of cash related to the Spin-Off Transaction of PMC, $0.9 million of cash for repurchases of our common stock and $36.4 million of cash for the payment of dividends on our common stock. Cash used for financing activities during the year ended December 31, 2021 also includes $24.9 million of cash proceeds associated with stock option exercises, more than offset by $32.3 million of cash used for the payment of withholding taxes on employees' share-based payment awards. During the year ended December 31, 2020, we utilized a net $5.7 million of cash for payments on outstanding debt, $140.0 million of cash for repurchases of our common stock and $38.6 million of cash for the payment of dividends on our common stock. Cash used for financing activities during the year ended December 31, 2020 also includes $37.5 million of cash proceeds associated with stock option exercises, partially offset by $9.4 million of cash used for the payment of withholding taxes on employees' share-based payment awards. Nine Months Ended December 31, 2020 Compared with the Nine Months Ended December 31, 2019 Net cash provided by operating activities in the nine months December 31, 2020, was $196.3 million compared to $174.7 million in the nine months ended December 31, 2019. The timing of payments on accrued expenses was partially offset by lower net income generated during the nine months ended December 31, 2020. Cash used for investing activities was $122.5 million in the nine months ended December 31, 2020 compared to $49.0 million in the nine months ended December 31, 2019. Investing activities in the nine months ended December 31, 2020, included $102.0 million of net cash used to fund the acquisitions of Hadrian and the remaining non-controlling interest in a PMC joint venture, whereas the nine months ended December 31, 2019, included $25.1 million of net cash used in connection with acquisitions of Stainlessdrains.com and the remaining non-controlling interest in a different PMC joint venture. We invested $28.3 million in capital expenditures in the nine months ended December 31, 2020, compared to $25.5 million in the nine months ended December 31, 2019. We also received $7.8 million in connection with the disposition of certain long-lived assets in the nine months ended December 31, 2020, compared to $2.9 million in the nine months ended December 31, 2019. Cash used for financing activities was $409.6 million in the nine months ended December 31, 2020 compared to $138.5 million in the nine months ended December 31, 2019. During the nine months ended December 31, 2020, we utilized a net $330.4 million of cash for payments on outstanding debt, $59.3 million of cash for repurchases of our common stock and $28.8 million of cash for the payment of dividends on our common stock. Cash used for financing activities during the nine months ended December 31, 2020 also includes $18.3 million of cash proceeds associated with stock option exercises, partially offset by $9.4 million of cash used for the payment of withholding taxes on employees' share-based payment awards. During the nine months ended December 31, 2019, we utilized a net $110.3 million of cash for payments on outstanding debt (including $100.0 million for a voluntary prepayment on our term loan), $20.0 million for repurchases of our common stock and $17.4 million for the payment of preferred stock dividends. Cash used for financing activities during the nine months ended December 31, 2019 also includes $16.8 million of cash proceeds associated with stock option exercises, partially offset by $7.6 million of cash used for the payment of withholding taxes on employees' share-based payment awards. 39 Tabular Disclosure of Contractual Obligations The table below lists our contractual obligations at December 31, 2021 by period when due: Payments Due by Period (in millions) Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Term loans (1) $ 550.0 $ 5.5 $ 11.0 $ 11.0 $ 522.5 Interest on long-term debt obligations (2) 99.0 15.1 29.7 29.1 25.1 Purchase commitments 215.6 211.8 3.3 0.5 — Operating lease obligations 15.9 6.6 8.1 1.2 — Pension and post-retirement plans (4) 27.0 2.8 11.4 12.8 See note (4) Totals $ 907.5 $ 241.8 $ 63.5 $ 54.6 $ 547.6 _______________________ (1) Excludes unamortized debt issuance costs of $10.8 million at December 31, 2021. (2) Interest on long-term debt obligations represents the cash interest expense using a LIBOR-based forecast. (3) Represents expected pension and post-retirement contributions and benefit payments to be paid directly by the Company. Contributions and benefit payments beyond fiscal 2027 cannot be reasonably estimated. No provision has been made for U.S. federal income taxes related to approximately $13.9 million of undistributed earnings of foreign subsidiaries considered to be permanently reinvested; see Item 8, Note 17 Income Taxes for further information. We may be required to make significant cash outlays related to our unrecognized tax benefits, including interest and penalties. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits, including interest and penalties and federal tax benefits where applicable, of $5.9 million as of December 31, 2021, have been excluded from the contractual obligations table above. See Item 8, Note 17 Income Taxes for more information related to our unrecognized tax benefits. Additionally, the deferred compensation liability of $16.3 million as of December 31, 2021, has been excluded from the contractual obligations table above, as we are unable to reasonably estimate the timing of the payments or the amount by which the liability will increase over time. See Item 8, Note 16, Retirement Benefits for more information related to our deferred compensation plan. Our pension and post-retirement benefit plans are discussed in detail in Item 8, Note 16, Retirement Benefits. The pension plans provide for monthly pension payments to eligible employees upon retirement. Other post-retirement benefits consist of retiree medical plans that cover a portion of employees in the United States that meet certain age and service requirements and other post-retirement benefits for employees at certain foreign locations. See Item 1A, Risk Factors for more information. Indebtedness As of December 31, 2021 we had $539.5 million of total indebtedness outstanding as follows (in millions): Total Debt at December 31, 2021 Current Maturities of Long-Term Debt Long-term Portion Term loans (1) $ 539.2 $ 5.5 $ 533.7 Other subsidiary debt (2) 0.3 0.1 0.2 Total $ 539.5 $ 5.6 $ 533.9 ____________________ (1) Includes unamortized original issue discount and debt issuance costs of $10.8 million at December 31, 2021. (2) Consists of finance lease obligations. See more information related to finance leases within Item 8, Note 14, Leases. See Item 8, Note 11, Long-Term Debt for a description of our outstanding indebtedness. Off-Balance Sheet Arrangements We do not have any off-balance sheet or non-consolidated special-purpose entities. 40 Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk during the normal course of business from changes in foreign currency exchange rates and interest rates. The exposure to these risks is managed through a combination of normal operating and financing activities and at times derivative financial instruments in the form of foreign currency forward contracts to cover certain known foreign currency transactional risks. We also have historically entered into interest rate derivatives to manage interest rate fluctuations. Foreign Currency Exchange Rate Risk Our exposure to foreign currency exchange rates relates primarily to our operations in Canada. For our operations in Canada, exchange rates impact the U.S. Dollar ("USD") value of our reported earnings, our investments in the subsidiaries and the intercompany transactions with the subsidiaries. Approximately 13% of our sales originated outside of the United States in the year ended December 31, 2021. Revenues and expenses denominated in foreign currencies are translated into USD at the end of the fiscal period using the average exchange rates in effect during the period. Fluctuations in currency exchange rates also impact the USD amount of our stockholders' equity. The assets and liabilities of our non-U.S. subsidiaries are translated into USD at the exchange rates in effect at the end of the fiscal periods. As of December 31, 2021, stockholders' equity decreased by $4.2 million from December 31, 2020 as a result of foreign currency translation adjustments. If the USD strengthened by 10% as of December 31, 2021, the result would have decreased stockholders' equity by approximately $11.2 million. As of December 31, 2021, we had not entered into foreign currency forward contracts. Interest Rate Risk Our indebtedness under the senior secured credit facilities bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates. As of December 31, 2021, our outstanding borrowings under the term loan facility were $539.2 million (net of $10.8 million unamortized debt issuance costs) and bore an effective interest rate of 2.75%, determined as London Interbank Offered Rate ("LIBOR") (subject to a 0.5% floor) plus an applicable margin of 2.25%. During the twelve months ended December 31, 2021 the weighted-average interest rate was 2.07%. Our net income is affected by changes in market interest rates on our variable-rate obligations. As discussed above, our term loan facilities bear interest at LIBOR (subject to a 0.5% floor) plus an applicable margin. Therefore, a 100 basis point increase in LIBOR above where it closed as of December 31, 2021 would increase the annual interest expense under our term loan facility by approximately $3.3 million. Further, every 100 basis point increase in LIBOR above our 0.5% LIBOR floor would increase the annual interest expense under our term loan facility by approximately $5.5 million. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information with respect to the Company's market risk is contained under the caption "Quantitative and Qualitative Disclosures About Market Risk" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. 41