Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
In addition to the risks and uncertainties discussed in this quarterly report on Form 10-Q, particularly those disclosed in the MD&A, see Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the Risk Factors except as set forth below:
Risks Related to the Merger with Elkay
We will record goodwill and other intangible assets as a result of the Merger that could become impaired and result in material non-cash charges to our results of operations in the future.
We will account for the Merger as an acquisition of a business in accordance with GAAP. Under the acquisition method of accounting, the assets and liabilities of Elkay and its subsidiaries will be recorded, as of the completion of the Merger, at their respective fair values and added to Zurn Elkay’s. Our reported financial condition and results of operations for periods after completion of the Merger will reflect Elkay’s balances and results after completion of the Merger but will not be restated retroactively to reflect the historical financial position or results of operations of Elkay and its subsidiaries for periods prior to the Merger.
Under the acquisition method of accounting, the total purchase price will be allocated to Elkay’s tangible assets and liabilities and identifiable intangible assets based on their fair values as of the date of completion of the Merger. The excess of the purchase price over those fair values, if any, will be recorded as goodwill. To the extent the value of goodwill or intangibles, if any, becomes impaired in the future, we may be required to incur material non-cash charges relating to such impairment. Our operating results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the impairment.
We may be unable to successfully integrate Elkay’s business into our business or achieve the anticipated benefits of the Merger.
The success of the Merger will depend, in part, on our ability to realize the anticipated benefits and cost savings from adding Elkay’s businesses, and there can be no assurance that we will be able to successfully integrate or otherwise realize the anticipated benefits of the Merger. Difficulties in integration may result in Zurn Elkay performing differently than expected, in operational challenges, or in the failure to realize anticipated expense-related efficiencies or other synergies. Potential difficulties that may be encountered in the integration process include, among others:
• the inability to successfully integrate Elkay in a manner that permits the achievement of full revenue, expected cash flows and cost savings anticipated from the Merger;
• not realizing anticipated synergies;
• integrating personnel from Elkay and the loss of key employees;
• potential unknown liabilities and unforeseen expenses;
• integrating relationships with customers, vendors and business partners;
• performance shortfalls as a result of the diversion of management’s attention caused by completing the Merger and integrating Elkay’s operations; and
• the disruption of, or the loss of momentum in, our ongoing business or inconsistencies in standards, controls, procedures and policies.
We may not be able to accomplish this integration process successfully.
Our results may suffer if we do not effectively manage our expanded operations following the Merger.
Following completion of the Merger, the size of our business will increase significantly beyond its current size. Our future success will depend, in part, on our ability to manage this expanded business, which poses numerous risks and uncertainties, including the need to integrate the operations and business of Elkay into our existing business in an efficient and
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timely manner, to combine systems and management controls and to integrate relationships with customers, vendors and business partners.
The market price for Zurn Elkay Common Stock following the completion of the Merger may be affected by factors different from, or in addition to, those that historically have affected or currently affect the market prices of Zurn Elkay Common Stock.
Zurn’s businesses differ in some regards from those of Elkay and, accordingly, the results of operations of Zurn following completion of the Merger will be affected by some factors that are different from those currently or historically affecting the results of operations of Zurn. In addition, following the closing of the Merger, we may seek to raise additional equity financing through one or more underwritten offerings and/or private placements and/or rights offerings, or issue stock in connection with acquisitions, which may result in downward pressure on the share price of the Zurn Elkay Common Stock.
Sales of substantial amounts of the Zurn Elkay Common Stock in the open market by the former Elkay stockholders could depress the trading price of our common stock
The former Elkay stockholders may wish to dispose of some or all of the Zurn Elkay Common Stock that they received in the Merger. These sales (or the perception that these sales may occur), coupled with the increase in the outstanding number of shares of our Common Stock, may adversely affect the trading price of our Common Stock.
Certain former stockholders of Elkay have registration rights, the exercise of which could adversely affect the trading price of our Common Stock.
In connection with the Merger, the Company and certain stockholders of Elkay entered into a Registration Rights Agreement, pursuant to which such stockholders have a right to demand registration of one public offering within the first three years after the closing of the Merger, subject to certain minimum and maximum thresholds and other customary conditions. The existence and potential or actual exercise of such rights, and the perception that a large number of shares will be publicly sold in the market, could adversely impact the trading price of our Common Stock.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.