What changed in this filing

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Item 1. Financial Statements

2022-10-25 compared with 2022-07-26 · 307 added, 157 removed, 470 unchanged (50% of the section changed)

3 unchanged sentences

(in Millions, except share amounts)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Current assets:

1 unchanged sentence

Receivables, net 269.1 144.1

Inventories 243.4 184.5

Inventories, net 400.2 184.5

Income taxes receivable 24.5 33.1

26 unchanged sentences

shares issued and outstanding:

126,182,246 at June 30, 2022 and 125,720,068 at December 31, 2021

177,759,553 at September 30, 2022 and 125,720,068 at December 31, 2021

Additional paid-in capital 2,850.2 1,436.9

7 unchanged sentences

(in Millions, except share and per share amounts)

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Net sales $ 417.7 $ 229.7 $ 941.5 $ 678.6

4 unchanged sentences

Amortization of intangible assets 14.5 5.8 19.1 17.7

Income from operations 53.5 37.3 97.4 61.3

(Loss) income from operations ( 10.1 ) 32.5 87.3 93.8

Non-operating expense:

Interest expense, net ( 8.0 ) ( 9.9 ) ( 18.0 ) ( 29.6 )

Other expense, net ( 0.6 ) ( 0.4 ) ( 0.3 ) ( 0.1 )

Income before income taxes 47.7 26.8 87.1 41.5

Other income (expense), net 0.6 ( 0.8 ) 0.3 ( 0.9 )

(Loss) income before income taxes ( 17.5 ) 21.8 69.6 63.3

Provision for income taxes ( 1.6 ) ( 5.7 ) ( 22.9 ) ( 16.6 )

Net income from continuing operations 36.4 20.6 65.8 30.6

Net (loss) income from continuing operations ( 19.1 ) 16.1 46.7 46.7

Income from discontinued operations, net of tax — 48.0 0.8 140.6

Net income attributable to Zurn Elkay common stockholders $ 36.4 $ 73.2 $ 66.6 $ 123.2

Basic net income per share:

Net (loss) income attributable to Zurn Elkay common stockholders $ ( 19.1 ) $ 64.1 $ 47.5 $ 187.3

Basic net (loss) income per share:

Continuing operations $ ( 0.11 ) $ 0.13 $ 0.33 $ 0.39

Discontinued operations $ — $ 0.40 $ 0.01 $ 1.17

Net income $ 0.29 $ 0.61 $ 0.53 $ 1.03

Diluted net income per share:

Net (loss) income $ ( 0.11 ) $ 0.53 $ 0.33 $ 1.55

Diluted net (loss) income per share:

Continuing operations $ ( 0.11 ) $ 0.13 $ 0.32 $ 0.38

Discontinued operations $ — $ 0.38 $ 0.01 $ 1.13

Net income $ 0.28 $ 0.59 $ 0.52 $ 0.99

Net (loss) income $ ( 0.11 ) $ 0.51 $ 0.33 $ 1.50

Weighted-average number of shares outstanding (in thousands):

6 unchanged sentences

(in Millions)

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Net income $ 36.4 $ 73.2 $ 66.6 $ 123.2

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Net (loss) income $ ( 19.1 ) $ 64.1 $ 47.5 $ 187.3

Other comprehensive income (loss):

1 unchanged sentence

Change in pension and postretirement defined benefit plans, net of tax — — — ( 0.2 )

Other comprehensive (loss) income, net of tax ( 2.0 ) 5.3 — 3.5

Total comprehensive income $ 34.4 $ 78.5 $ 66.6 $ 126.7

Other comprehensive loss, net of tax ( 4.1 ) ( 10.3 ) ( 4.1 ) ( 6.8 )

Total comprehensive (loss) income $ ( 23.2 ) $ 53.8 $ 43.4 $ 180.5

See notes to the condensed consolidated financial statements.

2 unchanged sentences

(in Millions)

Six Months Ended

June 30, 2022 June 30, 2021

Nine Months Ended

September 30, 2022 September 30, 2021

Operating activities

5 unchanged sentences

Deferred income taxes 4.1 ( 6.6 )

Other non-cash expenses (income) 1.7 ( 1.1 )

Other non-cash expenses 5.3 1.7

Stock-based compensation expense 15.5 38.3

5 unchanged sentences

Accruals and other ( 50.2 ) 16.7

Cash (used for) provided by operating activities ( 12.0 ) 145.0

Cash provided by operating activities 12.6 245.8

Investing activities

3 unchanged sentences

Proceeds associated with divestiture of discontinued operations 35.0 4.2

Cash provided by (used for) investing activities 35.4 ( 4.4 )

Cash used for investing activities ( 12.8 ) ( 6.5 )

Financing activities

7 unchanged sentences

Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 1.4 ) ( 4.2 )

Increase in cash, cash equivalents and restricted cash 13.8 135.1

(Decrease) increase in cash, cash equivalents and restricted cash ( 24.7 ) 222.0

Cash, cash equivalents and restricted cash at beginning of period 96.6 255.6

3 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2022

September 30, 2022

Basis of Presentation and Significant Accounting Policies

5 unchanged sentences

As previously disclosed, on July 1, 2022, the Company completed its combination with Elkay Manufacturing Company (“Elkay”) through the merger of Elkay with and into a newly created subsidiary of the Company, with Elkay surviving as a wholly owned subsidiary of Zurn Elkay (the “Merger” or "Elkay Transaction").

The Company's results of operations will include the acquired operations subsequent to July 1, 2022.

See Note 18, Subsequent Events for additional information on the Elkay Transaction.

Following the Merger, Zurn Elkay is a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets what the Company believes to be the broadest sustainable product portfolio of specification-driven water management solutions to improve health, human safety and the environment.

The Company's results of operations includes the acquired operations subsequent to July 1, 2022.

See Note 2, Acquisitions, for additional information on the Elkay Transaction.

Zurn Elkay is a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets what the Company believes to be the broadest sustainable product portfolio of specification-driven water management solutions to improve health, human safety and the environment.

The Company's product portfolio includes professional grade water control and safety, water distribution and drainage, drinking water, finish plumbing, hygienic, environmental and site works 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.

2 unchanged sentences

Grounded in the spirit of continuous improvement, ZEBS 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 the Company's business.

Following the Merger with Elkay, the Company continues to manage and evaluate its operations as a single operating segment and reporting unit structure primarily due to similarities in its products, production process, geographical footprint, customers, and methods of distribution.

The Company’s chief operating decision-maker is the Chief Executive Officer who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

Spin-Off of Process & Motion Control Segment

12 unchanged sentences

The amendments in this ASU are effective for all entities as of March 12, 2020, through December 31, 2022.

The Company did not modify any material contracts due to reference rate reform during the six months ended June 30, 2022.

The Company did not modify any material contracts due to reference rate reform during the nine months ended September 30, 2022.

The Company will continue to evaluate the impact this guidance will have on its consolidated financial statements for all future transactions affected by reference rate reform during the time period referenced above.

Six Months Ended June 30, 2022

On July 1, 2022, in accordance with the terms and conditions of the Merger Agreement dated February 12, 2022, the Company completed its combination with Elkay.

See Note 18 Subsequent Events for further information.

Nine Months Ended September 30, 2022

On July 1, 2022, the Company and Elkay completed the Elkay Merger for a preliminary purchase price of $ 1,462.9 million.

Elkay, a market leader of commercial sinks and drinking water solutions, complements the Company's existing product portfolio.

The preliminary purchase price includes $ 1,417.0 million of Zurn's common stock based on Zurn's closing stock price of $ 27.48 on July 1, 2022, and $ 45.9 million of net cash payments for the repayment of Elkay's existing term loan and Elkay's transaction related costs outstanding that were in excess of Elkay's cash and cash equivalents balance at the time of closing.

Pursuant to the terms of the Merger Agreement, Zurn issued 51,564,524 shares of common stock, $ 0.01 par value per share, of the Company ("Company common stock"), which represented approximately 29 % of the 177,746,770 outstanding shares of the Company common stock immediately following the Merger closing.

The total shares of Company common stock issued is preliminary and subject to change upon finalization of customary post-closing adjustments with respect to cash, indebtedness and working capital.

The Company incurred transaction-related costs of approximately $ 33.7 million for the three and nine months ended September 30, 2022.

These costs were associated with legal and professional services and were recognized as selling, general and administrative expenses in the condensed consolidated statements of operations.

As previously announced, upon the Merger closing and in accordance with the terms and conditions of the Merger Agreement, the Company increased the size of its Board to eleven members, and two directors designated by Elkay were appointed to the board.

Zurn senior management immediately prior to the consummation of the Elkay Transaction remained executive officers of the Company immediately after the Elkay Transaction.

The Company's management determined that the Company is the accounting acquirer in the Elkay Transaction based on the facts and circumstances noted within this section and other relevant factors.

As such, the Company applied the acquisition method of accounting to the identifiable assets and liabilities of the Elkay business, which have been measured at estimated fair value as of the date of the business combination.

Elkay’s assets and liabilities were measured at estimated fair values at July 1, 2022, primarily using Level 3 inputs.

Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates and others.

Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the Merger date.

See Note 14, Fair Value Measurements, for additional information.

Due to the timing of the business combination and the nature of the net assets acquired, at September 30, 2022, the valuation process to determine the fair values is not complete and further adjustments are expected.

The Company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available.

As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the Merger.

The Company will reflect measurement period adjustments in the period in which the adjustments are determined.

The preliminary fair value of the assets acquired and liabilities assumed were as follows (in millions):

Assets acquired:

Receivables, net $ 92.1

Inventories 165.9

Other current assets 9.9

Property, plant and equipment, net 147.1

Intangible assets, net 860.5

Goodwill 505.0

Other assets 73.8

Total assets acquired 1,854.3

Liabilities assumed:

Trade payables 30.4

Compensation and benefits 39.1

Current portion of pension and postretirement benefit obligations 17.3

Other current liabilities 30.1

Operating lease liability 40.5

Pension and postretirement benefit obligations 3.6

Deferred income taxes 222.6

Other liabilities 7.8

Total liabilities assumed 391.4

Total preliminary purchase price $ 1,462.9

Unaudited Pro Forma Information

The following unaudited supplemental pro forma financial information presents the financial results from continuing operations for the nine months ended September 30, 2022 and 2021 as if the Elkay Merger had occurred on January 1, 2021.

The pro forma financial information includes, where applicable, adjustments for:

(i) additional amortization expense that would have been recognized related to the acquired intangible assets, (ii) additional depreciation expense that would have been recognized related to the acquired property, plant, and equipment, (iii) transaction costs and other one-time non-recurring costs which reduced expenses by $ 33.7 million for the nine months ended September 30, 2022 and increased expenses by $ 33.7 million for the nine months ended September 30, 2021, (v) additional cost of sales related to the inventory valuation adjustment which reduced expenses by $ 14.6 million for the nine months ended September 30, 2022 and increased expenses by $ 18.3 million for the nine months ended September 30, 2021, and (vi) the estimated income tax effect on the pro forma adjustments.

The pro forma financial information excludes adjustments for estimated cost synergies or other effects of the integration of the Elkay Merger.

The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the Elkay Merger been completed as of the date indicated or the results that may be obtained in the future.

Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021

Net sales $ 1,240.2 $ 1,102.5

Net income (loss) from continuing operations $ 71.4 $ ( 3.8 )

Earnings per share from continuing operations

Basic $ 0.50 $ ( 0.03 )

Assuming dilution $ 0.49 $ ( 0.03 )

For the period from July 1, 2022 through September 30, 2022, Elkay had net sales and a net loss of $ 149.9 million and $ 9.4 million, respectively, which amounts include the impact of purchase accounting adjustments, and are included in the condensed consolidated statements of operations for the period from July 1, 2022 through September 30, 2022.

Fiscal Year 2021

1 unchanged sentence

for a cash purchase price of $ 12.6 million, excluding transaction costs and net of cash acquired.

During the six months ended June 30, 2022, the Company received a $ 1.1 million cash payment from the sellers of Wade Drains in connection with finalizing the acquisition date trade working capital, which is included in the total cash purchase price above.

During the nine months ended September 30, 2022, the Company received a $ 1.1 million cash payment from the sellers of Wade Drains in connection with finalizing the acquisition date trade working capital, which is included in the total cash purchase price above.

Wade Drains manufactures a wide range of specified commercial plumbing products for customers across North America and complements the Company's existing flow systems product portfolio.

4 unchanged sentences

The preliminary purchase price allocations associated with these acquisitions resulted in tax deductible goodwill of $ 7.5 million, customer relationship intangibles assets of $ 1.6 million, trade working capital of $ 9.0 million and $( 1.0 ) million of other net liabilities.

During the six months ended June 30, 2022, the preliminary purchase price allocations for Wade Drains were adjusted, resulting in a $ 1.3 million decrease to goodwill, primarily related to the aforementioned cash payment received from the sellers of Wade Drains.

The preliminary purchase price allocations for Wade Drains will be completed within the one-year period following the acquisition dates.

During the nine months ended September 30, 2022, the preliminary purchase price allocations for Wade Drains were adjusted, resulting in a $ 1.3 million decrease to goodwill, primarily related to the aforementioned cash payment received from the sellers of Wade Drains.

The preliminary purchase price allocations for Wade Drains will be completed within the one-year period following the acquisition date.

The Company's results of operations include the acquired operations subsequent to the acquisition dates.

2 unchanged sentences

Restructuring and Other Similar Charges

During the three and six months ended June 30, 2022, the Company continued to execute various restructuring actions.

These initiatives were implemented to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of acquisitions on the Company's overall manufacturing capacity and the refinement of its overall product portfolio.

During the three and nine months ended September 30, 2022, the Company continued to execute various restructuring actions.

These initiatives were implemented to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of acquisitions, including Elkay, on the Company's overall manufacturing capacity and the refinement of its overall product portfolio.

These restructuring actions primarily resulted in workforce reductions, lease termination costs, and other facility rationalization costs.

Following the Merger with Elkay, Management expects to continue executing initiatives and select product-line rationalizations to optimize its operating margin and manufacturing footprint.

As such, the Company expects further expenses related to workforce reductions, lease termination costs, and other facility

rationalization costs.

The Company expects further expenses related to workforce reductions, lease termination costs, and other facility rationalization costs.

Since the Company’s evaluation of other potential restructuring actions are in process, related restructuring expenses, if any, are not yet estimable.

The following table summarizes the Company's restructuring and other similar charges during the three and six months ended June 30, 2022 and June 30, 2021, (in millions):

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

The following table summarizes the Company's restructuring and other similar charges during the three and nine months ended September 30, 2022 and September 30, 2021, (in millions):

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Employee termination benefits $ 10.5 $ 0.7 $ 11.8 $ 1.6

1 unchanged sentence

Total restructuring and other similar costs $ 11.7 $ 0.7 $ 13.1 $ 1.6

The following table summarizes the activity in the Company's restructuring accrual for the six months ended June 30, 2022 (in millions):

The following table summarizes the activity in the Company's restructuring accrual for the nine months ended September 30, 2022 (in millions):

Employee termination benefits Contract termination and other associated costs Total

Accrued Restructuring Costs, December 31, 2021 (1) $ 2.4 $ — $ 2.4

Elkay opening balance sheet accrual 4.7 — 4.7

Charges 11.8 1.3 13.1

Cash payments ( 8.0 ) ( 0.1 ) ( 8.1 )

Accrued Restructuring Costs, June 30, 2022 (1) $ 1.1 $ — $ 1.1

Accrued Restructuring Costs, September 30, 2022 (1) $ 10.9 $ 1.2 $ 12.1

____________________

(1) The restructuring accrual is included in other current liabilities in the condensed consolidated balance sheets.

(1) As of September 30, 2022, $ 11.2 million of the restructuring accrual is included in other current liabilities and $ 0.9 million is included in other liabilities in the condensed consolidated balance sheets.

As of December 31, 2021, the restructuring accrual is included in other current liabilities in the condensed consolidated balance sheets.

Discontinued Operations

During the year ended December 31, 2021, the Company completed the Spin-Off Transaction of PMC.

The operating results of PMC are reported as discontinued operations in the consolidated statements of operations for all prior periods presented, as the Spin-Off Transaction of PMC represented a strategic shift that had a major impact on operations and financial results.

The condensed consolidated statements of cash flows for the six months ended June 30, 2022 and June 30, 2021 have not been adjusted to separately disclose cash flows related to the discontinued operations.

During the six months ended June 30, 2022, the Company received $ 35.0 million from Regal Rexnord Corporation as a result of the final working capital and cash balances at closing exceeding the targets stipulated in the Spin-Off Transaction agreement.

The major components of the Income from discontinued operations, net of tax presented in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and June 30, 2021, are as follows (in millions):

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

The operating results of PMC are reported as discontinued operations in the condensed consolidated statements of operations for all prior periods presented, as the Spin-Off Transaction of PMC represented a strategic shift that had a major impact on operations and financial results.

The condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and September 30, 2021 have not been adjusted to separately disclose cash flows related to the discontinued operations.

During the nine months ended September 30, 2022, the Company received $ 35.0 million from Regal Rexnord Corporation as a result of the final working capital and cash balances at closing exceeding the targets stipulated in the Spin-Off Transaction agreement.

The major components of the Income from discontinued operations, net of tax presented in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and September 30, 2021, are as follows (in millions):

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Net sales $ — $ 327.5 $ — $ 973.0

10 unchanged sentences

Income from discontinued operations, net of tax $ — $ 48.0 $ 0.8 $ 140.6

The condensed consolidated statements of cash flows for the six months ended June 30, 2022 and June 30, 2021 have not been adjusted to separately disclose cash flows related to discontinued operations.

However, the significant investing and financing cash flows and other significant non-cash operating items associated with the discontinued operations were as follows (in millions):

Six Months Ended

June 30, 2022 June 30, 2021

Nine Months Ended

September 30, 2022 September 30, 2021

Depreciation $ — $ 34.9

10 unchanged sentences

Taxes withheld and paid on employees' shared-based payment awards — ( 0.5 )

During the fiscal year ended March 31, 2019, the Company completed the sale of its VAG business, which was previously included in its Water Management platform.

The sale agreement provided for contingent consideration based on Earn-out EBITDA, as defined in the sale agreement.

During the three months ended September 30, 2021, the Company received a $ 4.2 million cash payment as a result of the VAG business performance in its fiscal year ended March 31, 2021, which represented the final period of the earn-out, which was recorded in income from discontinued operations, net of tax in the Company's condensed consolidated statements of operations.

Revenue Recognition

10 unchanged sentences

The Company has 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.

The Company classifies shipping and handling fees billed to customers as net sales and the corresponding costs are classified as cost of sales in the consolidated statements of operations.

The Company classifies shipping and handling fees billed to customers as net sales and the corresponding costs are classified as cost of sales in the condensed consolidated statements of operations.

Revenue by Category

The following tables present the Company's revenue disaggregated by customer type and customer geography (in millions):

Three Months Ended Six Months Ended

Customer Type June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Three Months Ended Nine Months Ended

Customer Type September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Institutional $ 169.8 $ 86.8 $ 366.2 $ 255.9

2 unchanged sentences

Total $ 417.7 $ 229.7 $ 941.5 $ 678.6

Three Months Ended Six Months Ended

Geography June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Three Months Ended Nine Months Ended

Geography September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

United States $ 383.6 $ 209.6 $ 860.7 $ 614.9

9 unchanged sentences

A contract liability exists when the Company has received consideration or the amount is due from the customer in advance of revenue recognition.

Contract liabilities and contract assets as of June 30, 2022 and June 30, 2021 were not material.

The Company had backlog of $ 84.0 million as of June 30, 2022, which represents the most likely amount of consideration expected to be received in satisfying the remaining backlog under open contracts.

Contract liabilities and contract assets as of September 30, 2022 and September 30, 2021 were not material.

The Company had backlog of $ 65.8 million as of September 30, 2022, which represents the most likely amount of consideration expected to be received in satisfying the remaining backlog under open contracts.

The Company has elected to use the optional exemption provided by ASC 606-10-50-14A for variable consideration, and has not included estimated rebates in the amount of unsatisfied performance obligations.

The Company expects to recognize approximately 98 % of the backlog in the remaining six months of the year ending December 31, 2022, and the remaining approximately 2 % in 2023 and beyond.

The Company expects to recognize approximately 94 % of the backlog in the remaining three months of the year ending December 31, 2022, and the remaining approximately 6 % in 2023 and beyond.

Timing of Performance Obligations Satisfied at a Point in Time

9 unchanged sentences

If the amortization period of these costs is expected to be greater than one year, the costs would be subject to capitalization.

As of June 30, 2022 and June 30, 2021, the contract assets capitalized, as well as amortization recognized in the three months ended June 30, 2022 and June 30, 2021, are not significant and no impairment losses were recognized.

As of September 30, 2022 and September 30, 2021, the contract assets capitalized, as well as amortization recognized in the three months ended September 30, 2022 and September 30, 2021, are not significant and no impairment losses were recognized.

Allowance for Doubtful Accounts

12 unchanged sentences

state NOL carryforwards.

Future changes to the balances of these valuation allowances, as a result of this continued review and analysis by the Company, could result in a material impact to the financial statements for such period of change.

The income tax provision was $ 11.3 million for the three months ended June 30, 2022, compared to $ 6.2 million for the three months ended June 30, 2021.

The effective income tax rate for the three months ended June 30, 2022 was 23.7 % versus 23.1 % for the three months ended June 30, 2021.

The effective income tax rate for the three months ended June 30, 2022 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.

The effective income tax rate for the three months ended June 30, 2021 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.

The income tax provision was $ 21.3 million for the six months ended June 30, 2022, compared to $ 10.9 million for the six months ended June 30, 2021.

The effective income tax rate for the six months ended June 30, 2022 was 24.5 % versus 26.3 % for the six months ended June 30, 2021.

The effective income tax rate for the six months ended June 30, 2022 was above the U.S.

Future changes to the balances of these valuation allowances, as a result of this continued review and analysis by the Company, could impact the financial statements for such period of change.

The income tax provision was $ 1.6 million for the three months ended September 30, 2022, compared to $ 5.7 million for the three months ended September 30, 2021.

The effective income tax rate for the three months ended September 30, 2022 was ( 9.1 )% versus 26.1 % for the three months ended September 30, 2021.

The income tax provision recognized on the loss from operations for the three months ended September 30, 2022 was primarily due to non-deductible transactions costs associated with the Merger, 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 reduction in the valuation allowance associated with certain state NOL carryforwards.

The effective income tax rate for the three months ended September 30, 2021 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.

The effective income tax rate for the six months ended June 30, 2021 was above the U.S.

The income tax provision was $ 22.9 million for the three months ended September 30, 2022, compared to $ 16.6 million for the nine months ended September 30, 2021.

The effective income tax rate for the nine months ended September 30, 2022 was 32.9 % versus 26.2 % for the nine months ended September 30, 2021.

The effective income tax rate for the nine months ended September 30, 2022 was above the U.S.

federal statutory rate of 21% primarily due to non-deductible transactions costs associated with the Merger, 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 and the reduction in the valuation allowance associated with certain state NOL carryforwards.

The effective income tax rate for the nine months ended September 30, 2021 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.

The Company’s total liability for net unrecognized tax benefits as of June 30, 2022 and December 31, 2021 was $ 5.0 million and $ 5.9 million, respectively.

The Company’s total liability for net unrecognized tax benefits as of September 30, 2022 and December 31, 2021 was $ 6.7 million and $ 5.9 million, respectively.

The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in income tax expense.

As of June 30, 2022 and December 31, 2021, the total amount of gross,

unrecognized income tax benefits included accrued interest and penalties of $ 0.4 million and $ 0.5 million, respectively.

The Company recognized $ 0.0 million and $ 0.1 million of net interest and penalties as income tax expense during the six months ended June 30, 2022 and June 30, 2021, respectively.

As of September 30, 2022 and December 31, 2021, the total amount of gross, unrecognized income tax benefits included accrued interest and penalties of $ 0.5 million.

The Company recognized $ 0.0 million and $ 0.1 million of net interest and penalties as income tax expense during the nine months ended September 30, 2022 and September 30, 2021, respectively.

The Company conducts business in multiple locations within and outside the U.S.

15 unchanged sentences

Diluted net income per share from continuing and discontinued operations attributable to Zurn Elkay common stockholders is computed based on the weighted average number of common shares outstanding, increased by the number of incremental shares that would have been outstanding if the potential dilutive shares were issued through the exercise of outstanding stock options to purchase common shares, except when the effect would be anti-dilutive.

The computation for diluted net income per share for the three and six months ended June 30, 2022 excludes 0.2 million and 0.2 million common shares due to their anti-dilutive effects, respectively.

The computation for diluted net income per share for the three and six months ended June 30, 2021 excludes 0.2 million and 0.2 million common shares due to their anti-dilutive effects, respectively.

The computation for diluted net income per share for the three and nine months ended September 30, 2022 excludes 2.3 million and 0.8 million common shares due to their anti-dilutive effects, respectively.

The computation for diluted net income per share for the three and nine months ended September 30, 2021 excludes 0.0 million and 0.2 million common shares due to their anti-dilutive effects, respectively.

Stockholders' Equity

16 unchanged sentences

Balance at June 30, 2021 $ 1.2 $ 1,436.7 $ 216.7 $ ( 70.3 ) $ 3.2 $ 1,587.5

Total comprehensive income (loss) — — 64.1 ( 10.3 ) — 53.8

Stock-based compensation expense — 11.3 — — — 11.3

Proceeds from exercise of stock options — 4.1 — — — 4.1

Common stock dividends ($ 0.09 per share)

— — ( 11.0 ) — — ( 11.0 )

Balance at September 30, 2021 $ 1.2 $ 1,452.1 $ 269.8 $ ( 80.6 ) $ 3.2 $ 1,645.7

Common stock (1) Additional

19 unchanged sentences

Balance at June 30, 2022 $ 1.3 $ 1,438.3 $ ( 1,135.3 ) $ ( 74.9 ) $ — $ 229.4

Total comprehensive loss — — ( 19.1 ) ( 4.1 ) — ( 23.2 )

Stock-based compensation expense — 7.8 — — — 7.8

Proceeds from exercise of stock options — 0.1 — — — 0.1

Elkay Merger (3) 0.5 1,416.5 — — — 1,417.0

Common stock dividends ($ 0.07 per share)

— ( 12.5 ) — — — ( 12.5 )

(1) During the three and six months ended June 30, 2022, the Company issued 335,177 and 462,178 shares of common stock upon the exercise of stock options, vesting of restricted stock units, and for other common stock awards, respectively.

Balance at September 30, 2022 $ 1.8 $ 2,850.2 $ ( 1,154.4 ) $ ( 79.0 ) $ — $ 1,618.6

____________________

(1) During the three and nine months ended September 30, 2022, the Company issued 51,577,307 and 52,039,485 shares of common stock upon the exercise of stock options, vesting of restricted stock units, Elkay merger, and for other common stock awards, respectively.

(2) Non-controlling interest through the Spin-Off Transaction represented a 5 % non-controlling interest in a PMC joint venture relationship.

The Company has no remaining non-controlling interest subsequent to the Spin-Off Transaction.

(3) Refer to Note 2, Acquisitions for additional information regarding the Elkay acquisition.

Prior year amounts disclosed within this note include amounts attributable to the Company's discontinued operations, unless otherwise noted.

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however, the program will continue until the maximum amount of dollars authorized have been expended or until it is modified or terminated by the Board.

The Company did no t repurchase any shares during the three and six months ended June 30, 2022.

During the six months ended June 30, 2021, the Company repurchased 22,300 shares of

common stock at a total cost of $ 0.9 million at a weighted average price of $ 39.27 per share.

The Company did no t repurchase any shares during the three and nine months ended September 30, 2022.

During the nine months ended September 30, 2021, the Company repurchased 22,300 shares of common stock at a total cost of $ 0.9 million at a weighted average price of $ 39.27 per share.

The repurchased shares were canceled by the Company upon receipt.

A total of approximately $ 162.8 million of the existing authority remained under the Repurchase Program at June 30, 2022.

A total of approximately $ 162.8 million of the existing authority remained under the Repurchase Program at September 30, 2022.

Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2022, are as follows (in millions):

The changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2022, are as follows (in millions):

Foreign Currency Translation and Other Pension and Postretirement Plans Total

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Net current period other comprehensive loss ( 4.1 ) — ( 4.1 )

Balance at June 30, 2022 $ ( 70.9 ) $ ( 4.0 ) $ ( 74.9 )

The following table summarizes the amounts reclassified from accumulated other comprehensive loss to net income during the three and six months ended June 30, 2022 and June 30, 2021 (in millions):

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Income Statement Line

Balance at September 30, 2022 $ ( 75.0 ) $ ( 4.0 ) $ ( 79.0 )

There were no amounts reclassified from accumulated other comprehensive loss to net income during the three and nine months ended September 30, 2022.

The following table summarizes the amounts reclassified from accumulated other comprehensive loss to net income during the three and nine months ended September 30, 2021 (in millions):

Three Months Ended Nine Months Ended

September 30, 2021 September 30, 2021 Income Statement Line

Pension and other postretirement plans

Amortization of prior service credit $ — $ ( 0.1 ) $ — $ ( 0.2 ) Other income, net

Amortization of prior service credit $ — $ ( 0.2 ) Other income (expense), net

Provision for income taxes — —

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The major classes of inventories are summarized as follows (in millions):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Finished goods $ 282.6 $ 169.1

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Goodwill and Intangible Assets

The changes in the net carrying value of goodwill for the six months ended June 30, 2022, are presented below (in millions):

The changes in the net carrying value of goodwill for the nine months ended September 30, 2022, are presented below (in millions):

Net carrying amount as of December 31, 2021 $ 254.1

Currency translation adjustments ( 3.0 )

Acquisition (1) 505.0

Purchase accounting adjustments (1) ( 1.3 )

Net carrying amount as of June 30, 2022 $ 252.6

(1) Refer to Note 2, Acquisitions for additional information regarding the purchase accounting adjustments.

The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of June 30, 2022 and December 31, 2021 are as follows (in millions):

June 30, 2022

Net carrying amount as of September 30, 2022 $ 754.8

(1) Refer to Note 2, Acquisitions for additional information regarding the acquisition and purchase accounting adjustments.

The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of September 30, 2022 and December 31, 2021 are as follows (in millions):

September 30, 2022

Weighted Average Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount

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Total intangible assets, net 15 years $ 474.6 $ ( 295.5 ) $ 179.1

Intangible asset amortization expense totaled $ 1.6 million and $ 5.8 million for the three months ended June 30, 2022 and June 30, 2021, respectively.

Intangible asset amortization expense totaled $ 4.6 million and $ 11.9 million for the six months ended June 30, 2022 and June 30, 2021, respectively.

Intangible asset amortization expense totaled $ 14.5 million and $ 5.8 million for the three months ended September 30, 2022 and September 30, 2021, respectively.

Intangible asset amortization expense totaled $ 19.1 million and $ 17.7 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Customer relationships acquired during the year ended December 31, 2021 were assigned a weighted-average useful life of 10 years.

There were no intangible assets acquired during the six months ended June 30, 2022.

The Company expects to recognize amortization expense on the intangible assets subject to amortization of $ 7.9 million in the year ending December 31, 2022 (inclusive of the $ 4.6 million of amortization expense recognized in the six months ended June 30, 2022), $ 6.5 million in 2023, $ 6.5 million in 2024, $ 6.4 million in 2025, $ 6.3 million in 2026 and $ 6.3 million in 2027.

Customer relationships and tradenames acquired during the nine months ended September 30, 2022 were assigned weighted average useful lives of 16 years and 20 years , respectively.

Based on preliminary purchase accounting, the Company expects to recognize amortization expense on the intangible assets subject to amortization of $ 33.6 million in the year ending December 31, 2022 (inclusive of the $ 19.1 million of amortization expense recognized in the nine months ended September 30, 2022), $ 58.1 million in 2023, $ 58.1 million in 2024, $ 58.0 million in 2025, $ 57.9 million in 2026 and $ 57.9 million in 2027.

Other Current Liabilities

Other current liabilities are summarized as follows (in millions):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Commissions $ 11.6 $ 8.1

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Long-term debt is summarized as follows (in millions):

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Term loan (1) $ 536.3 $ 539.2

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____________________

(1) Includes unamortized debt issuance costs of $ 10.0 million and $ 10.8 million at June 30, 2022 and December 31, 2021, respectively.

(2) Refer to Note 14, Leases, to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for further information regarding leases.

(1) Includes unamortized debt issuance costs of $ 9.6 million and $ 10.8 million at September 30, 2022 and December 31, 2021, respectively.

(2) Refer to Note 18, Leases, for further information regarding leases.

Senior Secured Credit Facility

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The Credit Agreement contains representations, warranties, covenants and events of default, including, without limitation, a financial covenant under which the Borrowers are, if certain conditions are met, obligated to maintain on a consolidated basis, as of the end of each fiscal quarter, a certain maximum Net First Lien Leverage Ratio (as defined in the Credit Agreement).

As of June 30, 2022, the Borrowers were in compliance with all applicable covenants under the Credit Agreement.

See Note 18, Subsequent Events for additional information on an amendment to the Credit Agreement entered into in connection with the Merger.

As of September 30, 2022, the Borrowers were in compliance with all applicable covenants under the Credit Agreement.

In connection with the consummation of the Merger, on July 1, 2022, Holdings, the Borrowers, Elkay and the other loan parties party thereto entered into that certain Amendment No.

1 (the “Amendment”) to the Fourth Amended and Restated First Lien Credit Agreement (the “Credit Agreement”) pursuant to which Elkay joined the Credit Agreement as a Borrower.

Elkay and its domestic subsidiaries also granted security interests in substantially all of their personal property assets to secure the obligations under the Credit Agreement pursuant to that certain Supplement No.

1 dated as of July 1, 2022 to the Collateral Agreement and certain other collateral documents.

The Term Loan has a maturity date of October 4, 2028.

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In the event the Borrowers’ Net First Lien Leverage Ratio is less than or equal to 1.80 to 1.00, the applicable margin on both base rate and LIBOR borrowings would decrease by 0.25 %.

The Borrowers’ Net First Lien Leverage Ratio was 2.08 to 1.00 as of June 30, 2022.

At June 30, 2022 and for the six months ended, the borrowings under the Term Loan had weighted-average effective interest rates of 4.04 % and 2.90 %, respectively.

The Borrowers’ Net First Lien Leverage Ratio was 1.61 to 1.00 as of September 30, 2022, as such, the Company expects the applicable margin for LIBOR borrowings to decrease by 0.25 % to 2.00 % on a go forward basis.

At September 30, 2022 and for the nine months then ended, the borrowings under the Term Loan had weighted-average effective interest rates of 5.39 % and 4.41 %, respectively.

Revolving Credit Facility

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If the Net First Lien Leverage Ratio is greater than 2.00 to 1.00, the applicable margin shall equal 1.00 % in the case of base rate borrowings and 2.00 % in the case of LIBOR borrowings.

In the event the Borrowers' Net First Lien Leverage Ratio is less than or equal to 2.00 to 1.00, the applicable margin on both base rate

and LIBOR borrowings would decrease by 0.25 %.

The Borrowers’ Net First Lien Leverage Ratio was 2.08 to 1.00 as of June 30, 2022.

In the event the Borrowers' Net First Lien Leverage Ratio is less than or equal to 2.00 to 1.00, the applicable margin on both base rate and LIBOR borrowings would decrease by 0.25 %.

The Borrowers’ Net First Lien Leverage Ratio was 1.61 to 1.00 as of September 30, 2022.

The Borrowers are also required to pay a quarterly commitment fee on the average daily unused portion of the Revolving Credit Facility for each fiscal quarter and fees in connection with the issuance of letters of credit.

If the Net First Lien Leverage Ratio is greater than 2.00 to 1.00, the commitment fee shall equal 0.50 %, and if the Company's Net First Lien Leverage Ratio is less than or equal to 2.00 to 1.00, the commitment fee shall equal 0.375 %.

At June 30, 2022 and December 31, 2021, there were no amounts borrowed under the Revolving Credit Facility.

As of June 30, 2022 and December 31, 2021, $ 6.1 million and $ 6.1 million of the Revolving Credit Facility were considered utilized in connection with outstanding letters of credit, respectively.

At September 30, 2022 and December 31, 2021, there were no amounts borrowed under the Revolving Credit Facility.

As of September 30, 2022 and December 31, 2021, $ 7.6 million and $ 6.1 million of the Revolving Credit Facility was considered utilized in connection with outstanding letters of credit, respectively.

Finance Leases and Other Subsidiary Debt

At June 30, 2022 and December 31, 2021, the Company had finance lease obligations of $ 0.2 million and $ 0.3 million, respectively.

See Note 14, Leases in the audited consolidated financial statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for further information regarding leases.

At September 30, 2022 and December 31, 2021, the Company had finance lease obligations of $ 0.7 million and $ 0.3 million, respectively.

See Note 18, Leases for further information regarding leases.

Fair Value Measurements

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Deferred compensation plan liabilities are classified within other liabilities on the condensed consolidated balance sheets.

The following table provides a summary of the Company's assets and liabilities that were recognized at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 (in millions):

Fair Value as of June 30, 2022

The following table provides a summary of the Company's assets and liabilities that were recognized at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 (in millions):

Fair Value as of September 30, 2022

Level 1 Level 2 Level 3 Total

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Deferred compensation plan liabilities 16.3 — — 16.3

There were no transfers of assets between levels at June 30, 2022 and December 31, 2021, respectively.

There were no transfers of assets between levels at September 30, 2022 and December 31, 2021, respectively.

Fair Value of Non-Derivative Financial Instruments

The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at June 30, 2022 and December 31, 2021, due to the short-term nature of those instruments.

The fair value of long-term debt as of June 30, 2022 and December 31, 2021, was approximately $ 534.5 million and $ 552.4 million, respectively.

The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at September 30, 2022 and December 31, 2021, due to the short-term nature of those instruments.

The fair value of long-term debt as of September 30, 2022 and December 31, 2021, was approximately $ 539.1 million and $ 552.4 million, respectively.

The fair value is based on quoted market prices for the same instruments.

Long-lived Assets and Intangible Assets

Long-lived assets (which include property, plant and equipment and real estate) may be measured at fair value if such assets are held-for-sale or when there is a determination that the asset is impaired.

Intangible assets (which include patents, tradenames, customer relationships, and non-compete agreements) also may be measured at fair value when there is a determination that the asset is impaired.

The determination of fair value for these assets is based on the best information available that resides within Level 3 of the fair value hierarchy, including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets and independent appraisals, as appropriate.

For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates.

Acquisition Method of Accounting

The methods used to determine the fair value of significant identifiable assets and liabilities included in the allocation of the Elkay purchase price are discussed below.

Inventories - Acquired inventory was comprised of finished goods, work in process and raw materials.

The fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort.

The fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort.

The fair value of raw materials and supplies was determined based on replacement cost which approximates historical carrying value.

Property, Plant and Equipment - The preliminary fair value of property, plant, and equipment was determined based on assumptions that market participants would use in pricing an asset.

Leases, including Right-Of-Use ("ROU") Assets and Lease Liabilities - Lease liabilities were measured as of the acquisition date at the present value of future minimum lease payments over the remaining lease term and the incremental borrowing rate of the Company as if the acquired leases were new leases as of the acquisition date.

ROU assets recorded are equal to the amount of the lease liability at the acquisition date adjusted for any off-market terms of the lease.

The remaining lease term was based on the remaining term at the acquisition date plus any renewal or extension options that the Company is reasonably certain will be exercised.

Identifiable Intangible Assets - The fair value estimates of the identifiable intangible assets are based upon assumptions that market participants would use in pricing an asset.

The preliminary fair value and weighted average useful life of the identifiable intangible assets are as follows (in millions):

Fair Value Weighted Average Useful Life

Trade name (1) $ 168.7 20

Customer relationships (2) 691.8 16

Fair value of intangible assets acquired 860.5

____________________

(1) The Elkay trade name was valued using the relief from royalty method, which considers both the market approach and the income approach.

(2) The fair value of customer relationships was valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from Elkay's existing customer base.

Deferred Income Tax Assets and Liabilities - The acquisition was structured as a merger and therefore, the Company assumed the historical tax basis of the Elkay business’s assets and liabilities.

The deferred income tax assets and liabilities include the expected future federal, state, and foreign tax consequences associated with temporary differences between the fair values of the assets acquired and liabilities assumed and the respective tax bases.

Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates at the effective date of the acquisition in the jurisdictions in which legal title of the underlying asset or liability resides.

Other Assets Acquired and Liabilities Assumed (excluding Goodwill) - The Company utilized the carrying values, net of allowances, to value accounts receivable and accounts payable as well as other current assets and liabilities as it was determined that carrying values represented the fair value of those items at the acquisition date.

Goodwill - The excess of the consideration for the acquisition over the fair value of net assets acquired was recorded as goodwill.

The goodwill is attributable to expected synergies and expanded market opportunities from combining the Company’s operations with those of Elkay.

The goodwill created in the acquisition is not expected to be deductible for tax purposes.

Commitments and Contingencies

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The following table presents changes in the Company’s product warranty liability (in millions):

Six Months Ended

June 30, 2022 June 30, 2021

Nine Months Ended

September 30, 2022 September 30, 2021

Balance at beginning of period $ 1.3 $ 1.2

Acquired obligations 3.4 —

Charged to operations 2.8 1.2

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Certain Company subsidiaries are subject to asbestos litigation.

As of June 30, 2022, Zurn and numerous other unrelated companies were defendants in approximately 6,000 asbestos related lawsuits representing approximately 7,000

As of September 30, 2022, Zurn and numerous other unrelated companies were defendants in approximately 6,000 asbestos related lawsuits representing approximately 7,000 claims.

Plaintiffs' claims allege personal injuries caused by exposure to asbestos used primarily in industrial boilers formerly manufactured by a segment of Zurn.

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These claims are being handled pursuant to a defense strategy funded by insurers.

As of June 30, 2022, the Company estimates the potential liability for the asbestos-related claims described above, as well as the claims expected to be filed in the next ten years , to be approximately $ 66.0 million, of which Zurn expects its insurance carriers to pay approximately $ 49.0 million in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent years.

As of September 30, 2022, the Company estimates the potential liability for the asbestos-related claims described above, as well as the claims expected to be filed in the next ten years , to be approximately $ 66.0 million, of which Zurn expects its insurance carriers to pay approximately $ 49.0 million in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent years.

The $ 66.0 million was developed based on actuarial studies and represents the projected indemnity payout for current and future claims.

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The liability for the asbestos-related claims is recorded in reserve for asbestos claims within the condensed consolidated balance sheets.

Management estimates that its available insurance to cover this potential asbestos liability as of June 30, 2022 is in excess of the ten year estimated exposure, and accordingly, believes that all current claims are covered by insurance.

As of June 30, 2022, the Company had a recorded receivable from its insurance carriers of $ 66.0 million, which corresponds to the amount of this potential asbestos liability that is covered by available insurance and is currently determined to be probable of recovery.

Management estimates that its available insurance to cover this potential asbestos liability as of September 30, 2022 is in excess of the ten year estimated exposure, and accordingly, believes that all current claims are covered by insurance.

As of September 30, 2022, the Company had a recorded receivable from its insurance carriers of $ 66.0 million, which corresponds to the amount of this potential asbestos liability that is covered by available insurance and is currently determined to be probable of recovery.

However, there is no assurance the Company's current insurance coverage will ultimately be available or that this asbestos liability will not ultimately exceed the Company's coverage limits.

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The components of net periodic benefit cost are as follows (in millions):

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Pension Benefits:

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The Company recognizes the net actuarial gains or losses in excess of the corridor in operating results during the final quarter of each fiscal year (or upon any required re-measurement event).

During the six months ended June 30, 2022 and June 30, 2021, the Company made contributions of $ 0.7 million and $ 1.8 million, respectively, to its qualified pension plan trusts.

During the nine months ended September 30, 2022 and September 30, 2021, the Company made contributions of $ 1.0 million and $ 1.9 million, respectively, to its qualified pension plan trusts.

In addition, during the nine months ended September 30, 2022, the Company liquidated a defined benefit plan acquired in the Elkay Merger with a $ 17.3 million cash payment to the participants.

The Company has no future obligations under the Elkay defined benefit plan following this cash payment.

Prior year amounts disclosed within this note include amounts attributable to the Company's discontinued operations, unless otherwise noted.

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The Zurn Elkay Water Solutions Corporation Performance Incentive Plan (the "Plan") is utilized to provide performance incentives to the Company's officers, employees, directors and certain others by permitting grants of equity awards (for common stock), as well as performance-based cash awards, to such persons to encourage them to maximize the Company's performance and create value for the Company's stockholders.

For the three months ended June 30, 2022 and June 30, 2021, the Company recognized $ 3.8 million and $ 7.1 million of stock-based compensation expense, respectively.

For the six months ended June 30, 2022 and June 30, 2021, the Company recognized $ 7.7 million and $ 16.2 million of stock-based compensation expense, respectively.

During the six months ended June 30, 2022, the Company granted the following restricted stock units, performance stock units and common stock to directors, executive officers, and certain other employees:

For the three months ended September 30, 2022 and September 30, 2021, the Company recognized $ 7.8 million and $ 7.0 million of stock-based compensation expense, respectively.

For the nine months ended September 30, 2022 and September 30, 2021, the Company recognized $ 15.5 million and $ 23.2 million of stock-based compensation expense, respectively.

During the nine months ended September 30, 2022, the Company granted the following restricted stock units, performance stock units and common stock to directors, executive officers, and certain other employees:

Award Type Number of Awards Weighted Average Grant-Date Fair Value

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See Note 15, Stock-Based Compensation, to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, for further information regarding stock-based compensation.

The Company determines if a contract is (or contains) a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset.

The Company has operating and finance leases primarily associated with real estate, automobiles and manufacturing and office equipment.

The Company has lease agreements that include lease and non-lease components, which the Company has elected to account for as a single lease component for all classes of the underlying assets.

The term of the Company’s leases generally reflects the non-cancellable period of the lease.

Some of the Company’s lease agreements include options to extend or terminate the lease, which are excluded from the minimum lease terms unless the Company is reasonably certain the option will be exercised.

Lease expense for operating leases and amortization expense for finance leases is recognized on a straight-line basis over the lease term.

Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets and are instead recognized on a straight-line basis over the lease term.

Right-of-use (“ROU”) assets and liabilities are recognized in the condensed consolidated balance sheets based on the present value of remaining lease payments over the lease term.

Additionally, ROU assets include any lease payments made at or before the lease commencement date, any initial direct costs incurred, and are reduced by lease incentives received.

As most of the Company’s leases do not provide an implicit rate, the present value of lease payments is determined using the Company’s incremental borrowing rate at the commencement date of the lease.

Lease payments included in the measurement of the lease liabilities are comprised of fixed payments, variable payments that depend on an index or rate, and amounts probable to be paid if an option is reasonably certain to be exercised.

Variable lease payments, typically based on usage of the asset or changes in an index or rate, are excluded from the lease liabilities and are recognized in the period in which the obligation for those payments is incurred.

ROU assets and lease liability balances recorded on the condensed consolidated balance sheets are summarized as follows (in millions):

Leases Classification September 30, 2022 December 31, 2021

Operating ROU assets Other assets $ 58.7 $ 14.1

Finance ROU assets Property, plant and equipment, net (1) 0.9 0.5

Total ROU assets $ 59.6 $ 14.6

Operating Other current liabilities $ 8.3 $ 6.1

Finance Current maturities of debt 0.2 0.1

Operating Operating lease liability 51.2 8.9

Finance Long-term debt 0.5 0.2

Total lease liabilities $ 60.2 $ 15.3

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(1) Finance lease assets are recorded net of accumulated amortization of $ 0.2 million and $ 0.2 million as of September 30, 2022 and December 31, 2021 , respectively.

The components of lease expense reported in the condensed consolidated statements of operations are as follows (in millions):

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Operating lease expenses (1) $ 3.4 $ 1.5 $ 6.5 $ 4.6

Finance lease expenses:

Depreciation of finance ROU assets (1) 0.1 — 0.1 0.1

Interest on lease liabilities (2) — — — —

Total finance lease expense 0.1 — 0.1 0.1

Variable and short-term lease expense (1) 1.7 0.8 4.0 2.6

Total lease expense $ 5.2 $ 2.3 $ 10.6 $ 7.3

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(1) Included in cost of sales and selling, general and administrative expenses.

(2) Included in interest expense, net.

Future minimum lease payments under operating and finance leases as of September 30, 2022 are as follows (in millions):

Years ending December 31, Operating Leases (1)

Finance Leases (1)

2022 (through December 31, 2022) $ 3.2 $ 0.1

2023 12.2 0.3

2024 10.1 0.2

Thereafter 47.4 —

Total future minimum lease payments 87.2 0.8

imputed interest ( 26.2 ) ( 0.1 )

Total lease liabilities $ 61.0 $ 0.7

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(1) Excludes legally binding minimum lease payments for leases signed but not yet commenced.

The weighted-average remaining lease terms and discount rates for leases are as follows:

Nine Months Ended

Lease Term and Discount Rate September 30, 2022 September 30, 2021

Weighted-average remaining lease terms (years):

Operating leases 10.2 3.0

Finance leases 3.3 3.5

Weighted-average discount rate:

Operating leases 6.5 % 3.4 %

Finance leases 5.2 % 3.4 %

Cash paid for amounts included in the measurement of lease liabilities are as follows (in millions):

Nine Months Ended

September 30, 2022 September 30, 2021

Operating cash flows from operating leases $ 6.5 $ 4.8

Operating cash flows from finance leases — —

Financing cash flows from finance leases 0.1 0.1

ROU assets obtained in exchange for lease liabilities are as follows (in millions):

Nine Months Ended

September 30, 2022 September 30, 2021

Operating leases $ 51.3 $ 0.4

Finance leases $ 0.5 $ 0.1

Subsequent Events

Elkay Transaction;

Credit Agreement Amendment

On July 1, 2022, in accordance with the terms and conditions of the Merger Agreement, dated February 12, 2022, the Company announced it had closed the Merger with Elkay.

Under the terms of the transaction agreements, subject to certain holdbacks and post-closing adjustments, the merger consideration to Elkay shareholders consisted of approximately 51.6 million shares of Zurn common stock, which results in former Elkay shareholders owning approximately 29 % of the combined company.

Elkay, a market leader of commercial drinking water solutions, complements the Company's existing product portfolio.

Following the closing of the Elkay Transaction, Zurn changed its legal name from Zurn Water Solutions Corporation to Zurn Elkay Water Solutions Corporation.

Zurn Elkay common stock will continue to trade on the New York Stock Exchange under the ticker symbol “ZWS.”

In connection with the consummation of the Merger, on July 1, 2022, Holdings, the Borrowers, Elkay and the other loan parties party thereto entered into that certain Amendment No.

1 (the “Amendment”) to the Fourth Amended and Restated First Lien Credit Agreement (the “Credit Agreement”) pursuant to which Elkay joined the Credit Agreement as a Borrower.

1 dated as of July 1, 2022 to the Collateral Agreement and certain other collateral documents.

The Company has estimated the total consideration transferred for the acquisition of Elkay to be approximately $ 1.4 billion, subject to finalization of purchase accounting and working capital adjustments.

Pro forma revenues and earnings have not been presented as the initial accounting for the Elkay Transaction is incomplete as of the date the consolidated financial statements are issued.

The Company is in the process of assessing the fair value of the acquired tangible assets, liabilities assumed and any applicable intangible assets and liabilities for this business combination.

On July 21, 2022, the Company's Board of Directors declared a quarterly cash dividend on the Company's common stock of $ 0.07 per-share to be paid on September 7, 2022, to stockholders of record as of August 19, 2022.

On October 20, 2022, the Company's Board of Directors declared a quarterly cash dividend on the Company's common stock of $ 0.07 per-share to be paid on December 7, 2022, to stockholders of record as of November 18, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements