What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-10-25 compared with 2022-07-26 · 117 added, 98 removed, 140 unchanged (61% of the section changed)

2 unchanged sentences

In conjunction with the Merger, we changed our name from Zurn Water Solutions Corporation to Zurn Elkay Water Solutions Corporation.

Our results of operations will include the acquired operations subsequent to July 1, 2022.

See Item 1, Note 18, Subsequent Events for additional information on the Elkay Transaction.

Our results of operations include the acquired operations subsequent to July 1, 2022.

See Item 1, Note 2, Acquisitions, for additional information on the Elkay Transaction.

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

8 unchanged sentences

Refer to Item 7, MD&A, of our Annual Report on Form 10-K for the year ended December 31, 2021 for information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management.

Except for the items reported below, management believes that as of June 30, 2022, and during the period from January 1, 2022 through June 30, 2022, there has been no material change to this information.

Except for the items reported below, management believes that as of September 30, 2022, and during the period from January 1, 2022 through September 30, 2022, there has been no material change to this information.

Recent Accounting Pronouncements

See Item 1, Note 1, Basis of Presentation and Significant Accounting Policies regarding recent accounting pronouncements.

On July 1, 2022, we 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 our existing product portfolio.

The preliminary purchase price includes $1,417.0 million of our common stock based on the 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 Merger Agreement, we issued 51,564,524 shares of common stock, $0.01 par value per share, of our common stock, which represented approximately 29% of the 177,746,770 outstanding shares of our common stock immediately following the Merger closing.

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

We 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 our condensed consolidated statements of operations.

On November 17, 2021, we completed the acquisition of the Wade Drains business ("Wade Drains") from McWane, Inc.

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, we 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, we 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 our existing flow systems product portfolio.

4 unchanged sentences

(“Land”), (ii) the shares of Land were distributed to our stockholders pro rata, and (iii) Land was merged with a subsidiary of Regal Rexnord Corporation (formerly known as Regal Beloit Corporation), in which the stock of Land was converted into a specified number of shares of Regal Rexnord Corporation.

During the six months ended June 30, 2022, we 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.

During the nine months ended September 30, 2022, we 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 operating results of PMC are reported as discontinued operations in our condensed consolidated statements of operations for all periods presented.

The condensed consolidated statements of cash flows for the period ended June 30, 2021 has not been adjusted to separately disclose cash flows related to the discontinued operations.

The condensed consolidated statements of cash flows for the period ended September 30, 2021 has not been adjusted to separately disclose cash flows related to the discontinued operations.

See Item 1, Note 4, Discontinued Operations for additional information on cash flows associated with the discontinued operations.

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 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

Restructuring and Other Similar Costs

During the three and nine months ended September 30, 2022, we executed various restructuring initiatives focused on driving efficiencies, reducing operating costs by modifying our footprint to reflect changes in the markets we serve and 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, impairment of related manufacturing facilities, equipment and intangible assets, 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, lease termination costs, and other facility rationalization costs on our overall manufacturing capacity, and refining our overall product portfolio.

For the three and nine months ended September 30, 2022, restructuring charges totaled $11.7 million and $13.1 million, respectively.

For the three and nine months ended September 30, 2021, restructuring charges totaled $0.7 million and $1.6 million, respectively.

Refer to Item 1, Note 3, Restructuring and Other Similar Charges for further information.

Results of Operations

Three Months Ended June 30, 2022 compared with the Three Months Ended June 30, 2021:

Three Months Ended September 30, 2022 compared with the Three Months Ended September 30, 2021:

(Dollars in Millions)

Three Months Ended

June 30, 2022 June 30, 2021 Change % Change

September 30, 2022 September 30, 2021 Change % Change

Net Sales $ 417.7 $ 229.7 $ 188.0 81.8 %

Net sales were $284.2 million during the three months ended June 30, 2022, an increase of 17% year over year.

Excluding a 2% increase to net sales resulting from our prior-year acquisition, core sales increased 15% year over year as nearly all of our product categories contributed to the sales growth.

Income from operations

Net sales were $417.7 million and $229.7 million during the three months ended September 30, 2022 and September 30, 2021, respectively, an increase of 82% year-over-year.

Excluding a 67 % increase in sales associated with our combination with Elkay and prior year acquisition of Wade Drains and a 1% decrease in sales associated with foreign currency translation, core sales increased 16% year-over-year as nearly all of our product categories, with the exception of products sold into the residential end market, contributed to the sales growth.

Income (loss) from operations

(Dollars in Millions)

Three Months Ended

June 30, 2022 June 30, 2021 Change % Change

Income from operations $ 53.5 $ 37.3 $ 16.2 43.4 %

September 30, 2022 September 30, 2021 Change % Change

(Loss) income from operations $ (10.1) $ 32.5 $ (42.6) (131.1) %

% of net sales (2.4) % 14.1 % (16.6) %

Income from operations was $53.5 million during the three months ended June 30, 2022, or 18.8% of net sales.

Income from operations as a percentage of net sales increased by 350 basis points primarily as a result of the favorable impact of year-over-year sales growth (inclusive of price realization), productivity savings and the lower intangible asset amortization and non-cash stock-based compensation expense, all of which was partially offset by the year-over-year increases in material and transportation costs, as well as incremental growth and productivity investments.

During the three months ended September 30, 2022, we generated a loss from operations of $(10.1) million compared to income from operations of $32.5 million during the three months ended September 30, 2021.

The year-over-year change is primarily the result of transaction related costs related to the Elkay Merger and higher intangible asset and other acquisition related amortization and restructuring costs following our combination with Elkay.

These costs were partially offset by the favorable impact of year-over-year sales growth (inclusive of price realization) and productivity savings.

Interest expense, net

Interest expense, net was $5.2 million during the three months ended June 30, 2022, compared to $10.1 million during the three months ended June 30, 2021.

Interest expense, net was $8.0 million for the three months ended September 30, 2022, compared to $9.9 million for the three months ended September 30, 2021.

The decrease in interest expense as compared to the prior year period is primarily a result of the lower outstanding borrowings following the Spin-Off Transaction refinancing, partially offset by a higher year-over-year interest rate.

See Item 1, Note 13 Long-Term Debt for more information.

Other expense, net

Other expense, net during the three months ended June 30, 2022 and 2021, was $0.6 million and $0.4 million, respectively.

Other expense, net consists primarily of foreign currency transaction gains and losses and the non-service cost components associated with our defined benefit plans.

Other income (expense), net

Other income (expense), net for the three months ended September 30, 2022 and 2021, was $0.6 million and $(0.8) million, respectively.

Other income (expense), net consists primarily of foreign currency transaction gains and losses and the non-service cost components associated with our defined benefit plans.

Provision for income taxes

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.

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 net operating loss ("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.

2 unchanged sentences

federal and state capital loss carryforwards.

In conjunction with this analysis, we weigh both positive and negative evidence for purposes of determining the proper balances of such valuation allowances.

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

Net income attributable to Zurn Elkay common stockholders

Net income attributable to Zurn Elkay common stockholders during the three months ended June 30, 2022, was $36.4 million compared to $73.2 million during the three months ended June 30, 2021.

Diluted net income per share attributable to Zurn Elkay common stockholders for the three months ended June 30, 2022 and June 30, 2021, was $0.28 and $0.59, respectively.

In conjunction with this analysis, we weigh both positive and negative evidence for purposes of determining the proper balances

of such valuation allowances.

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

Net (loss) income attributable to Zurn Elkay common stockholders

Net loss attributable to Zurn Elkay common stockholders for the three months ended September 30, 2022, was $19.1 million compared to net income of $64.1 million for the three months ended September 30, 2021.

Diluted net (loss) income per share attributable to Zurn Elkay common stockholders for the three months ended September 30, 2022 and September 30, 2021, was $(0.11) and $0.51, respectively.

The year over year change is the result of the PMC operations classified as discontinued operations in the prior year and the other factors described above.

Net income from discontinued operations, net of tax, was $0.0 million for the three months ended June 30, 2022 compared to $52.6 million for the three months ended June 30, 2021.

Diluted net income per share from discontinued operations for the three months ended June 30, 2022 and June 30, 2021, was $0.00 and $0.42, respectively.

Six Months Ended June 30, 2022 compared with the Six Months Ended June 30, 2021:

Net income from discontinued operations, net of tax, was $0.0 million for the three months ended September 30, 2022 compared to $48.0 million for the three months ended September 30, 2021.

Diluted net income per share from discontinued operations for the three months ended September 30, 2022 and September 30, 2021, was $0.00 and $0.38, respectively.

Nine Months Ended September 30, 2022 compared with the Nine Months Ended September 30, 2021:

(Dollars in Millions)

Six Months Ended

June 30, 2022 June 30, 2021 Change % Change

Nine Months Ended

September 30, 2022 September 30, 2021 Change % Change

Net Sales $ 941.5 $ 678.6 $ 262.9 38.7 %

Net sales were $523.8 million during the six months ended June 30, 2022, an increase of 17% year over year.

Excluding a 2% increase in net sales resulting from our prior-year acquisition, core sales increased 15% as nearly all of our product categories contributed to the sales growth.

Net sales were $941.5 million during the nine months ended September 30, 2022, an increase of 39% year over year.

Excluding a 24% increase in sales associated with our combination with Elkay and prior year acquisition of Wade Drains, core sales increased 15% year over year as nearly all of our product categories contributed to the sales growth.

Income from operations

(Dollars in Millions)

Six Months Ended

June 30, 2022 June 30, 2021 Change % Change

Nine Months Ended

September 30, 2022 September 30, 2021 Change % Change

Income from operations 87.3 93.8 (6.5) (6.9) %

% of net sales 9.3 % 13.8 % (4.6) %

Income from operations was $97.4 million during the six months ended June 30, 2022, or 18.6% of net sales.

Income from operations as a percentage of net sales increased by 490 basis points primarily as a result of the favorable impact of year-over-year sales growth (inclusive of price realization), productivity savings, lower non-cash stock-based compensation expense, lower intangible asset amortization and the year-over-year change in the adjustment to state inventories at last-in-first-out cost, all of which was partially offset by the year-over-year increases in material and transportation costs, as well as incremental growth and productivity investments.

Income from operations was $87.3 million during the nine months ended September 30, 2022, or 9.3% of net sales.

The year over year change is primarily the result of transaction related costs related to the Elkay merger and higher intangible asset and other acquisition related amortization and restructuring costs following our combination with Elkay as well as higher year-over-year costs within transportation and material inputs.

These costs were partially offset by the favorable impact of year-over-year sales growth (inclusive of price realization) and productivity savings.

Interest expense, net

Interest expense, net was $10.0 million during the six months ended June 30, 2022, compared to $19.7 million during the six months ended June 30, 2021.

Interest expense, net was $18.0 million during the nine months ended September 30, 2022, compared to $29.6 million during the nine months ended September 30, 2021.

See Item 1, Note 13 Long-Term Debt for more information.

Other expense, net

Other expense, net during the six months ended June 30, 2022 and 2021 was $0.3 million and $0.1 million, respectively.

Other expense, net consists primarily of foreign currency transaction gains and losses and the non-service cost components associated with our defined benefit plans.

Other income (expense), net

Other income (expense), net during the nine months ended September 30, 2022 and 2021 was $0.3 million and $(0.9) million, respectively.

Other income (expense), net consists primarily of foreign currency transaction gains and losses and the non-service cost components associated with our defined benefit plans.

Provision for income taxes

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

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 six months ended June 30, 2021 was above the U.S.

The income tax provision was $22.9 million for the nine 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.

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.

1 unchanged sentence

Net income attributable to Zurn Elkay common stockholders

Net income attributable to Zurn Elkay common stockholders during the six months ended June 30, 2022, was $66.6 million compared to $123.2 million during the six months ended June 30, 2021.

Diluted net income per share attributable to Zurn Elkay common stockholders for the six months ended June 30, 2022 and June 30, 2021, was $0.52 and $0.99, respectively.

Net income attributable to Zurn Elkay common stockholders for the nine months ended September 30, 2022, was $47.5 million compared to $187.3 million for the nine months ended September 30, 2021.

Diluted net income per share attributable to Zurn Elkay common stockholders for the nine months ended September 30, 2022 and September 30, 2021, was $0.33 and $1.50, respectively.

The year-over-year change is the result of the PMC operations classified as discontinued operations in the prior year and the other factors described above.

Net income from discontinued operations, net of tax, was $0.8 million for the six months ended June 30, 2022 compared to $92.6 million for the six months ended June 30, 2021.

Diluted net income per share from discontinued operations for the six months ended June 30, 2022 and June 30, 2021, was $0.01 and $0.75, respectively.

Net income from discontinued operations, net of tax, was $0.8 million for the nine months ended September 30, 2022 compared to $140.6 million for the nine months ended September 30, 2021.

Diluted net income per share from discontinued operations for the nine months ended September 30, 2022 and September 30, 2021, was $0.01 and $1.13, respectively.

Non-GAAP Financial Measures

5 unchanged sentences

Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.

Core sales excludes the impact of acquisitions (such as the Wade Drains acquisition), divestitures and foreign currency translation.

Core sales excludes the impact of acquisitions (such as the Wade Drains and Elkay acquisitions), divestitures 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 acquisitions and divestitures because the nature, size and number 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.

7 unchanged sentences

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 attributable to Zurn Elkay common stockholders in the six months ended June 30, 2022, of $66.6 million and Adjusted EBITDA for the same period of $116.3 million.

We reported net income attributable to Zurn Elkay common stockholders in the nine months ended September 30, 2022, of $47.5 million and Adjusted EBITDA for the same period of $200.0 million.

See “Covenant Compliance” for a reconciliation of Adjusted EBITDA to GAAP net income.

2 unchanged sentences

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 1.00 as of the end of each fiscal quarter.

At June 30, 2022, our net leverage ratio was 2.08 to 1.00.

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 comply with a maximum total net leverage ratio of 5.00 to 1.00 as of the end of each fiscal quarter.

At September 30, 2022, our net leverage ratio was 1.61 to 1.00.

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.

1 unchanged sentence

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.

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.

4 unchanged sentences

(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;

1 unchanged sentence

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.

In particular, our definition of Adjusted EBITDA adds 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 excluded 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 June 30, 2022, is presented in the table below.

The calculation of Adjusted EBITDA under our credit agreement as of September 30, 2022, 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.

Set forth below is a reconciliation of net income attributable to Zurn common stockholders to Adjusted EBITDA for the periods indicated below.

(in millions) Six months ended

June 30, 2021 Twelve months ended

December 31, 2021 Six months ended

June 30, 2022 Twelve months ended

June 30, 2022

Net income attributable to Zurn Elkay common stockholders $ 123.2 $ 120.9 $ 66.6 $ 64.3

Income from discontinued operations, net of tax (1) (92.6) (71.2) (0.8) 20.6

Set forth below is a reconciliation of net income attributable to Zurn Elkay common stockholders to Adjusted EBITDA for the periods indicated below.

(in millions) Nine months ended

September 30, 2021 Twelve months ended

December 31, 2021 Nine months ended

September 30, 2022 Twelve months ended

September 30, 2022

Net income (loss) attributable to Zurn Elkay common stockholders $ 187.3 $ 120.9 $ 47.5 $ (18.9)

Income (loss) from discontinued operations, net of tax (1) (140.6) (71.2) (0.8) 68.6

Provision for income taxes 16.6 2.7 22.9 9.0

Actuarial gain on pension and postretirement benefit obligations — (1.2) — (1.2)

Other expense, net (2) 0.1 0.7 0.3 0.9

Other expense (income), net (2) 0.9 0.7 (0.3) (0.5)

Loss on the extinguishment of debt — 20.4 — 20.4

5 unchanged sentences

Stock-based compensation expense 23.2 37.5 15.5 29.8

LIFO expense (income) (4) 4.3 14.1 (0.4) 9.4

Merger costs (4) — — 33.7 33.7

LIFO expense (5) 6.9 14.1 4.0 11.2

Acquisition-related fair value adjustment 0.6 0.8 15.2 15.4

8 unchanged sentences

(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.

(2) Other expense (income), 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 1, Note 3 , Restructuring and Other Similar Charges for more information.

(4) Merger costs is comprised of costs associated with legal and other professional services incurred in connection with completing the merger with Elkay, which are excluded in calculating Adjusted EBITDA as defined in our credit agreement.

(5) Last-in first-out (LIFO) inventory adjustments are excluded in calculating Adjusted EBITDA as defined in our credit agreement.

(6) Other, net consists of gains and losses on the disposition of long-lived assets.

(6) 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 July 1, 2021, through the date of the Wade Drains acquisition.

(7) Represents a pro forma adjustment to include Adjusted EBITDA related to the acquisition of Wade Drains and Elkay, which was permitted by our credit agreement.

The pro forma adjustment includes the period from October 1, 2021, through the date of the Wade Drains and Elkay acquisitions.

See Item 1, Note 2 , Acquisitions for more information.

(7) 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 $95.5 million (as defined by the credit agreement) at June 30, 2022.

(8) 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 $58.3 million (as defined by the credit agreement) at September 30, 2022.

(9) 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.

1 unchanged sentence

Our primary sources of liquidity are available cash and cash equivalents, cash flow from operations, and borrowing availability of up to $200.0 million under our revolving credit facility.

As of June 30, 2022, we had $110.4 million of cash and cash equivalents and $193.9 million of additional borrowing capacity.

As of June 30, 2022, the available borrowings under our credit facility were reduced by $6.1 million due to outstanding letters of credit.

As of September 30, 2022, we had $71.9 million of cash and cash equivalents and $192.4 million of additional borrowing capacity.

As of September 30, 2022, the available borrowings under our credit facility were reduced by $7.6 million due to outstanding letters of credit.

As of December 31, 2021, we had $96.6 million of cash and cash equivalents and approximately $193.9 million of additional borrowing capacity under our revolving credit facility.

1 unchanged sentence

We believe this resource is adequate for our expected needs.

Cash flows for the period ended June 30, 2021 include our continuing operations and discontinued operations for the entire period, while the period ended June 30, 2022 only includes the cash flows associated with continuing operations.

Cash flows for the period ended September 30, 2021 include our continuing operations and discontinued operations for the entire period, while the period ended September 30, 2022 only includes the cash flows associated with continuing operations.

Refer to Item 1, Note 4, Discontinued Operations for further information.

Cash (used for) provided by operating activities was $(12.0) million and $145.0 million during the six months ended June 30, 2022 and 2021, respectively.

The change in year over year operating cash flows was primarily the result of higher trade working capital and the impact of timing of payments on accounts payable and accrued expenses during the six months ended June 30, 2022.

Cash provided by investing activities was $35.4 million during the six months ended June 30, 2022 compared cash used for investing activities of $4.4 million during the six months ended June 30, 2021.

Investing activities during the six months ended June 30, 2022, included $2.0 million of capital expenditures which was offset by the receipt of $35.0 million from Regal Rexnord Corporation in connection with the final net assets transferred in the PMC Spin-Off Translation, the receipt of $1.3 million in connection with the sale of certain long-lived assets and the receipt of $1.1 million in connection with finalizing the acquisition date trade working capital associated with our 2021 acquisition of Wade Drains.

Investing activities during the six months ended June 30, 2021, primarily included $14.0 million of capital expenditures and a cash payment of $3.8 million in connection with our acquisition of ATS GREASEwatch, partially offset by the receipt of $13.0 million in connection with the sale of certain long-lived assets associated with our discontinued operations and the receipt of $0.4 million in connection with finalizing the acquisition date trade working capital associated with our 2020 acquisition of Hadrian.

Cash used for financing activities was $9.3 million during the six months ended June 30, 2022, compared to $5.6 million during the six months ended June 30, 2021.

During the six months ended June 30, 2022, we utilized a net $3.0 million of cash for payments on outstanding debt and $7.6 million for the payment of common stock dividends, which was partially offset by $1.3 million of proceeds from the exercise of stock options, net of taxes withheld and paid on employees' share-based awards.

During the six months ended June 30, 2021, we utilized $1.1 million of cash for payments on outstanding debt, $21.6 million for the payment of common stock dividends and $0.9 million to repurchase common stock, which was partially offset by $18.0 million of cash proceeds from the exercise of stock options, net of taxes withheld and paid on employees' share-based awards.

As of June 30, 2022, we had $537.5 million of total indebtedness outstanding as follows (in millions):

Cash provided by operating activities was $12.6 million and $245.8 million during the nine months ended September 30, 2022 and 2021, respectively.

The change in year-over-year operating cash flows was primarily the result of higher trade working capital and the impact of timing of payments on accounts payable and accrued expenses, including the payment of merger related costs in connection with the acquisition of Elkay during the nine months ended September 30, 2022.

In addition, cash provided by operating activities for the nine months ended September 30, 2021 includes cash flows associated with our discontinued operations that are not included in the nine months ended September 30, 2022.

Cash used for investing activities was $12.8 million during the nine months ended September 30, 2022 and $6.5 million during the nine months ended September 30, 2021.

Investing activities during the nine months ended September 30, 2022, included $4.3 million of capital expenditures and net cash payments of $44.8 million in connection with acquisitions, which were partially offset by the receipt of $35.0 million from Regal Rexnord Corporation in connection with the final net assets transferred in the PMC Spin-Off Translation and the receipt of $1.3 million in connection with the sale of certain long-lived assets.

Investing activities during the nine months ended September 30, 2021, primarily included $21.6 million of capital expenditures and net cash payments of $3.4 million in connection with our acquisition of ATS GREASEwatch and our 2020 acquisition of Hadrian, partially offset by the receipt of $18.5 million in connection with the sale of certain long-lived assets associated with our discontinued operations.

Cash used for financing activities was $23.1 million during the nine months ended September 30, 2022, compared to $13.1 million during the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, we utilized a net $4.4 million of cash for payments on outstanding debt and $20.1 million for the payment of common stock dividends, which was partially offset by $1.4 million of proceeds from the exercise of stock options, net of taxes withheld and paid on employees' share-based awards.

During the nine months ended September 30, 2021, we utilized $1.7 million of cash for payments on outstanding debt, $32.6 million for the payment of common stock dividends and $0.9 million to repurchase common stock, which was partially offset by $22.1 million of cash proceeds from the exercise of stock options, net of taxes withheld and paid on employees' share-based awards.

As of September 30, 2022, we had $537.0 million of total indebtedness outstanding as follows (in millions):

Total Debt at

June 30, 2022

September 30, 2022

Current Maturities of Debt Long-term

3 unchanged sentences

___________________________________________

(1) Includes unamortized debt issuance costs of $10.0 million at June 30, 2022.

(1) Includes unamortized debt issuance costs of $9.6 million at September 30, 2022.

See Item 1, Note 13, Long-Term Debt for a description of our outstanding indebtedness.

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 2. Management’s Discussion and Analysis