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Item 7. Management’s Discussion and Analysis

2023-02-14 compared with 2022-02-09 · 144 added, 148 removed, 347 unchanged (46% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of results of operations and financial condition includes periods prior to the acquisitions of the assets of East Creek Corporation ("StainlessDrains.com"), Just Manufacturing Company ("Just Manufacturing"), Hadrian Manufacturing Inc., as well as the stock of Hadrian Inc.

The following discussion of results of operations and financial condition includes periods prior to the acquisitions of the assets of Hadrian Manufacturing Inc., together with the stock of Hadrian Inc.

(Hadrian Inc.

and Hadrian Manufacturing Inc.

are collectively referred to as "Hadrian"), the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch") and Wade Drains ("Wade").

Our financial performance includes the Stainlessdrains.com business subsequent to May 10, 2019, the Just Manufacturing business subsequent to January 28, 2020, and the Hadrian business subsequent to December 11, 2020, the ATS GREASEwatch business subsequent to April 16, 2021 and the Wade Drains business subsequent to November 17, 2021, the respective dates of their acquisitions.

Accordingly, the discussion and analysis does not reflect any impact of Stainlessdrains.com, Just Manufacturing, Hadrian, ATS GREASEwatch or Wade Drains transactions prior to the respective closing dates.

are collectively referred to as "Hadrian"), the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch"), and the assets of Wade Drains ("Wade"), and the acquisition of Elkay in the Elkay merger.

Our financial performance includes the Hadrian business subsequent to December 11, 2020, the ATS GREASEwatch business subsequent to April 16, 2021, the Wade business subsequent to November 17, 2021, and the Elkay business subsequent to July 1, 2022, the respective dates of their acquisitions.

Accordingly, the discussion and analysis does not reflect any impact of Hadrian, ATS GREASEwatch, Wade, or Elkay transactions prior to the respective closing dates.

We completed the spin-off of our Process & Motion Control platform ("PMC") on October 4, 2021 in the Spin-Off Transaction, and, accordingly, the results of operations and financial condition associated with PMC have been reclassified to discontinued operations for all periods presented.

As a result, the following discussion of results of operations and financial condition is centered on the Zurn business excluding PMC.

The consolidated statements of cash flows for the year ended December 31, 2021, the nine month Transition Period ended December 31, 2021 and the fiscal year ended March 31, 2020 have not been adjusted to separately disclose cash flows related to the discontinued operations.

The consolidated statements of cash flows for the year ended December 31, 2022, the year ended December 31, 2021, and the nine-month Transition Period ended December 31, 2020 have not been adjusted to separately disclose cash flows related to the discontinued operations.

See Item 8, Note 4, Discontinued Operations for additional information on cash flows associated with the discontinued operations.

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Fiscal years prior to and including fiscal year 2020 ended on March 31 of each calendar year.

For example, our fiscal year 2020, or fiscal 2020, means the period from April 1, 2019 to March 31, 2020.

Our fiscal year 2021 commenced on January 1, 2021.

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" in Item 1A of this report.

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As noted above, following the end of fiscal 2020, we transitioned to a December 31 fiscal year-end and accordingly we reported the nine-month period from April 1, 2020, to December 31, 2020 as a Transition Period.

In providing analysis of the results of our operations, we have provided a comparison of our year ended December 31, 2021 to the twelve month period ended December 31, 2020, along with a comparison of the nine months ended December 31, 2020 included in the Transition Period to the nine month period ended December 31, 2019.

In providing analysis of the results of our operations, we have provided a comparison of our year ended December 31, 2022 to the year ended December 31, 2021, along with a comparison of the year ended December 31, 2021 to the year ended December 31, 2020.

Non-GAAP Financial Measures .

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Liquidity and Capital Resources .

This section provides an analysis of our cash flows for our years ended December 31, 2021 and 2020, and nine months ended December 31, 2020 and 2019, as well as a discussion of our indebtedness and its potential effects on our liquidity.

This section provides an analysis of our cash flows and year-to-year comparisons for our years ended December 31, 2022, 2021, and 2020, as well as a discussion of our indebtedness and its potential effects on our liquidity.

Tabular Disclosure of Contractual Obligations .

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Company Overview

After completion of the Spin-Off Transaction, we are a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets what we believe is the broadest sustainable product portfolio of specification-driven water management solutions to improve health, human safety and the environment.

Our product portfolio includes professional grade water safety and control, flow systems and hygienic and environmental products for public and private spaces that deliver superior value to building owners, positively impact the environment and human hygiene and reduce product installation time.

Zurn's heritage of innovation and specification have allowed us to provide highly-engineered, mission-critical solutions to customers for decades and affords us the privilege of having long-term, valued relationships with market leaders.

We operate in a disciplined way and the Zurn Business System (“ZBS”) is our operating philosophy.

Grounded in the spirit of continuous improvement, ZBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of our business.

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

Our product portfolio includes professional grade water safety and control products, flow system products, hygienic and environmental products, and drinking water products for public and private spaces that deliver superior value to building owners, positively impact the environment and human hygiene and reduce product installation time.

Zurn Elkay's heritage of innovation and specification has allowed us to provide highly-engineered, mission-critical solutions to customers for decades and affords us the privilege of having long-term, valued relationships with market leaders.

We operate in a disciplined way and the Zurn Elkay Business System (“ZEBS”) is our operating philosophy.

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 our business.

Refer to Item 1, Business for additional information.

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Other than a standard assurance-type warranty that the product will conform to agreed-upon specifications, there are generally no other significant post-shipment obligations.

The expected costs associated with standard warranties continues is recognized as an expense when the products are sold.

The expected costs associated with standard warranties is recognized as an expense when the products are sold.

When the contract provides the customer the right to return eligible products or when the customer is part of a sales rebate program, we reduce revenue at the point of sale using current facts and historical experience by using an estimate for expected product returns and rebates associated with the transaction.

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If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

The total write-down of inventories charged to expense was $0.9 million, $1.5 million and $2.2 million, during the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, respectively.

The total write-down of inventories charged to expense was $0.8 million, $0.9 million and $1.5 million, during the year ended December 31, 2022, the year ended December 31, 2021, and the nine-month Transition Period ended December 31, 2020, respectively.

Purchase accounting and business combinations.

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Actual results could vary from these estimates.

During the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, no impairment losses were recognized.

During the year ended December 31, 2022, the year ended December 31, 2021, and the nine-month Transition Period ended December 31, 2020, no impairment losses were recognized.

Goodwill, trademarks and certain tradenames have indefinite lives and are not amortized.

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During the fourth quarter of the year ended December 31, 2022, we completed our annual goodwill impairment test and elected to perform a qualitative assessment.

No goodwill impairment charges were recorded during the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020.

No goodwill impairment charges were recorded during the year ended December 31, 2022, the year ended December 31, 2021, or the nine-month Transition Period ended December 31, 2020.

Retirement benefits.

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Changes in the related pension and post-retirement benefit income/costs or assets/liabilities may occur in the future due to changes in the assumptions and changes in asset values.

We recognize the net actuarial gains or losses in excess of unrecognized gain or loss exceeding 10 percent of the greater of the market-related value of plan assets or the plan's projected benefit obligation at re-measurement (the "corridor") in the Corporate segment operating results during the fourth quarter of each fiscal year (or upon any re-measurement date).

During the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, we recognized non-cash actuarial gain (loss) from continuing operations of $1.2 million, $(0.3) million and $(20.9) million, respectively, in connection with re-measurements of the plans.

We recognize the net actuarial gains or losses in excess of unrecognized gain or loss exceeding 10 percent of the greater of the market-related value of plan assets or the plan's projected benefit obligation at re-measurement (the "corridor") in our consolidated statements of operations during the fourth quarter of each fiscal year (or upon any re-measurement date).

During the year ended December 31, 2022, the year ended December 31, 2021, and the nine-month Transition Period ended December 31, 2020, we recognized non-cash actuarial gain (loss) from continuing operations of $1.9 million, $1.2 million, and $(0.3) million, respectively, in connection with re-measurements of our plans.

Net periodic benefit costs recorded on a quarterly basis are primarily comprised of service and interest cost, amortization of unrecognized prior service cost and the expected return on plan assets.

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As a result, we have recorded a liability for pending and potential future asbestos claims, as well as a receivable for insurance coverage of such liability.

The valuation of our potential asbestos liability was based on the number and severity of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives.

We estimate that our available insurance to cover our potential asbestos liability as of December 31, 2021, is greater than our potential asbestos liability.

This conclusion was reached after considering our experience in asbestos litigation, the insurance payments made to date by our insurance carriers, existing insurance policies, the industry ratings of the insurers and the advice of insurance coverage counsel with respect to applicable insurance coverage law relating to the terms and conditions of those policies.

We used these same considerations when evaluating the recoverability of our receivable for insurance coverage of potential asbestos claims.

The valuation of our potential asbestos liability was developed from actuarial studies based on the number and severity of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives.

There are inherent uncertainties involved in estimating the number of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives.

As a result, actual liability could differ from the estimate described herein and could be substantial.

Our receivable for insurance coverage was developed by considering our experience in asbestos litigation, the insurance payments made to date by our insurance carriers, existing insurance policies, the industry ratings of the insurers and the advice of insurance coverage counsel with respect to applicable insurance coverage law relating to the terms and conditions of those policies.

As of December 31, 2022, the receivable recorded corresponds to the amount of this potential asbestos liability that we believe is probable to be covered by available insurance.

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

Factors that could cause a decrease in the amount of available coverage or create gaps in coverage include:

changes in law governing the policies, potential disputes and settlements with the carriers regarding the scope of coverage, and insolvencies of one or more of our carriers.

Recent Accounting Pronouncements

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Overview of Recent Developments

COVID-19 pandemic

We continue to manage through the ongoing and unpredictable Covid-19 pandemic, which continues to impact countries in which we do business and worldwide economic activity.

O ur suppliers, business partners and customers have at times experienced negative impacts from the Covid-19 pandemic.

Global supply chains have been disrupted, causing shortages and at times delays in receipt of product.

This disruption of our employees, distributors, suppliers and customers has historically impacted and may continue to impact our sales and future operating results.

We remain focused on the health and well-being of our employees and have undertaken numerous actions within our offices and manufacturing sites that are intended to minimize the spread of COVID-19.

While the duration of the COVID-19 pandemic is currently unknown and it is not possible at this time to estimate the scope and severity of the impact that the pandemic could have on our operations, the measures taken, and those that may be taken in the future, by the governments of countries affected, actions taken to protect employees, changes in customer buying patterns and the impact of the pandemic on various business activities in affected countries and the economy generally, it could adversely affect our financial condition, results of operations and cash flows.

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

Elkay, a market leader of drinking water solutions and commercial sinks, 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 term loan and Elkay's transaction related costs outstanding that were in excess of Elkay's cash and cash equivalents at the time of closing.

Pursuant to the Merger Agreement, we issued 51,564,524 shares of our common stock, which represented approximately 29% of our outstanding common shares immediately following the Merger.

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

We expect that approximately 186,000 of these shares will be returned to us in the first half of calendar year 2023 as a result of lower working capital and cash balances at closing compared to targets stipulated in the Merger Agreement.

We incurred transaction-related costs of approximately $33.7 million for the year ended December 31, 2022.

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

See Item 8, Note 3, Acquisitions for more information.

Discontinued Operations

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

The terms of the operative agreements governing the Spin-Off Transaction included targeted working capital and cash balances at closing of the transaction, which are subject to adjustment after determining final working capital and cash balances held by PMC on that date.

As of the date of this filing, no such adjustments have been made or asserted.

The major components of the Income from discontinued operations, net of tax presented in the consolidated statements of operations during the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020 are included in the table below (in millions):

Year Ended (1) Nine Month Transition Period Ended Year Ended

December 31, 2021 December 31, 2020 March 31, 2020

During the year ended December 31, 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 major components of the Income from discontinued operations, net of tax presented in the consolidated statements of operations during the year ended December 31, 2022, the year ended December 31, 2021, and the nine-month Transition Period ended December 31, 2020 are included in the table below (in millions):

Year Ended (1) Year Ended (2) Nine-Month Transition Period Ended

December 31, 2022 December 31, 2021 December 31, 2020

Net sales $ — $ 973.0 $ 870.4

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Interest expense, net — 4.1 3.3

Gain on extinguishment of debt — — (3.0)

Actuarial loss on pension and postretirement benefit obligations — 4.8 1.3

Other non-operating (income) expenses, net (5.6) (6.4) 4.4

Other non-operating income, net — (5.6) (6.4)

Income from discontinued operations before income tax 2.9 99.1 109.2

Income tax provision (28.0) (25.8) (49.7)

Income tax (provision) benefit 1.8 (28.0) (25.8)

Equity method investment income — 0.3 0.2

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____________________

(1) Results of operations for the year ended December 31, 2022 includes the reversal of certain accruals as a result of costs we are obligated to indemnify Regal Rexnord Corporation for being lower than original estimates.

(2) Results of operations during the year ended December 31, 2021 reflect the period from January 1, 2021 through October 4, 2021, the date on which the Spin-Off Transaction of PMC was completed.

During the year ended March 31, 2019, we completed the sale of the VAG business, which was previously included within the Water Management platform.

The operating results of the VAG business are reported as discontinued operations in the consolidated statements of operations for all periods presented, as the sale of VAG represented a strategic shift that had a major impact on operations and financial results.

The sale price was subject to customary working capital and cash balance adjustments, which were finalized in the year ended March 31, 2020.

As a result of these adjustments and other related costs, we recognized an additional $1.8 million loss on the sale of discontinued operations for the year ended March 31, 2020.

The terms of the sale agreement provided the opportunity to receive contingent consideration, based on, and subject to, the VAG business attainment of Earn-out EBITDA, as defined in the sale agreement.

During the year ended December 31, 2021, we received a $4.2 million cash payment as a result of the VAG businesses performance in its fiscal year ended March 31, 2021, which represented the final period of the Earn-out, and was recorded within income from discontinued operations, net of tax in its consolidated statements of operations.

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

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

During the year ended December 31, 2021, we received a $4.2 million cash payment as a result of the VAG 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 our condensed consolidated statements of operations.

See Item 8, Note 4, Discontinued Operations for more information.

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As such, we expect further expenses related to workforce reductions, potential impairment of assets, lease termination costs, and other facility rationalization costs.

We recorded restructuring charges of $3.7 million, $1.7 million and $1.2 million for the year ended December 31, 2021, the nine month Transition Period ended December 31, 2020 and the fiscal year ended March 31, 2020, respectively.

We recorded restructuring charges of $15.4 million, $3.7 million and $1.7 million for the year ended December 31, 2022, the year ended December 31, 2021, and the nine-month Transition Period ended December 31, 2020, respectively.

See Item 8, Note 5, Restructuring and Other Similar Costs for more information.

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Net sales were $1,281.8 million for the year ended December 31, 2022, a 40.7% increase year over year.

Excluding a 1% increase to net sales associated with foreign currency translation and an 8% increase in net sales resulting from our prior-year acquisition of Hadrian and the 2021 acquisition of Wade, core net sales increased 13% year over year.

The increase in core net sales was driven by increased demand across the majority of our product categories.

Excluding a 31% increase in sales associated with the Elkay merger and prior year acquisition of Wade and a 1% decrease in sales associated with foreign currency translation, core sales increased 11% year over year as nearly all of our product categories contributed to the sales growth.

Income from operations

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Income from operations was $107.1 million for the year ended December 31, 2022, or 8.4% of net sales, compared to income from operations of $107.0 million, or 11.7% of net sales for the year ended December 31, 2021.

Income from operations as a percentage of net sales decreased 270 basis points year-over-year as the favorable impact of sales year over year was more than offset by the year-over-year change in the adjustment to state inventories at last-in-first-out cost, higher year-over-year non-cash stock based compensation expense, the mix impact of the Hadrian acquisition and the benefit of temporary cost reduction actions in the prior year in response to the COVID-19 pandemic.

The year over year change is primarily the result of transaction costs related to the Elkay merger, higher intangible asset and other acquisition related amortization, depreciation, and restructuring costs following our merger 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 increases), productivity savings, and lower non-cash stock-based compensation expense.

Interest expense, net

Interest expense, net was $34.7 million during the year ended December 31, 2021 compared to $45.9 million during the year ended December 31, 2020, primarily due to lower outstanding borrowings following the Spin-Off Transaction refinancing.

Interest expense, net was $26.9 million for the year ended December 31, 2022 compared to $34.7 million for the year ended December 31, 2021, primarily due to lower outstanding borrowings following the Spin-Off Transaction refinancing, partially offset by higher year over year interest rates.

See Item 8, Note 11 Long-Term Debt for more information.

Loss on extinguishment of debt

There was no loss on the extinguishment of debt recognized for the year ended December 31, 2022.

During the year ended December 31, 2021, we recognized a $20.4 million loss on the extinguishment of debt in connection with the refinancing of our debt in connection with the Spin-Off Transaction.

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See Item 8, Note 11 Long-Term Debt for more information.

There was no loss on the extinguishment of debt recognized during the year ended December 31, 2020.

Actuarial (gain) loss on pension and postretirement benefit obligations

Actuarial gain on pension and postretirement benefit obligations for the year ended December 31, 2021, was $(1.2) million compared to a loss of $21.2 million for the year ended December 31, 2020.

The non-cash actuarial gain recognized for the year ended December 31, 2021, was primarily due to a year over year increase in discount rates assumptions utilized in performing the annual remeasurement of our defined benefit plans.

The non-cash actuarial loss recognized for the year ended December 31, 2020, was primarily due to favorable asset performance and contributions made to the plan partially offset by decreases in the year over year discount rate assumptions utilized within the annual remeasurement of our defined benefit plans.

Actuarial gain on pension and postretirement benefit obligations

Actuarial gain on pension and postretirement benefit obligations for the year ended December 31, 2022, was $1.9 million compared to a gain of $1.2 million for the year ended December 31, 2021.

The non-cash actuarial gain recognized for the year ended December 31, 2022, was primarily due to a year over year increase in discount rates assumptions utilized in performing the annual remeasurement of our defined benefit plans, partially offset by unfavorable asset performance.

The non-cash actuarial gain recognized for the year ended December 31, 2021, was primarily due to a year over year increase in the discount rate assumptions utilized within the annual remeasurement of our defined benefit plans.

See Item 8, Note 16 Retirement Benefits for more information.

Other expense, net

Other expense, net for the year ended December 31, 2021, was $0.7 million compared to other expense, net of $2.5 million for the year ended December 31, 2020.

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

The year-over-year change is primarily driven by changes in foreign currency rates and lower interest cost within the non-service cost components of our defined benefit plans.

Other income (expense), net

Other income, net for the year ended December 31, 2022, was $1.7 million compared to other expense, net of $0.7 million for the year ended December 31, 2021.

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

The year-over-year change is primarily driven by income recognized in the year ended December 31, 2022 in connection with an insurance settlement, partially offset by a charge recognized for the amount by which our estimated asbestos exposures exceed our estimated insurance coverage available.

Provision for income taxes

The income tax provision for the year ended December 31, 2022 was $26.8 million, or an effective tax rate of 32.0%.

The effective income tax rate for the year ended December 31, 2021 was below the U.S.

federal statutory rate of 21% primarily due to the recognition of income tax benefits associated with share-based payments partially offset by the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the increase in the valuation allowance associated with certain state net operating loss carryforwards, the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not and the accrual of various state income taxes.

The income tax provision for the year ended December 31, 2020 was $9.5 million, or an effective tax rate of 24.9%.

The effective income tax rate for the year ended December 31, 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.

federal statutory rate of 21% primarily due to non-deductible acquisition costs associated with the Merger, the accrual of foreign income taxes, which are generally above the U.S.

The income tax provision for the year ended December 31, 2021 was $2.7 million, or an effective tax rate of 5.2%.

The effective income tax rate for the year ended December 31, 2021 was below the U.S.

federal statutory rate of 21% primarily due to the recognition of income tax benefits associated with share-based payments, slightly offset by the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the increase in the valuation allowance associated with certain state NOL carryforwards, the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not and the accrual of various state income taxes.

Net income from continuing operations

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Diluted net income per share from continuing operations was $0.37 for the year ended December 31, 2022, as compared to $0.40 per share for the year ended December 31, 2021.

Net income attributable to Zurn common stockholders

Our net income attributable to Zurn common stockholders for the year ended December 31, 2021, was $120.9 million compared to $146.7 million for the year ended December 31, 2020.

Diluted net income per share attributable to Zurn common stockholders was $0.97 for the year ended December 31, 2021, compared to $1.19 for the year ended December 31, 2020.

The income from discontinued operations, net of tax, was $71.2 million for the year ended December 31, 2021 compared to $118.1 million for the year ended December 31, 2020.

The year-over-year change in net income from discontinued operations, net of tax, is due to the PMC results for the year ended December 31, 2021 only representing activity through the Spin-Off Transaction date and the recognition of approximately $60.0 million in costs associated with completing the Spin-Off Transaction.

The year-over-year change in net income attributable to Zurn common stockholders is primarily the result of the factors described above.

Nine Months Ended December 31, 2020 Compared with the Nine Months Ended December 31, 2019

Net income for the year ended December 31, 2022, was $61.7 million compared to $120.9 million for the year ended December 31, 2021.

Diluted net income per share was $0.40 for the year ended December 31, 2022, compared to $0.97 for the year ended December 31, 2021.

Income from discontinued operations, net of tax, was $4.7 million for the year ended December 31, 2022 compared to $71.2 million for the year ended December 31, 2021.

The year-over-year change in net income from discontinued operations, net of tax, is due to the completion of the PMC Spin-Off Transaction in the year ending December 31, 2021.

The year-over-year change in net income is primarily the result of the factors described above.

Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020

(Dollars in Millions)

Nine Months Ended

December 31, 2021 December 31, 2020 Change % Change

Net sales $ 910.9 $ 746.1 $ 164.8 22.1 %

Net sales were $562.7 million for the nine months ended December 31, 2020, a 6.8% increase year over year.

Excluding a 4% increase in net sales associated with our acquisitions of Just Manufacturing and Hadrian, core net sales increased 3% year over year.

The increase in core net sales was primarily the result of increased demand for our touchless and hygienic solutions partially offset by reduced overall market demand resulting from the COVID-19 pandemic.

Income (loss) from operations

Net sales were $910.9 million for the year ended December 31, 2021, a 22.1% increase year over year.

Excluding a 1% increase to net sales associated with foreign currency translation and an 8% increase in net sales resulting from our 2020 acquisition of Hadrian and the 2021 acquisition of Wade, core net sales increased 13% year over year.

The increase in core net sales was driven by increased demand across the majority of our product categories.

Income from operations

(Dollars in Millions)

Nine Months Ended

December 31, 2021 December 31, 2020 Change % Change

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11.7 % 14.4 % (2.7) %

Income from operations was $81.0 million for the nine months ended December 31, 2020, or 14.4% of net sales, compared to income from operations of $77.4 million, or 14.7% of net sales, for the nine months ended December 31, 2019.

Income from operations as a percentage of net sales decreased 30 basis points year-over-year as incremental restructuring costs, purchase accounting fair value adjustments and non-cash stock option expense more than offset the incremental profit generated on higher sales and benefits associated with our ongoing cost reduction and productivity initiatives.

Income from operations was $107.0 million for the year ended December 31, 2021, or 11.7% of net sales, compared to income from operations of $107.7 million, or 14.4% of net sales, for the year ended December 31, 2020.

Income from operations as a percentage of net sales decreased 270 basis points year-over-year as the favorable impact of increased sales was more than offset by the change in the adjustment to state inventories at last-in-first-out cost, higher non-cash stock-based compensation expense, the mix impact of the Hadrian acquisition and the benefit of temporary cost reduction actions in the prior year in response to the COVID-19 pandemic.

Interest expense, net

Interest expense, net was $33.3 million during the nine months ended December 31, 2020 compared to $44.0 million in during the nine months ended December 31, 2019.

The decrease in interest expense as compared to the prior year's period is primarily a result of the impact of lower outstanding borrowings and lower average interest rates following the $100.0 million voluntary prepayment and refinancing of our term loan in 2019.

See Item 8, Note 11 Long-Term Debt for more information.

Loss on extinguishment of debt

During the nine months ended December 31, 2019, we recognized a $2.0 million loss on the extinguishment of debt in connection with the refinancing of our term loan and a $100.0 million voluntary prepayment made on our term loan during the period.

There were no gains or losses on debt extinguishment recognized during the nine month ended December 31, 2020.

Actuarial loss on pension and postretirement benefit obligations

Actuarial loss on pension and postretirement benefit obligations for the nine months ended December 31, 2020 was $0.3 million.

There were no gains or losses on pension and postretirement benefits during the nine months ended December 31, 2019.

The non-cash actuarial loss recognized for the nine months ended December 31, 2020, was primarily due to favorable asset performance and contributions made to the plan partially offset by decreases in the discount rate assumptions utilized within the annual remeasurement of our defined benefit plans.

During the year ended December 31, 2021, we recognized a $20.4 million loss on the extinguishment of debt in connection with the refinancing of our debt in connection with the Spin-Off Transaction.

The loss on extinguishment of debt was comprised of $16.2 million of refinancing related costs, as well as a non-cash write-off of unamortized debt issuance costs associated with the previously outstanding debt of $4.2 million.

See Item 8, Note 11 Long-Term Debt for more information.

There was no loss on the extinguishment of debt recognized during the year ended December 31, 2020.

Actuarial gain (loss) on pension and postretirement benefit obligations

Actuarial gain on pension and postretirement benefit obligations for the year ended December 31, 2021, was $1.2 million compared to a loss of $21.2 million for the year ended December 31, 2020.

See Item 8, Note 16 Retirement Benefits for more information.

Other expense, net

Other expense, net for the nine months ended December 31, 2020 was $1.9 million compared to other expense, net of $0.6 million for the nine months ended December 31, 2019.

Other expense, net for the year ended December 31, 2021, was $0.7 million compared to other expense, net of $2.5 million for the year ended December 31, 2020.

Other expense, net consists primarily of gains and losses from foreign currency transactions, the non-service cost components of net periodic benefit costs associated with our defined benefit plans and other non-operational gains and losses.

The year-over-year change is primarily driven by changes in foreign currency rates and lower interest cost within the non-service cost components of our defined benefit plans.

Provision for income taxes

The income tax provision for the nine months ended December 31, 2020 was $10.5 million, or an effective tax rate of 23.1%.

The effective income tax rate for the nine months ended December 31, 2020 was above the U.S.

The income tax provision for the year ended December 31, 2021 was $2.7 million, or an effective tax rate of 5.2%.

The effective income tax rate for the year ended December 31, 2021 was below the U.S.

federal statutory rate of 21% primarily due to the recognition of income tax benefits associated with share-based payments slightly offset by the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the increase in the valuation allowance associated with certain state NOL carryforwards, the accrual of unrecognized income tax benefits in which such realization is not deemed more-likely-than-not and the accrual of various state income taxes.

The income tax provision for the year ended December 31, 2020 was $9.5 million, or an effective tax rate of 24.9%.

The effective income tax rate for the year ended December 31, 2020 was above the U.S.

federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue

Code and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments and the reduction of the valuation allowance associated with certain state net operating loss carryforwards.

The income tax provision for the nine months ended December 31, 2019 was $5.4 million, or an effective tax rate of 17.5%.

The effective income tax rate for the nine months ended December 31, 2019 was below the U.S.

federal statutory rate of 21% primarily due to the recognition of certain previously unrecognized tax benefits generally due to the lapse of the applicable statutes of limitations and the recognition of income tax benefits associated with share-based payments, partially offset by the accrual of foreign income taxes, which are generally above the U.S.

Net income from continuing operations

Our net income from continuing operations for the nine months ended December 31, 2020 was $35.0 million, compared to net income from continuing operations of $25.4 million for the nine months ended December 31, 2019, as a result of the factors described above.

Diluted net income per share from continuing operations was $0.28 for the nine months ended December 31, 2020, as compared to $0.10 per share for the nine months ended December 31, 2019.

Net income attributable to Zurn common stockholders

Our net income attributable to Zurn common stockholders for the nine months ended December 31, 2020, was $118.2 million compared to $137.2 million for the nine months ended December 31, 2019.

Diluted net income per share attributable to Zurn common stockholders was $0.96 for the nine months ended December 31, 2020, compared to $1.24 for the nine months ended December 31, 2019.

The income from discontinued operations, net of tax, was $83.2 million for the nine months ended December 31, 2020 compared to $126.2 million for the nine months ended December 31, 2019.

The year-over-year change in net income attributable to Zurn common stockholders is primarily the result of the factors described above, partially offset by the reduction of dividends paid on shares of preferred stock, which were converted to common stock during the nine months ended December 31, 2019.

Our net income from continuing operations for the year ended December 31, 2021, was $49.7 million, compared to net income from continuing operations of $28.6 million for the year ended December 31, 2020, as a result of the factors described above.

Diluted net income per share from continuing operations was $0.40 for the year ended December 31, 2021, as compared to $0.23 per share for the year ended December 31, 2020.

Net income for the year ended December 31, 2021, was $120.9 million compared to $146.7 million for the year ended December 31, 2020.

Diluted net income per share was $0.97 for the year ended December 31, 2021, compared to $1.19 for the year ended December 31, 2020.

Income from discontinued operations, net of tax, was $71.2 million for the year ended December 31, 2021 compared to $118.1 million for the year ended December 31, 2020.

The year-over-year change in net income is primarily the result of the factors described above.

Non-GAAP Financial Measures

Non-GAAP financial measures are intended to supplement and not replace financial measures prepared in accordance with GAAP.

Core sales excludes the impact of acquisitions (such as the Hadrian, Just Manufacturing, Stainlessdrains.com, and World Dryer acquisitions), divestitures (such as PMC) and foreign currency translation.

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

Management believes that core sales facilitates easier and more meaningful comparisons of our net sales performance with prior and future periods and to our peers.

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Adjusted EBITDA (as described below in "Covenant Compliance") is an important measure because, under our credit agreement, our ability to incur certain types of acquisition debt and certain types of subordinated debt, make certain types of acquisitions or asset exchanges, operate our business and make dividends or other distributions, all of which will impact our financial performance, is impacted by our Adjusted EBITDA, as our lenders measure our performance with a net first lien leverage ratio by comparing our senior secured bank indebtedness to our Adjusted EBITDA (see "Covenant Compliance" for additional discussion of this ratio, including a reconciliation to our net income).

We reported net income available to Zurn common stockholders in the year ended December 31, 2021, of $120.9 million and Adjusted EBITDA for the same period of $195.8 million.

We reported net income in the year ended December 31, 2022, of $61.7 million and Adjusted EBITDA for the same period of $264.6 million.

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

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Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control.

Certain covenants contained in the credit agreement restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to meet a maximum total net leverage ratio of 5.00 to 1.0 as of the end of each fiscal quarter (it was 2.3 to 1.0 at December 31, 2021).

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 Net First Lien Leverage Ratio of 5.0 to 1.0 as of the end of each fiscal quarter (the ratio was 1.5 to 1.0 at December 31, 2022).

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.

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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.

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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 addition, certain of these expenses added back in calculating Adjusted EBITDA 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.

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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 year ended December 31, 2021.

Set forth below is a reconciliation of net income to Adjusted EBITDA for the year ended December 31, 2022.

(in millions) Year Ended December 31, 2022

Net income attributable to Zurn common stockholders $ 120.9

Net income $ 61.7

Income from discontinued operations, net of tax (1) (4.7)

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Actuarial gain on pension and postretirement benefit obligations (1.9)

Other expense, net (2) 0.7

Loss on the extinguishment of debt 20.4

Other income, net (2) (1.7)

Interest expense, net 26.9

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Stock-based compensation expense 25.0

LIFO adjustments (4) 14.1

Merger costs (4) 33.7

LIFO expense (5) 9.7

Acquisition-related fair value adjustment 18.9

Other, net (6) 0.3

Subtotal of adjustments to EBITDA 103.0

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Consolidated indebtedness (8) $ 438.3

Total net leverage ratio (7) 2.3

Net First Lien Leverage Ratio (9) 1.46

____________________

(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 income, net consists primarily of gains and losses from foreign currency transactions, the non-service cost components of net periodic benefit costs associated with our defined benefit plans and other non-operational gains and losses.

(3) Restructuring and other similar charges is comprised of costs associated with workforce reductions, lease termination costs, and other facility rationalization costs.

See Item 8, Note 5, Restructuring and Other Similar Charges for more information.

(4) 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.

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

The pro forma adjustment includes the period from January 1, 2021, through the date of the Wade Drains acquisition.

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

(7) Represents a pro forma adjustment to include Adjusted EBITDA related to the merger with Elkay, which was permitted by our credit agreement.

The pro forma adjustment includes the period from January 1, 2022, through the date of the Elkay Merger.

See Item 8, Note 3, Acquisitions for more information.

(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 $97.6 million (as defined by the credit agreement) at December 31, 2022.

(7) Our credit agreement defines the total net leverage ratio as the ratio of consolidated indebtedness (as described above) to Adjusted EBITDA for the trailing four fiscal quarters.

(9) Our credit agreement defines the Net First Lien Leverage Ratio as the ratio of consolidated indebtedness (as described above) to Adjusted EBITDA for the trailing four fiscal quarters.

Liquidity and Capital Resources

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As of December 31, 2022, the available borrowings under our credit facility were reduced by $7.5 million due to outstanding letters of credit.

As of December 31, 2020, we had $255.6 million of cash and cash equivalents (inclusive of $193.3 million of cash and cash equivalents from the discontinued operation) and $339.2 million of additional borrowing capacity ($261.0 million of available borrowings under our prior revolving credit facility and $78.2 million available under our prior accounts receivable securitization program).

As of December 31, 2020, the available borrowings under our prior credit facility and accounts receivable securitization were reduced by $3.0 million and $7.5 million, respectively, due to outstanding letters of credit.

As of December 31, 2021, we had $96.6 million of cash and cash equivalents and $193.9 million of additional borrowing capacity.

As of December 31, 2021, the available borrowings under our credit facility were reduced by $6.1 million, due to outstanding letters of credit.

Our revolving credit facility is available to fund our working capital requirements, capital expenditures and other general corporate purposes.

We believe this resource is adequate for expected needs.

Amounts below include amounts attributable to our discontinued operations, unless otherwise noted.

Amounts below include activities attributable to our discontinued operations, unless otherwise noted.

In addition, cash flows for the year ended December 31, 2020 include our continuing operations and discontinued operations for the entire period, while the year ended December 31, 2021 only includes the cash flows associated with our PMC platform for the period from January 1, 2021 to October 4, 2021, the date the Spin-Off Transaction was completed.

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Year Ended December 31, 2022 Compared with the Year Ended December 31, 2021

Net cash provided by operating activities in the year ended December 31, 2022, was $97.0 million compared to $223.6 million in the year ended December 31, 2021 due to lower net income as a result of the Spin-Off Transaction and timing of payments on accounts payable and accrued expenses.

Cash used for investing activities was $6.6 million in the year ended December 31, 2022 compared to $21.9 million in the year ended December 31, 2021.

Investing activities in the year ended December 31, 2022, included $7.6 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 Transaction, the receipt of $9.5 million in connection with an insurance settlement and $1.3 million from the sale of certain long-lived assets.

Investing activities for the year ended December 31, 2021, included $17.1 million of cash used to fund the acquisitions of Wade and ATS GREASEwatch, $23.3 million of capital expenditures, partially offset by the receipt of $18.5 million in connection with the disposition of certain long-lived assets.

Cash used for financing activities was $61.1 million in the year ended December 31, 2022 compared to cash used for financing activities of $356.2 million in the year ended December 31, 2021.

Financing activities in the year ended December 31, 2022 included $32.5 million of cash for the payment of dividends on our common stock, $24.7 million of cash for repurchases of our common stock, $5.7 million of net cash payments on outstanding debt, which were partially offset by $1.8 million of net cash proceeds associated with stock option exercises.

During the year ended December 31, 2021, we utilized a net $311.5 million of cash related to the Spin-Off Transaction of PMC, $0.9 million of cash for repurchases of our common stock and $36.4 million of cash for the payment of dividends on our common stock.

Cash used for financing activities during the year ended December 31, 2021 also included $24.9 million of cash proceeds associated with stock option exercises, more than offset by $32.3 million of cash used for the payment of withholding taxes on employees' share-based payment awards.

Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020

Net cash provided by operating activities in the year ended December 31, 2021, was $223.6 million compared to $320.2 million in the year ended December 31, 2020 due to lower net income as a result of the Spin-Off Transaction and investments in working capital.

Cash used for investing activities was $21.9 million in the year ended December 31, 2021 compared to $196.6 million in the year ended December 31, 2020.

Investing activities in the year ended December 31, 2021, included $17.1 million of net cash used to fund the acquisitions of Wade Drains and ATS GREASEwatch, whereas the year ended December 31, 2020, included $161.4 million of net cash used in connection with acquisitions of Hadrian, Just Manufacturing and the remaining non-controlling interest in a PMC joint venture.

Investing activities in the year ended December 31, 2021, included $17.1 million of net cash used to fund the acquisitions of Wade and ATS GREASEwatch, whereas the year ended December 31, 2020, included $161.4 million of net cash used in connection with acquisitions of Hadrian, Just Manufacturing and the remaining non-controlling interest in a PMC joint venture.

We invested $23.3 million in capital expenditures in the year ended December 31, 2021, compared to $44.2 million in the year ended December 31, 2020.

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Cash used for financing activities during the year ended December 31, 2021 also includes $24.9 million of cash proceeds associated with stock option exercises, more than offset by $32.3 million of cash used for the payment of withholding taxes on employees' share-based payment awards.

During the year ended December 31, 2020, we utilized a net $5.7 million of cash for payments on outstanding debt, $140.0 million of cash for repurchases of our common stock and $38.6 million of cash for the payment of dividends on our common stock.

Cash used for financing activities during the year ended December 31, 2020 also includes $37.5 million of cash proceeds associated with stock option exercises, partially offset by $9.4 million of cash used for the payment of withholding taxes on employees' share-based payment awards.

Nine Months Ended December 31, 2020 Compared with the Nine Months Ended December 31, 2019

Net cash provided by operating activities in the nine months December 31, 2020, was $196.3 million compared to $174.7 million in the nine months ended December 31, 2019.

The timing of payments on accrued expenses was partially offset by lower net income generated during the nine months ended December 31, 2020.

Cash used for investing activities was $122.5 million in the nine months ended December 31, 2020 compared to $49.0 million in the nine months ended December 31, 2019.

Investing activities in the nine months ended December 31, 2020, included $102.0 million of net cash used to fund the acquisitions of Hadrian and the remaining non-controlling interest in a PMC joint venture, whereas the nine months ended December 31, 2019, included $25.1 million of net cash used in connection with acquisitions of Stainlessdrains.com and the remaining non-controlling interest in a different PMC joint venture.

We invested $28.3 million in capital expenditures in the nine months ended December 31, 2020, compared to $25.5 million in the nine months ended December 31, 2019.

We also received $7.8 million in connection with the disposition of certain long-lived assets in the nine months ended December 31, 2020, compared to $2.9 million in the nine months ended December 31, 2019.

Cash used for financing activities was $409.6 million in the nine months ended December 31, 2020 compared to $138.5 million in the nine months ended December 31, 2019.

During the nine months ended December 31, 2020, we utilized a net $330.4 million of cash for payments on outstanding debt, $59.3 million of cash for repurchases of our common stock and $28.8 million of cash for the payment of dividends on our common stock.

Cash used for financing activities during the nine months ended December 31, 2020 also includes $18.3 million of cash proceeds associated with stock option exercises, partially offset by $9.4 million of cash used for the payment of withholding taxes on employees' share-based payment awards.

During the nine months ended December 31, 2019, we utilized a net $110.3 million of cash for payments on outstanding debt (including $100.0 million for a voluntary prepayment on our term loan), $20.0 million for repurchases of our common stock and $17.4 million for the payment of preferred stock dividends.

Cash used for financing activities during the nine months ended December 31, 2019 also includes $16.8 million of cash proceeds associated with stock option exercises, partially offset by $7.6 million of cash used for the payment of withholding taxes on employees' share-based payment awards.

Cash used for financing activities during the year ended December 31, 2020 also included $37.5 million of cash proceeds associated with stock option exercises, partially offset by $9.4 million of cash used for the payment of withholding taxes on employees' share-based payment awards.

Tabular Disclosure of Contractual Obligations

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1 Year 1-3 Years 3-5 Years More than

Term loans (1) $ 550.0 $ 5.5 $ 11.0 $ 11.0 $ 522.5

Term loans and finance lease obligations (1) $ 545.1 $ 5.7 $ 11.4 $ 11.0 $ 517.0

Interest on long-term debt obligations (2) 194.9 34.7 68.3 66.9 25.0

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(1) Excludes unamortized debt issuance costs of $9.2 million at December 31, 2022.

(2) Interest on long-term debt obligations represents the cash interest expense using a LIBOR-based forecast.

(2) Interest on long-term debt obligations represents the cash interest expense using LIBOR as of December 31, 2022.

(3) Represents expected pension and post-retirement contributions and benefit payments to be paid directly by the Company.

Contributions and benefit payments beyond fiscal 2027 cannot be reasonably estimated.

Contributions and benefit payments beyond fiscal 2027 cannot be estimated.

No provision has been made for U.S.

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As of December 31, 2022 we had $535.9 million of total indebtedness outstanding as follows (in millions):

Total Debt at December 31, 2021 Current Maturities of Long-Term Debt Long-term

Term loans (1) $ 539.2 $ 5.5 $ 533.7

Other subsidiary debt (2) 0.3 0.1 0.2

Total Debt at December 31, 2022

Current Maturities of Long-Term Debt Long-term

Term loan (1) $ 535.3 $ 5.5 $ 529.8

Finance leases 0.6 0.2 0.4

Total $ 535.9 $ 5.7 $ 530.2

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(1) Includes unamortized original issue discount and debt issuance costs of $9.2 million at December 31, 2022.

(2) Consists of finance lease obligations.

See more information related to finance leases within Item 8, Note 14, Leases.

See Item 8, Note 11, Long-Term Debt for a description of our outstanding indebtedness.

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As of December 31, 2022, our outstanding borrowings under the term loan facility were $535.3 million (net of $9.2 million unamortized debt issuance costs) and bore an effective interest rate of 6.39%, determined as London Interbank Offered Rate ("LIBOR") (subject to a 0.5% floor) plus an applicable margin of 2.00%.

During the twelve months ended December 31, 2021 the weighted-average interest rate was 2.07%.

During the year ended December 31, 2022, the weighted-average interest rate was 4.00%.

Our net income is affected by changes in market interest rates on our variable-rate obligations.

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Therefore, a 100 basis point increase in LIBOR above where it closed as of December 31, 2022 would increase the annual interest expense under our term loan facility by approximately $5.5 million.

Further, every 100 basis point increase in LIBOR above our 0.5% LIBOR floor would increase the annual interest expense under our term loan facility by approximately $5.5 million.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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-K

Item 7. Management’s Discussion and Analysis