What changed in this filing

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Item 1. Financial Statements

2023-04-25 compared with 2022-10-25 · 185 added, 377 removed, 400 unchanged (58% of the section changed)

3 unchanged sentences

(in Millions, except share amounts)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Current assets:

1 unchanged sentence

Receivables, net 223.0 219.7

Inventories, net 400.2 184.5

Inventories 349.1 366.7

Income taxes receivable 10.2 18.3

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shares issued and outstanding:

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

175,132,260 at March 31, 2023 and 176,876,406 at December 31, 2022

Additional paid-in capital 2,851.9 2,853.1

7 unchanged sentences

(in Millions, except share and per share amounts)

Three Months Ended Nine Months Ended

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

Three Months Ended

March 31, 2023 March 31, 2022

Net sales $ 372.1 $ 239.6

4 unchanged sentences

Amortization of intangible assets 14.7 3.0

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

Income from operations 43.7 43.9

Non-operating expense:

Interest expense, net ( 9.6 ) ( 4.8 )

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

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

Other (expense) income, net ( 2.4 ) 0.3

Income before income taxes 31.7 39.4

Provision for income taxes ( 9.1 ) ( 10.0 )

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

Net income from continuing operations 22.6 29.4

Income from discontinued operations, net of tax 0.2 0.8

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

Basic net (loss) income per share:

Net income $ 22.8 $ 30.2

Basic net income per share:

Continuing operations $ 0.13 $ 0.23

Discontinued operations $ 0.00 $ 0.01

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

Diluted net (loss) income per share:

Net income $ 0.13 $ 0.24

Diluted net income per share:

Continuing operations $ 0.13 $ 0.23

Discontinued operations $ 0.00 $ 0.01

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

Net income $ 0.13 $ 0.24

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

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(in Millions)

Three Months Ended Nine Months Ended

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

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

Three Months Ended

March 31, 2023 March 31, 2022

Net income $ 22.8 $ 30.2

Other comprehensive income (loss):

Foreign currency translation adjustments ( 0.1 ) 2.0

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

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

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

Other comprehensive (loss) income, net of tax ( 0.1 ) 2.0

Total comprehensive income $ 22.7 $ 32.2

See notes to the condensed consolidated financial statements.

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(in Millions)

Nine Months Ended

September 30, 2022 September 30, 2021

Three Months Ended

March 31, 2023 March 31, 2022

Operating activities

Net income $ 22.8 $ 30.2

Adjustments to reconcile net income to cash provided by operating activities:

Adjustments to reconcile net income to cash provided by (used for) operating activities:

Depreciation 8.1 2.3

Amortization of intangible assets 14.7 3.0

Loss (gain) on dispositions of long-lived assets 0.3 ( 10.1 )

Deferred income taxes 0.9 4.6

7 unchanged sentences

Accruals and other ( 24.1 ) ( 38.4 )

Cash provided by operating activities 12.6 245.8

Cash provided by (used for) operating activities 5.0 ( 53.9 )

Investing activities

Expenditures for property, plant and equipment ( 5.2 ) ( 0.8 )

Acquisitions, net of cash acquired ( 44.8 ) ( 3.4 )

Proceeds from dispositions of long-lived assets — 1.3

Proceeds associated with divestiture of discontinued operations — 35.0

Cash used for investing activities ( 12.8 ) ( 6.5 )

Cash (used for) provided by investing activities ( 5.2 ) 35.5

Financing activities

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Effect of exchange rate changes on cash, cash equivalents and restricted cash 0.5 0.2

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

Decrease in cash, cash equivalents and restricted cash ( 50.0 ) ( 23.4 )

Cash, cash equivalents and restricted cash at beginning of period 124.8 96.6

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Notes to Condensed Consolidated Financial Statements

September 30, 2022

March 31, 2023

Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements included herein have been prepared by Zurn Elkay Water Solutions Corporation (formerly known as Zurn Water Solutions Corporation) (“Zurn Elkay” or the “Company”) in accordance with accounting principles generally accepted in the United States ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission.

The unaudited condensed consolidated financial statements included herein have been prepared by Zurn Elkay Water Solutions Corporation (“Zurn Elkay” or the “Company”) in accordance with accounting principles generally accepted in the United States ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

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These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

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

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

The Company's product portfolio includes professional grade water control and safety, water distribution and drainage, drinking water, finish plumbing, hygienic, environmental and site works products for public and private spaces that deliver superior value to building owners, positively impact the environment and human hygiene and reduce product installation time.

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

The Company operates in a disciplined way and the Zurn Elkay Business System (“ZEBS”), described below, is its 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 the Company's business.

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

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

Spin-Off of Process & Motion Control Segment

On October 4, 2021, the Company completed a Reverse Morris Trust tax-free spin-off transaction (the “Spin-off Transaction”) in which (i) substantially all the assets and liabilities of the Company's Process & Motion Control ("PMC") business were transferred to a newly created subsidiary, Land Newco, Inc.

(“Land”), (ii) the shares of Land were distributed to the Company's 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.

As a result of the Spin-Off Transaction, in accordance with authoritative guidance, the operating results of PMC are reported as discontinued operations in the condensed consolidated statements of operations for all prior periods presented.

The condensed consolidated statements of cash flows has not been adjusted to separately disclose cash flows related to the discontinued operations.

See Note 4, Discontinued Operations for additional information.

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

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

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

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

The Company's product portfolio includes professional grade water 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.

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

The Company operates in a disciplined way and the Zurn Elkay Business System (“ZEBS”) is its operating philosophy.

Reclassifications

Certain prior year amounts have been reclassified to conform to the presentation used for the three months ended March 31, 2023.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

In December 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU No.

2022-06, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04").

The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate that is expected to be discontinued because of reference rate reform.

The amendments in this update provide optional expedients and exceptions for applying GAAP to instruments affected by reference rate reform if certain criteria are met.

The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

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

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

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

Nine Months Ended September 30, 2022

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

Deferral of the Sunset Date of Topic 848 ("ASU 2022-06").

In 2020, the Board issued Accounting Standards Update No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is described below.

The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate ("LIBOR") would cease being published.

At the time that Update 2020-04 was issued, the UK Financial Conduct Authority ("FCA") had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021.

As a result, the sunset provision was set for December 31, 2022—12 months after the expected cessation date of all currencies and tenors of LIBOR.

In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848.

Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in ASU 2022-06 defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

The amendments in ASU 2022-06 are effective for all entities upon issuance of the update.

The Company did not modify any material contracts due to reference rate reform during the three

months ended March 31, 2023.

On July 1, 2022, the Company completed the Elkay Merger for a purchase price of $ 1,457.8 million.

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

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

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

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

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

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

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

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

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

The purchase price includes $ 1,411.9 million of Zurn's common stock based on Zurn's closing stock price of $ 27.48 on July 1, 2022, and $ 45.9 million of net cash payments for the repayment of Elkay's 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 terms of the Merger Agreement, the Company issued 51,564,524 shares of its common stock, which represented approximately 29 % of outstanding shares immediately following the Merger.

During the three months ended March 31, 2023, the preliminary purchase price was adjusted and is reflected in the purchase price amounts above, following the return of 186,020 of the shares issued at closing to the Company as a result of lower working capital and cash balances at closing compared to targets stipulated in the Merger Agreement.

The shares returned to the Company were canceled upon receipt.

In accordance with the Merger Agreement, the Company increased the size of its Board of Directors to eleven members, and appointed two directors designated by Elkay.

As of March 31, 2023, the Board of Directors consisted of eleven members, including one director designated by Elkay.

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

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

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

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

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

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

Due to the timing of the business combination and the nature of the net assets acquired, at March 31, 2023, the valuation process to determine the fair values is not complete and further adjustments are expected.

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

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

As Reported September 30, 2022 Measurement Period Adjustments As Reported March 31, 2023

Assets acquired:

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Unaudited Pro Forma Information

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

The following unaudited supplemental pro forma financial information presents the financial results from continuing operations for the three months ended March 31, 2022 as if the Elkay Merger had occurred on January 1, 2022.

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

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

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

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

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

Three Months Ended

March 31, 2022

Net sales $ 384.6

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

Net income from continuing operations $ 21.1

Earnings per share from continuing operations

Basic $ 0.50 $ ( 0.03 )

Assuming dilution $ 0.16

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

Fiscal Year 2021

On November 17, 2021, the Company 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 nine months ended September 30, 2022, the Company received a $ 1.1 million cash payment from the sellers of Wade Drains in connection with finalizing the acquisition date trade working capital, which is included in the total cash purchase price above.

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

On April 16, 2021, the Company acquired substantially all of the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch") for a cash purchase price of $ 4.5 million, excluding transaction costs and net of cash acquired.

The Company paid $ 3.8 million to the sellers at closing, with the remaining $ 0.7 million payable to the sellers upon settlement of certain indemnities within two years of closing, ATS GREASEwatch develops, manufactures and markets remote tank monitoring devices, alarms, software and services for various applications and provides technology to enhance and expand our current product offerings.

The acquisitions have been accounted for as business combinations and were recorded by allocating the purchase prices to the fair value of assets acquired and liabilities assumed at the acquisition dates.

The excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill.

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

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

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

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

Pro-forma results of operations and certain other U.S.

GAAP disclosures related to these acquisitions have not been presented because the acquisitions did not significantly impact the Company's condensed consolidated statements of operations or financial position.

Restructuring and Other Similar Charges

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

During the three months ended March 31, 2023, the Company continued to execute various restructuring actions.

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

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

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

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

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

Three Months Ended Nine Months Ended

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

Management expects to continue executing similar initiatives to optimize its operating margin and manufacturing footprint.

As such, the Company expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of assets, lease termination costs and other facility rationalization costs.

The Company's restructuring plans are preliminary and the full extent of related expenses are not yet estimable.

The following table summarizes the Company's restructuring and other similar charges during the three months ended March 31, 2023 and March 31, 2022, (in millions):

Three Months Ended

March 31, 2023 March 31, 2022

Employee termination benefits $ 0.9 $ 1.1

1 unchanged sentence

Total restructuring and other similar costs $ 1.9 $ 1.1

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

The following table summarizes the activity in the Company's restructuring accrual for the three months ended March 31, 2023 (in millions):

Employee termination benefits Contract termination and other associated costs Total

Accrued Restructuring Costs, December 31, 2022 (1) $ 7.8 $ 1.2 $ 9.0

Elkay opening balance sheet accrual 4.7 — 4.7

Charges 0.9 1.0 1.9

Cash payments ( 3.7 ) ( 1.2 ) ( 4.9 )

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

Accrued Restructuring Costs, March 31, 2023 (1) $ 5.0 $ 1.0 $ 6.0

____________________

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

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

(1) As of March 31, 2023, $ 5.9 million of the restructuring accrual is included in other current liabilities and $ 0.1 million is included in other liabilities in the condensed consolidated balance sheets.

As of December 31, 2022, $ 8.4 million of the restructuring accrual is included in other current liabilities and $ 0.6 million is included in other liabilities in the condensed consolidated balance sheets.

Discontinued Operations

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

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

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

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

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

Three Months Ended Nine Months Ended

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

Net sales $ — $ 327.5 $ — $ 973.0

Cost of sales — ( 204.5 ) — ( 598.5 )

Selling, general and administrative expenses — ( 61.0 ) — ( 184.2 )

Restructuring and other similar charges — ( 1.3 ) — ( 2.1 )

Amortization of intangible assets — ( 3.3 ) — ( 9.9 )

Interest expense, net — ( 1.1 ) — ( 4.1 )

Other non-operating income, net — 3.9 — 5.3

On October 4, 2021, the Company completed a Reverse Morris Trust tax-free spin-off transaction (the “Spin-Off Transaction”) in which (i) substantially all the assets and liabilities of the Company's PMC business were transferred to a newly created subsidiary, Land Newco, Inc.

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

The condensed consolidated statements of cash flows for the three months ended March 31, 2023 and March 31, 2022 have not been adjusted to separately disclose cash flows related to the discontinued operations.

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

The major components of the Income from discontinued operations, net of tax presented in the condensed consolidated statements of operations for the three months ended March 31, 2023 and March 31, 2022, are as follows (in millions):

Three Months Ended

March 31, 2023 March 31, 2022

Income from discontinued operations before income tax $ — $ —

Income tax (provision) benefit — ( 12.2 ) 0.8 ( 39.0 )

Equity method investment income — — — 0.3

Non-controlling interest income — — — 0.2

Income tax benefit 0.2 0.8

Income from discontinued operations, net of tax $ 0.2 $ 0.8

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

Nine Months Ended

September 30, 2022 September 30, 2021

Depreciation $ — $ 34.9

Amortization of intangible assets — 9.9

Gain on disposition of assets — ( 10.1 )

Deferred income taxes — 0.5

Other non-cash charges — ( 0.3 )

Stock-based compensation — 13.9

Expenditures for property, plant and equipment — ( 17.5 )

Proceeds from dispositions of long-lived assets — 14.3

Three Months Ended

March 31, 2023 March 31, 2022

Proceeds associated with divestiture of discontinued operations $ — $ 35.0

Repayments of debt — ( 1.6 )

Proceeds from exercise of stock options — 12.8

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

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

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

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

Revenue Recognition

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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 to be recognized as an expense when the products are sold.

The expected costs associated with standard warranties continue to be 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, the Company reduces 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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Revenue by Category

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

Three Months Ended Nine Months Ended

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

The Company designs, procures, manufactures, and markets a comprehensive portfolio of water management solutions.

The Company disaggregates its sales by customer type and geographic location, which the Company believes best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows may be impacted differently by certain economic factors.

The following tables present revenue disaggregated by customer type and the geographic region of the end customer (in millions):

Three Months Ended

Customer Type March 31, 2023 March 31, 2022

Institutional $ 167.9 $ 87.6

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Total $ 372.1 $ 239.6

Three Months Ended Nine Months Ended

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

Three Months Ended

Geography March 31, 2023 March 31, 2022

United States $ 348.9 $ 219.6

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

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

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

Contract liabilities and contract assets as of March 31, 2023 and December 31, 2022 were not material.

The Company had backlog of $ 44.6 million as of March 31, 2023, which represents the most likely amount of consideration expected to be received in satisfying the remaining backlog under open contracts.

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

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

The Company expects to recognize approximately 99 % of the backlog in the remaining nine months of the year ending December 31, 2023, and the remaining approximately 1 % in 2024 and beyond.

Timing of Performance Obligations Satisfied at a Point in Time

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

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

Allowance for Doubtful Accounts

As of March 31, 2023 and December 31, 2022, the contract assets capitalized, as well as amortization recognized in the three months ended March 31, 2023 and March 31, 2022, are not significant and no impairment losses were recognized.

Allowance for Credit Losses

The Company assesses the collectability of customer receivables based on the credit worthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history.

In determining the allowance for doubtful accounts, the Company also considers various factors including the aging of customer accounts and historical write-offs.

In addition, the Company monitors other risk factors, including forward-looking information when establishing adequate allowances for doubtful accounts, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables.

In determining the allowance for credit losses, the Company also considers various factors including the aging of customer accounts and historical write-offs.

In addition, the Company monitors other risk factors, including forward-looking information when establishing allowances for credit losses, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables.

The provision for income taxes for all periods presented is based on an estimated effective income tax rate for the respective fiscal years.

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

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

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

The income tax provision recognized on the loss from operations for the three months ended September 30, 2022 was primarily due to non-deductible transactions costs associated with the Merger, the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, and the accrual of various state income taxes, partially offset by the reduction in the valuation allowance associated with certain state NOL carryforwards.

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

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

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

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

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

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

federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments and the reduction in the valuation allowance associated with certain state NOL carryforwards.

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

The income tax provision was $ 9.1 million for the three months ended March 31, 2023, compared to $ 10.0 million for the three months ended March 31, 2022.

The effective income tax rate for the three months ended March 31, 2023 was 28.7 % versus 25.4 % for the three months ended March 31, 2022.

The effective income tax rate for each of the three months ended March 31, 2023 and the three months ended March 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.

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

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 certain previously unrecognized tax benefits due to the lapse of

the applicable statutes of limitations, and, for the three months ended March 31, 2022, income tax benefits associated with share-based payments.

The Company’s total liability for net unrecognized tax benefits as of March 31, 2023 and December 31, 2022 was $ 5.3 million and $ 5.5 million, respectively.

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

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

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

As of March 31, 2023 and December 31, 2022, the total amount of unrecognized tax benefits includes $ 0.7 million of gross accrued interest and penalties.

The Company recognized $ 0.1 million and $( 0.1 ) million of net interest and penalties as income tax expense (benefit) during the three months ended March 31, 2023 and March 31, 2022, respectively.

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

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Currently, the Company is undergoing routine, periodic income tax examinations in foreign jurisdictions.

During the nine month Transition Period ended December 31, 2020, the Internal Revenue Service (the “IRS”) completed an income tax examination of the Company’s U.S.

consolidated federal income tax returns for the tax years ended March 31, 2016 and 2017.

The Company paid approximately $ 1.5 million upon the conclusion of such examination, all of which was previously accrued in the Company’s financial statements.

In accordance with the terms of the VAG sale agreement, the Company is required to indemnify the purchaser for any future income tax liabilities associated with all open tax years ending prior to, and including, the short period ended on the date of the Company's sale of VAG.

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Earnings per Share

Basic net income per share from continuing and discontinued operations attributable to Zurn Elkay common stockholders is computed by dividing net income from continuing operations and income from discontinued operations attributable to Zurn Elkay common stockholders, respectively, by the corresponding weighted average number of common shares outstanding for the period.

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

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

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

Basic net income per share from continuing and discontinued operations is computed by dividing net income from continuing operations and income from discontinued operations, respectively, by the corresponding weighted average number of common shares outstanding for the period.

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

The computation for diluted net income per share for the three months ended March 31, 2023 and March 31, 2022 excludes 1.2 million and 0.2 million common shares due to their anti-dilutive effects, respectively.

Stockholders' Equity

Stockholders' equity consists of the following (in millions):

Common stock (1) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Non-controlling interest (2) Total stockholders’ equity

Common stock Additional paid-in capital Retained deficit Accumulated other comprehensive loss Total stockholders’ equity

Balance at December 31, 2021 $ 1.3 $ 1,436.9 $ ( 1,236.9 ) $ ( 74.9 ) $ 126.4

Total comprehensive income (loss) — — 50.0 ( 1.8 ) 0.1 48.3

Stock-based compensation expense — 14.2 — — — 14.2

Proceeds from exercise of stock options — 2.8 — — — 2.8

Repurchase of common stock — — ( 0.9 ) — — ( 0.9 )

Common stock dividends ($ 0.09 per share)

— — ( 10.8 ) — — ( 10.8 )

Balance at March 31, 2021 $ 1.2 $ 1,409.9 $ 154.3 $ ( 75.6 ) $ 3.1 $ 1,492.9

Total comprehensive income — — 30.2 2.0 32.2

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

Common stock dividends ($ 0.09 per share)

— — ( 10.8 ) — — ( 10.8 )

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

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

Stock-based compensation expense — 11.3 — — — 11.3

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

Proceeds associated with divestiture of discontinued operations — — 35.0 — 35.0

Common stock dividends ($ 0.03 per share)

— ( 3.8 ) — — ( 3.8 )

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

Balance at March 31, 2022 $ 1.3 $ 1,437.0 $ ( 1,171.7 ) $ ( 72.9 ) $ 193.7

Common stock (1) Additional

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comprehensive

loss Non-controlling interest (2) Total

stockholders’

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Proceeds from exercise of stock options — 0.6 — — 0.6

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

Proceeds associated with divestiture of discontinued operations — — 35.0 — — 35.0

Common stock dividends ($ 0.03 per share)

— ( 3.8 ) — — — ( 3.8 )

Balance at March 31, 2022 $ 1.3 $ 1,437.0 $ ( 1,171.7 ) $ ( 72.9 ) $ — $ 193.7

Total comprehensive income (loss) — — 36.4 ( 2.0 ) — 34.4

Stock-based compensation expense — 3.8 — — — 3.8

Proceeds from exercise of stock options — 1.3 — — — 1.3

Common stock dividends ($ 0.03 per share)

— ( 3.8 ) — — — ( 3.8 )

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

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

Stock-based compensation expense — 7.8 — — — 7.8

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

Elkay Merger (2) — ( 5.1 ) — — ( 5.1 )

Common stock issued to fund defined contribution plans — 0.8 — — 0.8

Repurchase of common stock — — ( 37.0 ) — ( 37.0 )

Common stock dividends ($ 0.07 per share)

— ( 8.7 ) — — ( 8.7 )

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

Balance at March 31, 2023 $ 1.8 $ 2,851.9 $ ( 1,179.1 ) $ ( 75.1 ) $ 1,599.5

____________________

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

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

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

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

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

Refer to Note 4 Discontinued Operations for further detail.

(1) During the three months ended March 31, 2023 and March 31, 2022 , the Company issued 156,319 and 127,001 shares of common stock upon the exercise of stock options, vesting of restricted stock units, and for other common stock issuances, respectively.

(2) During the three months ended March 31, 2023, 186,020 of the shares issued at closing of the Elkay Merger were returned to the Company as a result of lower working capital and cash balances at closing compared to targets stipulated in the Merger Agreement.

The shares returned to the Company were canceled upon receipt.

Refer to Note 2, Acquisition for additional information.

Share Repurchase Program

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On January 27, 2020, the Company's Board of Directors approved increasing the remaining share repurchase authority under the Repurchase Program to $ 300.0 million.

On February 8, 2023, the Company's Board of Directors approved increasing the remaining share repurchase authority under the Repurchase Program to $ 500.0 million.

The Repurchase Program does not require the Company to acquire any particular amount of common stock and does not specify the timing of purchases or the prices to be paid;

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

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

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

During the three months ended March 31, 2023, the Company repurchased 1,682,756 shares of common stock at a total cost of $ 37.0 million at a weighted average price of $ 21.99 per share.

The repurchased shares were canceled by the Company upon receipt.

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

During the three months ended March 31, 2022, the Company did no t repurchase any shares of common stock.

Approximately $ 478.5 million of the existing authority remained under the Repurchase Program at March 31, 2023.

Accumulated Other Comprehensive Loss

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

The changes in accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2023, are as follows (in millions):

Foreign Currency Translation and Other Pension and Postretirement Plans Total

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Other comprehensive loss before reclassifications ( 0.1 ) — ( 0.1 )

Amounts reclassified from accumulated other comprehensive loss — — —

Net current period other comprehensive loss ( 0.1 ) — ( 0.1 )

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

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

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

Three Months Ended Nine Months Ended

September 30, 2021 September 30, 2021 Income Statement Line

Pension and other postretirement plans

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

Provision for income taxes — —

Total net of tax $ — $ ( 0.2 )

Balance at March 31, 2023 $ ( 75.2 ) $ 0.1 $ ( 75.1 )

There were no amounts reclassified from accumulated other comprehensive loss to net income during the three months ended March 31, 2023 and 2022.

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Finished goods $ 273.9 $ 285.9

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Goodwill and Intangible Assets

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

The changes in the net carrying value of goodwill for the three months ended March 31, 2023, are presented below (in millions):

Net carrying amount as of December 31, 2022 $ 777.0

Currency translation adjustments ( 0.7 )

Acquisition (1) 505.0

Purchase accounting adjustments (1) 14.4

Net carrying amount as of September 30, 2022 $ 754.8

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

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

September 30, 2022

Net carrying amount as of March 31, 2023 $ 790.7

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

The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of March 31, 2023 and December 31, 2022 are as follows (in millions):

March 31, 2023

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

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Total intangible assets, net 16 years $ 1,338.9 $ ( 329.2 ) $ 1,009.7

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

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

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

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

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

Intangible asset amortization expense totaled $ 14.7 million and $ 3.0 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

The Company expects to recognize amortization expense on the intangible assets subject to amortization of $ 58.7 million in the year ending December 31, 2023 (inclusive of the $ 14.7 million of amortization expense recognized in the three months ended March 31, 2023), $ 58.7 million in 2024, $ 58.7 million in 2025, $ 58.5 million in 2026, $ 58.5 million in 2027 and $ 58.5 million in 2028.

Other Current Liabilities

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Commissions $ 11.0 $ 9.0

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Term loan (1) $ 534.3 $ 535.3

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____________________

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

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

(1) Includes unamortized debt issuance costs of $ 8.8 million and $ 9.2 million at March 31, 2023 and December 31, 2022, respectively.

Senior Secured Credit Facility

On October 4, 2021, ZBS Global, Inc.

(“Holdings”), Zurn Holdings, Inc., Zurn LLC (together, the “Borrowers”), the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative agent for the lenders (in such capacity, the “Administrative Agent”) entered into a Fourth Amended and Restated First Lien Credit Agreement (the “Credit Agreement”).

(“Holdings”), Zurn Holdings, Inc., Zurn LLC (together, the “Original Borrowers”), the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative agent for the lenders (in such capacity, the “Administrative Agent”) entered into a Fourth Amended and Restated First Lien Credit Agreement as amended by that certain Amendment No.

1 to Fourth Amended and Restated First Lien Credit Agreement dated as of July 1, 2022 (the "Amendment") (as so amended, the “Credit Agreement”).

Pursuant to the Amendment, Elkay joined the Credit Agreement as a borrower (Elkay and the Original Borrowers, collectively, the "Borrowers").

The Credit Agreement is funded by a syndicate of banks and other financial institutions and provides for (i) a $ 550.0 million term loan facility (the “Term Loan”) and (ii) a $ 200.0 million revolving credit facility (the “Revolving Credit Facility”).

The obligations under the Credit Agreement and related documents are secured by liens on substantially all of the assets of Holdings, the Borrowers, and certain subsidiaries of the Borrowers pursuant to a Third Amended and Restated Guarantee and Collateral Agreement, dated as of October 4, 2021 (the "Collateral Agreement"), among Holdings, the Borrowers, the subsidiaries of the Borrowers party thereto, and the Administrative Agent, and certain other collateral documents.

The obligations under the Credit Agreement and related documents are secured by liens on substantially all of the assets of Holdings, the Borrowers, and certain subsidiaries of the Borrowers pursuant to a Third Amended and Restated Guarantee and Collateral Agreement, dated as of October 4, 2021, among Holdings, the Borrowers, the subsidiaries of the Borrowers party thereto, and the Administrative Agent, as supplemented pursuant to that certain Supplement No.

1 dated as of July 1, 2022, executed by Elkay and its domestic subsidiaries, and certain other collateral documents.

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

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

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

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

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

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

As of March 31, 2023, the Borrowers were in compliance with all applicable covenants under the Credit Agreement.

The Credit Agreement amended and restated in its entirety the Company’s Third Amended and Restated First Lien Credit Agreement, as amended (the “Prior Credit Agreement”).

At December 31, 2020, the Prior Credit Agreement was funded by a syndicate of banks and other financial institutions and provided for (i) a $ 625.0 million term loan facility (the “Prior Term Loan”) and (ii) a $ 264.0 million revolving credit facility.

In connection with the 2021 amendment of the Credit Agreement, the Company recognized a $ 20.4 million loss in the prior year on the extinguishment of debt, comprised of refinancing-related costs incurred and a non-cash write-off of debt issuance costs associated with the previous debt outstanding.

The Credit Agreement provides for the issuance of a term loan facility in an aggregate principal amount of $ 550.0 million.

The proceeds of the Term Loan were, together with the dividend received by the Company in connection with the Spin-Off Transaction and cash on hand, used to (i) repay in full the aggregate principal amount outstanding of the Prior Term Loan, together with accrued interest thereon, (ii) redeem the $ 500 million of outstanding principal amount of the Notes, as described below, and (iii) pay related fees and expenses.

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

The Borrowers are required to make quarterly payments of principal in an amount equal to $ 1.4 million on each quarter until the maturity date.

Commencing on March 31, 2022, the Borrowers are required to make quarterly payments of principal in an amount equal to $ 1.4 million on each quarter until the maturity date.

The Term Loan bears interest at the Borrowers’ option, by reference to a base rate or a rate based on LIBOR, in either case plus an applicable margin determined quarterly based on the Borrowers’ Net First Lien Leverage Ratio as of the last day of each fiscal quarter.

If the Net First Lien Leverage Ratio is greater than 1.80 to 1.00, the applicable margin shall equal 1.25 % in the case of base rate borrowings and 2.25 % in the case of LIBOR borrowings.

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

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

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

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

decrease by 0.25 %.

The Borrowers’ Net First Lien Leverage Ratio was 1.63 to 1.00 as of March 31, 2023, and therefore the applicable margin is 2.00 %.

At March 31, 2023 and for the three months then ended, the borrowings under the Term Loan had weighted-average effective interest rates of 6.86 % and 6.53 %, respectively.

Revolving Credit Facility

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

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

The Borrowers’ Net First Lien Leverage Ratio was 1.63 to 1.00 as of March 31, 2023.

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

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

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

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

Finance Leases and Other Subsidiary Debt

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

See Note 18, Leases for further information regarding leases.

At March 31, 2023 and December 31, 2022, there were no amounts borrowed under the Revolving Credit Facility.

As of March 31, 2023 and December 31, 2022, $ 6.3 million and $ 7.5 million of the Revolving Credit Facility was considered utilized in connection with outstanding letters of credit, respectively.

Finance Leases

At March 31, 2023 and December 31, 2022, the Company had finance lease obligations of $ 22.3 million and $ 0.6 million, respectively.

Fair Value Measurements

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

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

Fair Value as of September 30, 2022

The following table provides a summary of the Company's assets and liabilities that were recognized at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 (in millions):

Fair Value as of March 31, 2023

Level 1 Level 2 Level 3 Total

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Deferred compensation plan liabilities 12.1 — — 12.1

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

There were no transfers of assets between levels at March 31, 2023 and December 31, 2022, respectively.

Fair Value of Non-Derivative Financial Instruments

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

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

The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at March 31, 2023 and December 31, 2022, due to the short-term nature of those instruments.

The fair value of long-term debt as of March 31, 2023 and December 31, 2022, was approximately $ 564.0 million and $ 543.1 million, respectively.

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

Acquisition Method of Accounting

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

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

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

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

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

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

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

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

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

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

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

Fair Value Weighted Average Useful Life

Trade name (1) $ 168.7 20

Customer relationships (2) 691.8 16

Fair value of intangible assets acquired 860.5

____________________

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

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

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

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

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

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

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

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

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

Commitments and Contingencies

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

Nine Months Ended

September 30, 2022 September 30, 2021

Three Months Ended

March 31, 2023 March 31, 2022

Balance at beginning of period $ 4.2 $ 1.3

Acquired obligations 3.4 —

Charged to operations 0.5 0.2

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Certain Company subsidiaries are subject to asbestos litigation.

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

As of March 31, 2023, Zurn and numerous other unrelated companies were defendants in approximately 6,000 asbestos related lawsuits representing approximately 7,000 claims.

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

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

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

As of March 31, 2023, the Company estimates the potential liability for the asbestos-related claims described above, as well as the claims expected to be filed in the next ten years , to be approximately $ 79.0 million, of which Zurn expects approximately $ 58.0 million to be paid in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent years.

The $ 79.0 million was developed based on actuarial studies and represents the projected indemnity payout for current and future claims.

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.

As a result, actual liability

could differ from the estimate described herein and could be substantial.

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

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

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

Management estimates that the available insurance to cover this ten-year estimated potential asbestos liability as of March 31, 2023 is $ 72.1 million.

The Company recorded a receivable from its insurance carriers, which corresponds to the amount of this potential asbestos liability that is covered by available insurance and is currently determined to be probable of recovery.

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

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 31, 2023 March 31, 2022

Pension Benefits:

Service cost $ — $ 0.2 $ — $ 0.4

Interest cost $ 3.0 $ 2.1

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Interest cost $ 0.2 $ 0.1

Amortization:

Prior service credit — — — ( 0.2 )

Net periodic benefit cost $ 0.2 $ 0.1

The service cost component of net periodic benefits is presented within Cost of sales and Selling, general and administrative expenses in the condensed consolidated statements of operations, while the other components of net periodic benefit cost are presented within Other income, net.

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

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

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

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

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

Refer to Note 4 Discontinued Operations for further detail.

During the three months ended March 31, 2023 and March 31, 2022, the Company made contributions of $ 0.1 million and $ 0.2 million, respectively, to its U.S.

qualified pension plan trusts.

See Note 16, Retirement Benefits, to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for further information regarding retirement benefits.

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

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

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

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

For the three months ended March 31, 2023 and March 31, 2022, the Company recognized $ 10.3 million and $ 3.9 million of stock-based compensation expense, respectively.

During the three months ended March 31, 2023, the Company granted the following stock options, restricted stock units, performance stock units and common stock to directors, executive officers, and certain other employees:

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

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See Note 15, Stock-Based Compensation, to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, for further information regarding stock-based compensation.

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

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

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

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

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

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

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

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

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

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

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

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

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

Leases Classification September 30, 2022 December 31, 2021

Operating ROU assets Other assets $ 58.7 $ 14.1

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

Total ROU assets $ 59.6 $ 14.6

Operating Other current liabilities $ 8.3 $ 6.1

Finance Current maturities of debt 0.2 0.1

Operating Operating lease liability 51.2 8.9

Finance Long-term debt 0.5 0.2

Total lease liabilities $ 60.2 $ 15.3

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

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

Three Months Ended Nine Months Ended

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

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

Finance lease expenses:

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

Interest on lease liabilities (2) — — — —

Total finance lease expense 0.1 — 0.1 0.1

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

Total lease expense $ 5.2 $ 2.3 $ 10.6 $ 7.3

____________________

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

(2) Included in interest expense, net.

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

Years ending December 31, Operating Leases (1)

Finance Leases (1)

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

2023 12.2 0.3

2024 10.1 0.2

Thereafter 47.4 —

Total future minimum lease payments 87.2 0.8

imputed interest ( 26.2 ) ( 0.1 )

Total lease liabilities $ 61.0 $ 0.7

____________________

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

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

Nine Months Ended

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

Weighted-average remaining lease terms (years):

Operating leases 10.2 3.0

Finance leases 3.3 3.5

Weighted-average discount rate:

Operating leases 6.5 % 3.4 %

Finance leases 5.2 % 3.4 %

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

Nine Months Ended

September 30, 2022 September 30, 2021

Operating cash flows from operating leases $ 6.5 $ 4.8

Operating cash flows from finance leases — —

Financing cash flows from finance leases 0.1 0.1

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

Nine Months Ended

September 30, 2022 September 30, 2021

Operating leases $ 51.3 $ 0.4

Finance leases $ 0.5 $ 0.1

Subsequent Events

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

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

What changed 10-Q

Item 1. Financial Statements