What changed in this filing

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Item 1A. Risk Factors

2024-02-06 compared with 2023-02-14 · 62 added, 54 removed, 249 unchanged (32% of the section changed)

9 unchanged sentences

Our financial performance depends, in large part, on conditions in the markets that we serve in the U.S.

and, to a lessor extent, the global economy generally.

and, to a lesser extent, the global economy generally.

Some of the end markets we serve are highly cyclical, and some at times have experienced greater cyclicality than others.

Any sustained weakness in demand or downturn or uncertainty in the economy, could materially reduce our net sales and profitability.

For example, sales to the construction industry are driven by trends in commercial, institutional, and residential construction, housing starts and trends in residential repair and remodeling.

Consumer confidence, employment rates, weather conditions, interest rates, credit standards and availability of consumer credit and income levels play a significant role in driving demand in commercial and residential construction, repair and remodeling sectors.

For example, sales to the construction industry are driven by trends in institutional, commercial, and residential construction, housing starts and trends in residential repair and remodeling.

Consumer confidence, employment rates, weather conditions, interest rates, credit standards and availability of consumer credit and income levels play a significant role in driving demand in institutional, commercial and residential construction, repair and remodeling sectors.

A drop or weakness in consumer confidence, prolonged adverse weather conditions, lack of availability or increased cost of credit, tightened credit standards or increased unemployment could materially impact demand for and sales of our products and/or result in downward pressure on product pricing and our profit margins, any or all of which could adversely affect our financial results.

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An inability to effectively integrate acquisitions, mergers or other business combinations could adversely affect our business, financial condition, results of operations or cash flows.

Additionally, dispositions or liabilities retained in connection with dispositions could negatively affect us.

Acquisitions, mergers and other business combinations are part of our growth strategy, and we have completed several in the last few years.

We cannot ensure that we will be able to complete any future acquisition, successfully integrate any acquired business or operations, or accomplish our strategic objectives as a result of any such acquisition.

We also sell or divest businesses, products and technologies from time to time.

We cannot ensure that we will be able to complete any future acquisition or divestiture, successfully integrate any acquired business or operations, or accomplish our strategic objectives as a result of any such acquisition or divestiture.

Acquisitions are often undertaken to improve the operating results of either or both of the acquirer and the acquired company and we cannot ensure that we will be successful in this regard.

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Refer to Risks Related to the Merger with Elkay section below for additional considerations.

The loss or financial instability of any significant customer or customers accounting for our backlog could adversely affect our business, financial condition, results of operations or cash flows.

If dispositions are not completed in a timely manner, there may be a negative effect on our cash flows and/or our ability to execute our strategy.

In addition, we may not realize some or all of the anticipated benefits of our dispositions.

From time to time, we have sold or divested businesses, products and technologies.

With respect to some of these former businesses, we may contractually agree to indemnify the counterparties against, or otherwise retain, certain liabilities, including, certain lawsuits, tax liabilities, product liability claims, and environmental matters.

Even without ongoing contractual indemnification obligations, we could be exposed to liabilities arising out of the businesses for certain activities prior to the divestitures.

In addition, certain of the counterparties to those divestitures and/or the divested businesses have agreed to indemnify us or assume certain liabilities relating to those divestitures.

However, there can be no assurance that the indemnity or assumption of liability by the counterparties or divested businesses will be sufficient to protect us against the full amount of these liabilities, or that a counterparty or divested business will be able to fully satisfy its obligations.

Third parties also could seek to hold us responsible for any of the liabilities that a counterparty or divested business agreed to assume.

Even if we ultimately succeed in recovering any amounts for which we were initially held liable, we may be temporarily required to bear these losses ourselves.

The loss or financial instability of any significant customer or customers accounting for our backlog could adversely affect

our business, financial condition, results of operations or cash flows.

A substantial part of our business is concentrated with a few customers, and we have certain customers that are significant to our business.

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We rely on independent distributors and independent sales representatives.

Termination of one or more of our relationships with any of our key independent distributors and / or a substantial number of independent representatives, or an increase in their sales of our competitors’ products could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Termination of one or more of our relationships with any of our key independent distributors and / or a substantial number of independent representatives could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We depend on 1,055 independent sales representatives and approximately 70 third-party warehouses to distribute our products.

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We do not typically enter into hedge transactions to reduce our exposure to purchase price risks and cannot ensure that we would be successful in recouping any increases if these risks were to materialize.

In addition, if we are unable to continue to purchase our required quantities of raw materials on commercially reasonable terms, or at all, or if we are unable to maintain or enter into new purchase contracts for our larger commodities, our business operations could be disrupted and our profitability could be adversely impacted.

The ongoing updates to our Enterprise Resource Planning ("ERP") systems, as well as failures of our data security and information technology infrastructure or cyber security breaches, could cause substantial business interruptions and adversely affect our business.

In addition, if we are unable to continue to purchase our required quantities of raw materials on commercially reasonable terms, or at all, or if we are unable to maintain or

enter into new purchase contracts for our larger commodities, our business operations could be disrupted and our profitability could be adversely impacted.

The ongoing updates to our Enterprise Resource Planning ("ERP") systems, as well as failures of our data security and information technology infrastructure or cybersecurity breaches, could cause substantial business interruptions and adversely affect our business.

Utilizing a phased approach, we continue to update our ERP systems across our Zurn Elkay operations.

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In addition, we depend heavily on information technology infrastructure to manage our business objectives and operations, support our customers’ requirements and protect sensitive information.

There have been significant and increasing instances of data and security breaches, malicious interference with technology systems and industrial espionage involving companies in numerous industries, including cloud providers, and cyber security threats are becoming more complex.

Like other companies, we have experienced these types of threats;

In the regular course of our business, we also handle a range of sensitive security and customer information.

We are subject to laws and rules issued by different agencies concerning safeguarding and maintaining the confidentiality of this information.

Like other companies, we have experienced, and will continue to experience, these types of threats;

however, to date, we have not experienced a material threat or incident.

In addition, at times a large percentage of our workforce may be working remotely in response to outbreaks of infectious disease, which may heighten these risks.

While we have taken steps to maintain and enhance our cyber security by implementing additional security technologies, internal controls, network and data center resiliency, redundancy and recovery processes, upgrading our remote work environment and by obtaining insurance coverage, these measures may be inadequate.

While we have taken steps to maintain and enhance our cybersecurity by implementing additional security technologies, internal controls, network and data center resiliency, redundancy and disaster recovery processes and backup systems, upgrading our remote work environment and by obtaining insurance coverage, these measures may be inadequate and our technology systems could be vulnerable to disability, failures or unauthorized access.

As a result, any inability by us to successfully manage our information systems, or respond effectively to any attack on or interference with our systems, including matters related to system and data security, privacy, reliability, compliance, performance and access, problems related to our systems caused by natural disasters, security breaches or malicious attacks, and any inability of these systems to fulfill their intended business purpose, could impede our ability to record or process orders, manufacture and ship in a timely manner, account for and collect receivables, protect sensitive data of the Company, our customers, our employees, our suppliers and other business partners, comply with our third party obligations of confidentiality and care, or otherwise carry on business in the normal course.

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The physical impacts of climate change may materially adversely affect our business and financial condition.

The physical impact of climate change on our operations are highly uncertain and could differ amongst the geographic regions of relevant markets and areas of operation.

The physical impacts of climate change on our operations are highly uncertain and could differ amongst the geographic regions of relevant markets and areas of operation.

These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures.

The impact of climate change may materially and adversely affect the cost, production and financial performance of our operations.

The impacts of climate change may materially and adversely affect the cost, production and financial performance of our operations.

Further, any impacts to our business and financial condition as a result of climate change are likely to occur over an extended period of time and are therefore difficult to quantify with any degree of specificity.

For example, extreme weather events may result in adverse physical effects on portions of our

infrastructure, which could disrupt our supply chain and ultimately our business operations.

For example, extreme weather events may result in adverse physical effects on portions of our infrastructure, which could disrupt our supply chain and ultimately our business operations.

In addition, disruption of transportation and distribution systems could result in reduced operational efficiency and customer service interruption.

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Equally unpredictable are the responses of national and local governments and health authorities in affected regions to reduce community spread and protect employees, which may include mandatory shutdowns or limitations on all or certain types of business operations.

The ultimate impact of an infectious disease outbreak on our business, depends on the severity, location and duration of outbreaks, and the actions of government and health official in response to the outbreaks, none of which is predictable at this time.

The ultimate impact of an infectious disease outbreak on our business, depends on the severity, location and duration of outbreaks, and the actions of government and health officials in response to the outbreaks, none of which is predictable at this time.

Financial Risks

Our debt levels could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, inhibit us from making beneficial acquisitions, adversely impact our ability to implement our capital allocation strategy and prevent us from making debt service payments.

In addition, changing or increasing interest rates, including the rates under our debt agreements, could adversely affect our business or financial condition.

As a leveraged company, our ability to generate sufficient cash flow from operations to make scheduled payments on our debt will depend on a range of economic, competitive and business factors, many of which are outside our control.

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Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our indebtedness could also have other important consequences with respect to our ability to manage and grow our business successfully, including the following:

Our indebtedness could also have other important consequences with respect to our ability to manage and grow our

business successfully, including the following:

• it may limit our ability to borrow money for our working capital, capital expenditures, strategic initiatives, acquisitions or other purposes;

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• along with the financial and other restrictive covenants in the documents governing our indebtedness, among other things, may limit our ability to borrow additional funds, make acquisitions or capital expenditures, acquire or dispose of assets or take certain of the actions mentioned above, or adversely impact our ability to implement our capital allocation strategy (which includes paying dividends on our common stock), any of which could restrict our operations and business plans.

Furthermore, a substantial portion of our indebtedness, including the senior secured credit facilities, bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates, including the London Interbank Offered Rate ("LIBOR").

The United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer persuade or compel panel banks to submit the rates required to calculate LIBOR.

On March 5, 2021, ICE Benchmark Administration (“IBA”) confirmed it would cease publication of 1 Week and 2 Month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, but it would not cease publication of Overnight, 1, 3, 6 and 12 Month USD LIBOR settings until immediately following the LIBOR publication on June 30, 2023.

The extended cessation date for most USD LIBOR tenors will allow for more time for existing legacy USD LIBOR contracts to mature and provide additional time to continue to prepare for the transition from LIBOR.

The Alternative Reference Rates Committee (“ARCC”), which was convened by the Board of Governors of the Federal Reserve and the Federal Reserve Bank of New York, has identified the Secured Overnight Financing Rate (“SOFR”) as the recommended alternative rate for USD LIBOR.

The composition and characteristics of SOFR are not the same as those of LIBOR.

SOFR is a broad U.S.

Treasury repurchase agreement market financing rate that represents overnight secured funding transactions.

This means that SOFR is fundamentally different from LIBOR in two key respects.

First, SOFR is a secured rate, while LIBOR is an unsecured rate.

Second, SOFR is an overnight rate, while LIBOR represents interbank funding over different maturities.

As a result, there can be no assurance that SOFR or any alternative reference rate will perform in the same way as LIBOR would have at any time, including, without limitation, as a result of changes in interest and yield rates in the market, market volatility or global or regional economic, financial, political, regulatory, judicial or other events.

The agreement governing our senior secured credit facilities provides that if LIBOR becomes unavailable, or the Financial Conduct Authority determines that LIBOR is not a representative index, then SOFR will automatically replace LIBOR for all purposes of such agreement.

Although the consequences of these developments cannot be predicted at this time, should LIBOR, SOFR, or any other alternative reference rate no longer be available, the rates under our variable rate indebtedness could increase and access to capital could be limited.

Additionally, we may continue to be subject to risk on outstanding instruments which rely on LIBOR.

For example, if a contract or instrument is not transitioned to a new reference rate and LIBOR ceases to exist, we may experience increased interest rate risk.

In addition, we may be dependent on third parties to upgrade their systems, software, and other critical functions to assist in our orderly transition from LIBOR.

See Item 7A, Quantitative and Qualitative Disclosures About Market Risk for additional information on our debt that is subject to the LIBOR rate.

We recently amended our credit facilities to switch from eurodollar loans based on LIBOR to term Secured Overnight Financing Rate (“SOFR”) loans.

SOFR is a relatively new reference rate, and its composition and characteristics are not the same as LIBOR.

It is not possible to predict what effect the change to SOFR may have on our interest rates.

As indicated above, SOFR is a relatively new reference rate.

Any failure of SOFR to gain market acceptance could cause the SOFR to be modified or discontinued.

Our current credit facilities provide a mechanism for determining an alternative rate of interest upon the occurrence of certain events related to the discontinuance of SOFR.

The change to SOFR or transition to other alternative rates, whether in connection with borrowings under the current credit facilities, or borrowings under replacement facilities or lines of credit, could expose our future borrowings to less favorable rates.

If the change to SOFR, or other alternative rates, results in increased alternative interest rates or if our lenders have increased costs due to such phase out or changes, then our debt that uses benchmark rates could be affected and, in turn, our cash flows and interest expense could be adversely impacted.

Also, in spite of the limitations in our credit agreement, we may still incur significantly more debt, which could intensify the risks described above on our business, results and financial condition.

3 unchanged sentences

• incur or guarantee additional indebtedness;

• pay dividends on our capital stock or redeem, repurchase, retire or make distributions in respect of our capital stock or subordinated indebtedness or make other restricted payments;

• pay dividends on our common stock or redeem, repurchase, retire or make distributions in respect of our common stock or subordinated indebtedness or make other restricted payments;

• make certain loans, acquisitions, capital expenditures or investments;

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• enter into certain transactions with our affiliates.

These agreements contain covenants that restrict our ability to take certain actions, such as incurring additional debt, if we are unable to meet defined specified financial ratios, which could result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.

These agreements contain covenants that restrict our ability to take certain actions, such as incurring additional debt, if

we are unable to meet defined specified financial ratios, which could result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.

Failure to comply with certain covenants in these agreements could result in a default.

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and as a result, such changes could result in substantially higher taxes and, therefore, could have a significant adverse effect on our results or operations, financial conditions and liquidity.

Moreover, in recent years, the Organization for Economic Co-operation and Development (“OECD”) and member countries have been focused on taxation issues relating to multi-national companies.

In October 2021, more than 130 countries agreed to implement Pillar 2, a plan introduced by the OECD providing for a global minimum tax rate of 15% (calculated on a country-by-country basis) for those companies having consolidated revenue of at least €750 million;

with any shortfall of the 15% minimum tax resulting in a related tax assessment ("Top-Up Tax").

The implementation of the Pillar 2 global minimum tax rules is intended to apply for tax years beginning in 2024.

The main purpose of such rules is to minimize tax base erosion and profit shifting from higher tax jurisdictions to lower tax jurisdictions by multi-national companies.

On February 2, 2023, the OECD issued various administrative guidance including transitional safe harbor rules available in conjunction with the implementation of the Pillar 2 global minimum tax.

Based upon the current OECD rules and administrative guidance, the Company does not anticipate being subject to material Top-Up Taxes as various tax jurisdictions begin enacting such legislation.

The Company is continuing to monitor the potential impact of the Pillar 2 proposals and developments on our consolidated financial statements and related disclosures, including eligibility for any transitional safe harbor rules.

We may incur significant costs for environmental compliance and/or to address liabilities under environmental laws and regulations, and our reputation may be adversely affected.

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Future investigations we undertake may lead to discoveries of contamination that must be remediated, and decisions to close facilities may trigger remediation requirements that are not currently applicable.

We may also face

liability for alleged personal injury or property damage due to exposure to hazardous substances used or disposed of by us, contained within our current or former products, or present in the soil or groundwater at our current or former facilities.

We may also face liability for alleged personal injury or property damage due to exposure to hazardous substances used or disposed of by us, contained within our current or former products, or present in the soil or groundwater at our current or former facilities.

We could incur significant costs in connection with such liabilities.

See Item 8, Note 17, Commitments and Contingencies for additional information.

Certain subsidiaries are subject to litigation, including numerous asbestos and product liability claims, which could adversely affect our business, reputation, financial condition, results of operations or cash flows.

Certain subsidiaries are co-defendants in various lawsuits in a number of U.S.

jurisdictions alleging personal injury as a result of exposure to asbestos that was used in certain components of our products.

The uncertainties of litigation and the uncertainties related to insurance and indemnification coverage make it difficult to accurately predict the ultimate financial effect of these claims.

If our insurance or indemnification coverage is not adequate to cover our potential financial exposure, our insurers dispute their obligations to provider coverage or the actual number or value of asbestos-related claims differs materially from our existing estimates, we could incur material costs that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

In addition, we may be subject to product liability claims if the use of our products, or the exposure to our products or their raw materials, is alleged to have resulted in injury or other adverse effects.

Certain subsidiaries are subject to litigation, including product liability and other claims, which could adversely affect our business, reputation, financial condition, results of operations or cash flows.

We may be subject to product liability and other claims if the use of our products, or the exposure to our products or their raw materials, is alleged to have resulted in injury or other adverse effects.

We currently maintain product liability insurance coverage but we cannot assure that we will be able to obtain such insurance on commercially reasonable terms in the future, if at all, or that any such insurance will provide adequate coverage against claims.

Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome.

Litigation and product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome.

In addition, our business depends on the strong brand reputation we have developed;

if this reputation is damaged as a result of a product liability claim, it may be difficult to maintain our pricing positions and market share with respect to our products.

Therefore, an unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations or cash flows.

if this reputation is damaged as a result of litigation or product liability claims, it may be difficult to maintain our pricing positions and market share with respect to our products.

Therefore, an unsuccessful litigation matter or product liability defense could have a material adverse effect on our business, financial condition, results of operations or cash flows.

See Item 8, Note 17, Commitments and Contingencies for additional details.

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Under the acquisition method of accounting, the assets and liabilities of Elkay and its subsidiaries have been recorded, as of the completion of the Merger, at their respective fair values.

Our reported financial condition and results of operations for periods after completion of the Merger reflect Elkay’s balances and results after completion of the Merger but have not been restated retroactively to reflect the

historical financial position or results of operations of Elkay and its subsidiaries for periods prior to the Merger.

Our reported financial condition and results of operations for periods after completion of the Merger reflect Elkay’s balances and results but have not been restated retroactively to reflect the historical financial position or results of operations of Elkay and its subsidiaries for periods prior to the Merger.

Under the acquisition method of accounting, the total purchase price was allocated to Elkay’s tangible assets and liabilities and identifiable intangible assets based on their fair values as of the date of completion of the Merger.

The excess of the purchase price over those fair values, if any, was recorded as goodwill.

To the extent the value of goodwill or intangibles, if any, becomes impaired in the future, we may be required to incur material non-cash charges relating to such impairment.

The excess of the purchase price over those fair values was recorded as goodwill.

To the extent the value of goodwill or intangibles becomes impaired in the future, we may be required to incur material non-cash charges relating to such impairment.

Our operating results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the impairment.

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The success of the Merger depends, in part, on our ability to realize the anticipated benefits and cost savings from adding Elkay’s businesses, and we cannot assure successful integration or realization of the anticipated benefits of the Merger.

Potential difficulties that may be encountered in the integration process which may result in Zurn Elkay performing differently than expected include, among others:

Potential difficulties that may be encountered as we continue the integration process which may result in Zurn Elkay performing differently than expected include, among others:

• the inability to successfully integrate Elkay in a manner that permits the achievement of full revenue, expected cash flows and cost savings anticipated from the Merger;

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The existence and potential or actual exercise of such rights could adversely impact the market price of our Common Stock.

UNRESOLVED STAFF COMMENTS.

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 1A. Risk Factors