What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-10 compared with 2024-02-06 · 53 added, 66 removed, 317 unchanged (27% of the section changed)

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

The following discussion of results of operations and financial condition includes periods prior to the acquisitions of the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch"), and the assets of Wade Drains ("Wade"), and the acquisition of Elkay in the Elkay merger.

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

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

The following discussion of results of operations and financial condition includes periods prior to the acquisition of Elkay.

Our financial performance includes the Elkay business subsequent to July 1, 2022, the date of the acquisition.

Accordingly, the discussion and analysis does not reflect any impact of the Elkay transaction prior to the closing date.

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

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

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

The consolidated statements of cash flows for the years ended December 31, 2024, 2023, and 2022 have not been adjusted to separately disclose cash flows related to the discontinued operations.

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Recent Accounting Pronouncements .

This section cites to the discussion of new or revised accounting pronouncements and standards in Item 8, Note 2, Significant Accounting Policies of our consolidated financial statements.

This section cites the discussion of new or revised accounting pronouncements and standards in Item 8, Note 2, Significant Accounting Policies of our consolidated financial statements.

Overview of Recent Developments .

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Company Overview

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

Our product portfolio includes professional grade water safety and control products, flow system products, hygienic and environmental products, and filtered 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.

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

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

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We purchase a broad range of materials and components throughout the world in connection with our manufacturing activities.

Major raw materials and components include brass, castings, copper, zinc, stainless steel, forgings, plate steel, high-performance engineered plastic and resin.

Major raw materials and components include bronze, iron, brass, stainless steel, carbon steel, zinc, and engineered plastics.

We have a strategic sourcing program that is designed to significantly reduce the number of direct and indirect suppliers we use and to lower the cost of purchased materials.

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Actual results could vary from these estimates.

During the year ended December 31, 2023, the Company recognized $2.5 million of fixed asset impairment charges.

The Company recognized no impairment charges during the during the years ended December 31, 2022 or 2021.

During the years ended December 31, 2024 and December 31, 2023, the Company recognized $7.4 million and $2.5 million of fixed asset impairment charges, respectively.

The Company recognized no impairment charges during the during the year ended December 31, 2022.

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

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If the carrying amount exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value up to the amount of the recorded goodwill.

During the fourth quarter of the year ended December 31, 2023, we completed our annual goodwill impairment test and elected to perform a quantitative assessment.

During the fourth quarter of the year ended December 31, 2024, we completed our annual goodwill and intangible asset impairment tests and elected to perform a qualitative assessment.

No goodwill impairment charges were recorded during the years ended December 31, 2024, 2023, or 2022.

During the year ended December 31, 2024, we recorded a $0.6 million impairment charge related to an indefinite-lived tradename no longer used.

No intangible asset impairment charges were recorded during the years ended December 31, 2023 or 2022.

Retirement benefits.

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During the years ended December 31, 2024, 2023, and 2022, we recognized a non-cash actuarial gain from continuing operations of $1.4 million, $2.0 million, and $1.9 million, respectively, in connection with re-measurements of our plans.

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

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

See Item 8, Note 15, Retirement Benefits for additional information.

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In October 2021, more than 130 countries agreed to implement Pillar 2, a plan introduced by the Organization for Economic Co-operation and Development (“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.

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

The implementation of the Pillar 2 global minimum tax rules has begun 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 1, 2023, the Financial Accounting Standards Board indicated that they view the minimum tax (“Top-Up Tax”) imposed under Pillar 2 as an alternative minimum tax, and as such, it should be recognized in the period incurred versus recognizing or adjusting deferred tax assets and liabilities.

On February 1, 2023, the Financial Accounting Standards Board (“FASB”) indicated that they view the minimum tax (“Top-Up Tax”) imposed under Pillar 2 as an alternative minimum tax, and as such, it should be recognized in the period incurred versus recognizing or adjusting deferred tax assets and liabilities.

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.

Based upon the current OECD rules and administrative guidance, as well as the related legislation of those countries which has been enacted to date, the Company does not anticipate being subject to material Top-Up Taxes.

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 assess our income tax positions and record tax liabilities for all years subject to examination based upon management’s evaluation of the facts and circumstances and information available at the reporting dates.

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As a result of this review, we established a full valuation allowance against U.S.

federal and state capital loss carryforwards, as well as certain foreign NOL carryforwards and related deferred tax assets, and continue to maintain a partial valuation allowance against certain U.S.

federal and state capital loss carryforwards, as well as certain foreign NOL carryforwards and related deferred tax assets, and continues to maintain a partial valuation allowance against certain U.S.

state NOL and tax credit carryforwards.

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Elkay, a market leader of filtered drinking water solutions and commercial sinks, complements our existing product portfolio.

The purchase price includes $1,411.9 million of our common stock based on the closing stock price of $27.48 on July 1, 2022, and $45.9 million of net cash payments for the repayment of Elkay's term loan and Elkay's transaction related costs outstanding that were in excess of Elkay's cash and cash equivalents at the time of closing.

The purchase price includes $1,411.9 million of our common stock based on the closing stock price of $27.48 per share 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, we issued 51,564,524 shares of our common stock, which represented approximately 29% of outstanding shares immediately following the Merger.

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The major components of the Income from discontinued operations, net of tax presented in the consolidated statements of operations during the years ended December 31, 2024, 2023, and 2022 are included in the table below (in millions):

Year Ended (1) Year Ended (2) Year Ended (3)

December 31, 2024 December 31, 2023 December 31, 2022

Net sales $ — $ — $ 973.0

Cost of sales — — 598.6

Selling, general and administrative expenses (income) (8.4) (2.9) 260.2

Restructuring and other similar charges — — 1.9

Amortization of intangible assets — — 9.9

Interest expense, net — — 4.1

Actuarial loss on pension and other postretirement benefit obligations — — 4.8

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

Selling, general and administrative income (0.7) (8.4) (2.9)

Income from discontinued operations before income tax 0.7 8.4 2.9

Income tax (provision) benefit 0.1 1.8 (28.0)

Equity method investment income — — 0.3

Non-controlling interest income — — (0.2)

Income tax benefit 0.6 0.1 1.8

Income from discontinued operations, net of tax $ 1.3 $ 8.5 $ 4.7

____________________

(1) Selling, general and administrative expenses for the year ended December 31, 2023 include the reversal of certain accruals as a result of costs the Company will no longer incur related to the Spin-Off Transaction.

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

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

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

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

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

(1) Selling, general and administrative income for the years ended December 31, 2024 and 2023 include the release of certain accruals as a result of costs the Company will no longer incur related to the Spin-Off Transaction.

(2) Results of operations for the year ended December 31, 2022 include the release of certain accruals as a result of costs we are obligated to under indemnification being lower than original estimates.

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

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Net sales were $1,566.5 million for the year ended December 31, 2024, a 2.4% increase year over year.

Excluding a 20% increase in sales associated with the Elkay merger, core sales decreased 1% year over year as a result of a 400 basis point impact from the planned exit of certain residential sink products, lower year-over-year demand associated with products sold into our residential end markets, as well as timing of shipments in the prior year as we worked down an elevated backlog.

Core sales growth of 3%, including growth in nearly all product categories, was offset by a 100 basis point impact from the planned exit of certain residential sink products.

Income from operations

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Income from operations was $244.6 million for the year ended December 31, 2024, or 15.6% of net sales, compared to income from operations of $191.4 million, or 12.5% of net sales, for the year ended December 31, 2023.

Income from operations as a percentage of net sales increased by 410 basis points year over year due to the benefits of productivity synergies and restructuring actions as well as lower material and transportation costs, partially offset by the loss on divestiture of asbestos liabilities and certain assets (see Item 8, Note 17, Commitments and Contingencies), higher non-cash stock-based compensation and incremental depreciation and intangible asset amortization resulting from the Elkay Merger.

Additionally, income from operations for the year ended December 31, 2022 included merger costs of $33.7 million and a purchase accounting fair value adjustment of $18.9 million related to the Elkay Merger.

Income from operations as a percentage of net sales increased by 310 basis points year over year due to the benefits resulting from productivity synergies and restructuring actions related to the Elkay Merger, as well as lower material costs and restructuring costs.

The prior year also included a $11.4 million loss on divestiture of asbestos liabilities and certain assets.

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

Interest expense, net

Interest expense, net was $33.1 million for the year ended December 31, 2024 compared to $38.5 million for the year ended December 31, 2023.

The increase in interest expense as compared to the prior year period is primarily a result of higher year-over-year interest rates, partially offset by a decrease in interest expense as a result of a voluntary prepayment on the Term Loan of $60.0 million.

The decrease in interest e xpense, net as compared to the prior year period is due to interest earned on higher cash balances and reduced interest expense due to the prior year voluntary prepayment on the Term Loan of $60.0 million.

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

Loss on extinguishment of debt

During the year ended December 31, 2023, we recognized a $0.9 million loss on the extinguishment of debt in connection with the write off of a portion of the unamortized debt issuance costs due to a $60.0 million Term Loan voluntary prepayment.

There was no loss on the extinguishment of debt recognized for the year ended December 31, 2024.

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

Actuarial gain on pension and other postretirement benefit obligations

Actuar ial gain on pension and other postretirement benefit obligations

Actuarial gain on pension and other postretirement benefit obligations for the year ended December 31, 2024, was $1.4 million compared to a gain of $2.0 million for the year ended December 31, 2023.

The non-cash actuarial gain recognized for the year ended December 31, 2024, was primarily due to a combination of discount rate increases coupled with demographic and claims gains experienced during 2024 that were reflected in the other post-retirement benefit plans.

These gains were partially offset by an increase in the medical cost growth assumption from the prior measurement.

The non-cash actuarial gain recognized for the year ended December 31, 2023, was primarily due to demographic gains experienced during 2023 that were reflected in other postretirement benefits plans.

In addition, the post 65 medical provider options changed resulting in much lower premiums for the plans.

These gains were partially offset by a decrease in the discount rate from the prior measurement.

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

Those gains were partially offset by a decrease in the discount rate from the prior measurement.

See Item 8, Note 15, Retirement Benefits for more information.

Other income (expense), net

Other expense, net for the year ended December 31, 2023, was $7.2 million compared to other income, net of $1.7 million for the year ended December 31, 2022.

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

The year-over-year change is primarily driven by higher interest cost within the non-service cost components of our defined benefit plans and lower expected return on plan assets.

Other expense, net for the year ended December 31, 2024, was $5.9 million compared to other expense, net of $7.2 million for the year ended December 31, 2023.

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

The year-over-year change is primarily driven by income recognized in connection with an insurance settlement in the prior year, partly offset by accruals for estimated environmental remediation costs in the prior year, foreign currency gains and lower defined benefit plan costs in the current year.

Provision for income taxes

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The effective income tax rate for the year ended December 31, 2024 was above the U.S.

federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes, the nondeductible loss on divestiture of asbestos liabilities and certain assets and the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments.

federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments and the recognition of certain previously unrecognized tax benefits due to the lapse of the applicable statutes of limitations.

The income tax provision for the year ended December 31, 2023 was $42.6 million, or an effective tax rate of 29.0%.

The effective income tax rate for the year ended December 31, 2023 was above the U.S.

federal statutory rate of 21% primarily due to non-deductible transaction costs associated with the Elkay Merger, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S.

federal statutory rate, 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.

federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments.

Net income from continuing operations

Our net income from continuing operations for the year ended December 31, 2024, was $158.9 million, compared to net income from continuing operations of $104.2 million for the year ended December 31, 2023, as a result of the factors described above.

Diluted net income per share from continuing operations was $0.59 for the year ended December 31, 2023, as compared to $0.37 per share for the year ended December 31, 2022.

Diluted net income per share from continuing operations was $0.91 per share for the year ended December 31, 2024, as compared to $0.59 per share for the year ended December 31, 2023.

Net income for the year ended December 31, 2024, was $160.2 million compared to $112.7 million for the year ended December 31, 2023.

Diluted net income per share was $0.64 for the year ended December 31, 2023, compared to $0.40 for the year ended December 31, 2022.

Diluted net income per share was $0.92 per share for the year ended December 31, 2024, compared to $0.64 per share for the year ended December 31, 2023.

Income from discontinued operations, net of tax, was $1.3 million for the year ended December 31, 2024 compared to $8.5 million for the year ended December 31, 2023.

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

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

Core sales excludes the impact of mergers and acquisitions, divestitures and foreign currency translation.

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

We exclude the effect of acquisitions and divestitures because the nature, size and number of acquisitions and divestitures can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult.

We exclude the effect of mergers and acquisitions and divestitures because the nature, size and number of mergers and acquisitions and divestitures can vary dramatically from period to period and between us and our peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult.

We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.

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Other expense, net (2) 5.9

Loss on the extinguishment of debt 0.9

Interest expense, net 33.1

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Stock-based compensation expense 37.9

LIFO gain (4) (6.5)

Loss on divestiture of asbestos liabilities and certain assets (5) 11.4

Other, net (5) 0.6

Subtotal of adjustments to EBITDA 57.5

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

(5) Loss on divestiture of asbestos liabilities and certain assets are excluded in calculating Adjusted EBITDA as defined in our credit agreement.

(5) Other, net consists of gains and losses on the disposition of long-lived assets in accordance with the terms of our credit agreement.

(6) Our credit agreement defines our consolidated indebtedness as the sum of all indebtedness (other than letters of credit or bank guarantees, to the extent undrawn) consisting of indebtedness for borrowed money and capitalized lease obligations, less unrestricted cash, which was $159.2 million (as defined by the credit agreement) at December 31, 2024.

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The consolidated statements of cash flows for the year ended December 31, 2024, December 31, 2023, and December 31, 2022 have not been adjusted to separately disclose cash flows related to the discontinued operations.

for the year ended December 31, 2021 only includes the cash flows associated with our PMC platform for the period from January 1, 2021 to October 4, 2021, the date the Spin-Off Transaction was completed.

Refer to Item 8, Note 4, Discontinued Operations for further information.

Year Ended December 31, 2024 Compared with the Year Ended December 31, 2023

Net cash provided by operating activities in the year ended December 31, 2023, was $253.9 million compared to $97.0 million in the year ended December 31, 2022 due to higher net income as a result of a full year of Elkay sales, lower use of cash for trade working capital as well as benefits generated from ongoing productivity actions.

Net cash provided by operating activities in the year ended December 31, 2024, was $293.5 million compared to $253.9 million in the year ended December 31, 2023 due to higher net income, lower use of cash for trade working capital as well as benefits generated from ongoing productivity actions.

Cash used for investing activities was $20.2 million in the year ended December 31, 2024 compared to $4.6 million in the year ended December 31, 2023.

Investing activities in the year ended December 31, 2023, included $21.3 million of capital expenditures, which were partially offset by the receipt of $9.0 million in connection with an insurance settlement and $7.7 million from the sale of certain long-lived assets.

Investing activities for the year ended December 31, 2022, included $7.6 million of capital expenditures and net cash payments of $44.8 million in connection with acquisitions, which were partially offset by the receipt of $35.0 million from Regal Rexnord Corporation in connection with the final net assets transferred in the PMC Spin-Off Transaction, the receipt of $9.5 million in connection with an insurance settlement and $1.3 million from the sale of certain long-lived assets.

Cash used for financing activities was $239.2 million in the year ended December 31, 2023 compared to cash used for financing activities of $61.1 million in the year ended December 31, 2022.

Investing activities in the year ended December 31, 2024, included $21.8 million of capital expenditures, which were partially offset by the receipt of $1.6 million from the sale of certain long-lived assets.

Investing activities for the year ended December 31, 2023, included $21.3 million of capital expenditures, which were partially offset by the receipt of $9.0 million in connection with an insurance settlement and $7.7 million from the sale of certain long-lived assets.

Cash used for financing activities was $207.5 million in the year ended December 31, 2024 compared to $239.2 million in the year ended December 31, 2023.

Financing activities in the year ended December 31, 2024 included $56.6 million of cash for the payment of dividends on our common stock, $150.2 million of cash for repurchases of our common stock, $0.8 million of net cash payments on outstanding debt, and $8.6 million of cash used for the payment of withholding taxes on employees' share-based payment awards, which were partially offset by $8.7 million of net cash proceeds associated with stock option exercises and Employee Stock Purchase Plan ("ESPP") contributions.

Financing activities in the year ended December 31, 2023 included $50.4 million of cash for the payment of dividends on our common stock, $125.1 million of cash for repurchases of our common stock, $64.9 million of net cash payments on outstanding debt, and $3.1 million of cash used for the payment of withholding taxes on employees' share-based payment awards, which were partially offset by $4.3 million of net cash proceeds associated with stock option exercises.

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

As of December 31, 2024 we had $495.6 million of total indebtedness outstanding as follows (in millions):

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subsidiaries are translated into USD at the exchange rates in effect at the end of the fiscal periods.

As of December 31, 2023, stockholders' equity increased by $3.6 million from December 31, 2022 as a result of foreign currency translation adjustments.

As of December 31, 2024, stockholders' equity decreased by $10.0 million from December 31, 2023 as a result of foreign currency translation adjustments.

If the USD strengthened by 10% as of December 31, 2024, the result would have decreased stockholders' equity by approximately $11.5 million.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis