Zurn Water Solutions Corporation — FY2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021. Zurn transitioned from a March 31 fiscal year-end to a calendar year-end; FY2021 is a 12-month audited period, while the comparable 12 months ended December 31, 2020 are unaudited. On October 4, 2021, the company completed the spin-off of its Process & Motion Control business and became a pure-play water management company. Results for that business are presented as discontinued operations. Zurn sells specification-driven water safety and control, flow systems, and hygienic and environmental products, primarily into commercial and institutional construction and retrofit markets.
Financial performance and position
| Metric | FY2021 | Comparable FY2020 |
|---|---|---|
| Net sales | $910.9 million | $746.1 million |
| Gross profit / margin | $373.2 million / 41.0% | $338.2 million / 45.3% |
| Operating income / margin | $107.0 million / 11.7% | $107.7 million / 14.4% |
| Continuing-operations net income | $49.7 million | $28.6 million |
| Net income attributable to Zurn common stockholders | $120.9 million | $146.7 million |
| Diluted EPS attributable to common stockholders | $0.97 | $1.19 |
| Cash provided by operating activities | $223.6 million | $320.2 million |
Revenue and margins: Sales rose 22.1% year over year. Management attributed 1 percentage point to foreign currency and 8 points to acquisitions; core sales increased 13%, reflecting higher demand across most product categories. Operating margin fell 270 basis points: higher sales were more than offset by LIFO inventory effects, increased non-cash stock compensation, acquisition mix, and prior-year temporary cost reductions. Materials were approximately 34% of FY2021 sales.
Cash flow, liquidity and debt: FY2021 investing cash outflow was $21.9 million, including $17.1 million for acquisitions; capital expenditures were $23.3 million. Financing cash outflow was $356.2 million, including spin-off-related cash movements. Cash and cash equivalents were $96.6 million at year-end. The company reported $539.5 million of total debt, including $539.2 million of term loans, and $193.9 million of available revolving-credit capacity after letters of credit. Covenant net leverage was 2.3x, versus a maximum threshold of 5.0x; the company reported compliance with applicable covenants. Cash-flow comparisons include discontinued operations and are affected by the spin-off.
Other metrics: Adjusted EBITDA, a non-GAAP measure, was $195.8 million; pro forma Adjusted EBITDA was $196.8 million. Backlog was approximately $69.9 million at year-end, up from $36.3 million, and was expected to ship during 2022. The company declared a quarterly dividend of $0.03 per share after the spin-off.
Material changes and unusual items
- The spin-off materially changed the company’s business and balance sheet; prior-year figures include the former PMC business in discontinued operations. FY2021 PMC results reflect activity only through October 4, 2021.
- FY2021 included a $20.4 million loss on debt extinguishment related to refinancing. Net interest expense declined to $34.7 million from $45.9 million, primarily following refinancing and lower outstanding borrowings.
- Approximately $60 million of spin-off separation costs were recorded in discontinued operations. FY2021 discontinued-operations income was $71.2 million versus $118.1 million in FY2020, contributing to lower total net income despite higher continuing-operations income.
- In the unaudited fourth quarter, continuing-operations net income was $2.9 million; discontinued operations recorded a $69.3 million loss, and total net loss was $66.4 million. The quarter included the debt-extinguishment loss and spin-off separation costs.
- Acquisitions included ATS GREASEwatch ($4.5 million) and the Wade product line ($13.7 million). Restructuring charges were $3.7 million; management expects further restructuring costs but did not quantify them.
Outlook, commentary and risks
Management did not provide quantified revenue or earnings guidance in the supplied filing text. It expects all year-end backlog to ship in 2022 and expects to continue restructuring and footprint optimization. Management described COVID-related supply-chain disruptions and shortages as ongoing, with uncertain effects on operations and results.
- Customer and channel concentration: the largest customer represented 23% of FY2021 sales; the top five customers represented approximately 41%. The three largest independent distributors represented approximately 35% of sales.
- Raw-material, freight and supply-chain price or availability changes may pressure costs; the company generally does not hedge commodity purchases and may not recover cost increases through pricing.
- Variable-rate term debt exposes earnings to higher interest rates; management estimated a 100-basis-point increase above year-end LIBOR would add approximately $3.3 million of annual interest expense at then-current borrowing levels.
- Other disclosed risks include cyclical construction demand, COVID-19, acquisitions and integration, cybersecurity and ERP implementation, climate and severe weather, pension funding, environmental matters, and asbestos claims.
- Asbestos claims were estimated at $66.0 million, with a corresponding $66.0 million insurance receivable recorded. Recovery depends on insurance coverage and collectability; actual claims or coverage may differ from estimates.
- The spin-off’s intended tax-free treatment depends on representations and restrictions; a tax challenge or breach could create significant tax exposure. The company also indemnifies Regal for certain pre-spin tax liabilities.
Most important facts for investors to verify
- Separate continuing-business performance from discontinued PMC results and account for the spin-off’s effect on year-over-year comparisons and cash flows.
- Review the drivers of the 270-basis-point operating-margin decline, especially inventory accounting effects, stock-based compensation and acquisition mix.
- Assess cash conversion and working-capital investment: operating cash flow declined, with receivables and inventory uses noted in the cash-flow statement.
- Confirm debt principal, refinancing terms, variable-rate exposure, covenant headroom and available revolver capacity.
- Monitor customer and distributor concentration, backlog conversion, supply costs and the expected costs and benefits of restructuring.
- Evaluate the assumptions behind asbestos insurance recovery, pension obligations, deferred-tax valuation allowances and spin-off tax indemnities.