Zurn Elkay Water Solutions Corporation — Q2 2023 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2023; financial amounts are in U.S. dollars. Zurn Elkay designs and sells water-management products, including water safety and control, flow systems, hygienic and environmental products, and drinking-water solutions. The July 2022 Elkay acquisition materially affects comparisons: Q2 2022 results did not include Elkay, while 2023 results include it.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $403.2 million | $284.2 million | $775.3 million | $523.8 million |
| Gross profit | $173.5 million | $113.8 million | $322.3 million | $215.7 million |
| Income from operations | $54.8 million | $53.5 million | $98.5 million | $97.4 million |
| Net income | $34.6 million | $36.4 million | $57.4 million | $66.6 million |
| Diluted EPS | $0.20 | $0.28 | $0.32 | $0.52 |
Q2 gross margin was approximately 43.0% versus 40.0%; operating margin was 13.6% versus 18.8%. For the first half, operating margin was 12.7% versus 18.6%. Management attributed margin pressure to restructuring, stock-based compensation, acquired-asset depreciation and amortization, and the sale of higher-cost inventory; productivity actions partly offset these factors. Q2 net income included $1.7 million from discontinued operations.
Operating cash flow was $92.2 million for the first half, versus cash used of $12.0 million a year earlier. Capital expenditures were $11.1 million. Investing cash outflow was $1.8 million, including $9.0 million of insurance proceeds. Financing cash outflow was $113.5 million, including $87.1 million of share repurchases and $24.5 million of dividends. Cash declined to $103.0 million from $124.8 million at year-end 2022.
At June 30, total debt was $555.4 million, including $533.4 million of term-loan debt and $22.0 million of finance leases. No revolving-credit borrowings were outstanding; $194.2 million of borrowing capacity remained, after letters of credit. The reported net first-lien leverage ratio was 1.54x, and the company was in compliance with applicable credit-agreement covenants. The term loan’s effective interest rate was 7.22% at quarter-end; SOFR replaced LIBOR beginning July 1, 2023.
Material changes and outlook
Sales rose 41.9% in Q2 and 48.0% in the first half, primarily reflecting the Elkay combination. Excluding acquisition impact, management reported core sales down 5% in Q2 and down 1% for the first half, citing softer residential end-market demand and prior-year shipment timing. These reported growth rates are therefore not directly comparable on a same-business basis.
Backlog was $53.6 million at June 30; the company expected to recognize approximately 98% during the remainder of 2023. No full-year sales or earnings guidance is provided in the supplied filing text. Management expects further restructuring actions and related costs as it optimizes operating margins and its manufacturing footprint; the full extent of those costs is not yet estimable. Adjusted EBITDA was $159.4 million for the first half and $307.7 million for the trailing twelve months, as defined by the credit agreement; this non-GAAP measure should not be viewed as a substitute for GAAP results or cash flow.
Risks, contingencies, and unusual items
- About 6,000 asbestos lawsuits representing approximately 7,500 claims were outstanding. Estimated liability was $79.0 million, with $72.1 million of insurance recovery recorded as probable; actual liabilities and recoveries could differ materially.
- The company disclosed ongoing routine tax examinations and indemnification obligations related to formerly owned VAG entities and the PMC spin-off. Potential payments were not expected to be significant, according to management.
- Interest expense increased to $10.3 million in Q2 from $5.2 million, primarily due to higher interest rates. The company is exposed to interest-rate and foreign-currency risk.
- Q2 included $7.8 million of restructuring charges; first-half charges were $9.7 million. The filing also reports an insurance settlement, including $9.0 million of first-half cash proceeds.
Important facts for investors to verify
- Whether core sales stabilize, particularly in residential end markets, and how acquisition-driven growth compares with underlying demand.
- Whether productivity and integration benefits can offset recurring amortization, restructuring, compensation costs, and inventory-related margin pressure.
- How cash generation and working capital develop after substantial repurchases and dividends, and whether planned capital needs remain covered by liquidity.
- Debt service exposure as rates change, covenant headroom, and the effect of the post-quarter SOFR transition.
- Future restructuring costs, asbestos claim developments and insurance collectability, and outcomes of the disclosed tax examinations and indemnities.