Business context and reporting period
Zurn Elkay Water Solutions Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company designs, manufactures and markets water-management products. Results include Elkay only from July 1, 2022, following its $1.46 billion merger; accordingly, year-over-year comparisons are substantially affected by the acquisition.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $372.1 million | $239.6 million |
| Gross profit / margin | $148.8 million / 40.0% | $101.9 million / 42.5% |
| Operating income / margin | $43.7 million / 11.7% | $43.9 million / 18.3% |
| Net income | $22.8 million | $30.2 million |
| Diluted earnings per share | $0.13 | $0.24 |
| Operating cash flow | $5.0 million | $(53.9) million |
| Capital expenditures | $5.2 million | $0.8 million |
| Adjusted EBITDA | $72.4 million | $52.0 million |
At March 31, 2023, cash and cash equivalents were $74.8 million, down from $124.8 million at year-end 2022. Total debt, including finance leases, was $556.6 million; the term loan balance was $534.3 million. The company had $193.7 million of additional revolving-credit availability, net of letters of credit, and reported a 1.63x Net First Lien Leverage Ratio. It was in compliance with applicable credit covenants.
Material changes versus the prior comparable period
- Sales rose 55.3% year over year. Management attributed 53 percentage points to Elkay, a 1% reduction to foreign-currency translation, and reported 3% core-sales growth.
- Operating income was nearly flat despite higher sales; operating margin fell 6.6 percentage points. Management cited higher stock-based compensation, incremental depreciation and amortization from the merger, and sales of higher-cost inventory, partly offset by productivity actions.
- Net income declined to $22.8 million from $30.2 million. Net interest expense doubled to $9.6 million, primarily due to higher interest rates; other expense was $2.4 million versus $0.3 million of other income.
- Operating cash flow improved by $58.9 million year over year, which management attributed mainly to lower trade-working-capital cash use and timing of accrued expenses. Financing cash outflow included $37.0 million of share repurchases and $12.3 million of dividends.
- Amortization expense increased to $14.7 million from $3.0 million, largely reflecting acquired intangible assets.
Outlook, management commentary, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said available cash, operating cash flow and revolver capacity are adequate for expected needs.
- Backlog was $44.6 million at March 31; the company expects approximately 99% to be recognized during the remaining nine months of 2023.
- Management expects further restructuring actions and related costs, potentially including workforce reductions, asset impairment or accelerated depreciation, lease termination and facility rationalization. The full amount is not yet estimable.
- The Elkay purchase-price allocation remained preliminary; further measurement-period adjustments may be recorded, no later than one year after the merger.
- Asbestos-related liabilities were estimated at $79.0 million, with $72.1 million of insurance recovery recorded as probable. Management cautioned that actual claims, insurance availability and recoveries could differ materially from estimates.
- Other exposures include routine legal and environmental matters, tax examinations and indemnification obligations. Management did not expect the legal matters or potential tax examination payments described to have a material adverse effect.
- Forward-looking results are subject to risks including market conditions, backlog conversion, foreign exchange and interest-rate movements, integration and restructuring execution, and the uncertainties described in the filing and prior annual report.
Important facts for investors to verify
- How much reported sales growth and future performance reflect Elkay versus underlying core demand, especially in residential products.
- Whether margins recover as higher-cost inventory is sold and integration, productivity and restructuring actions progress.
- Cash generation, working-capital trends, capital returns and the effect of higher interest rates on debt-service costs.
- Final Elkay purchase accounting, acquired-intangible amortization and any further restructuring costs.
- Developments in asbestos claims and the collectability and adequacy of insurance coverage.