Zurn Elkay Water Solutions Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The results cover Zurn’s continuing water-solutions business; Elkay was acquired on July 1, 2022, so its operations are not included. The filing reports PMC as discontinued operations following its October 2021 spin-off, which limits comparisons with 2021 total net income and cash flow.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $284.2 million | $243.7 million | $523.8 million | $448.9 million |
| Gross profit | $113.8 million | $103.8 million | $215.7 million | $192.2 million |
| Operating income | $53.5 million | $37.3 million | $97.4 million | $61.3 million |
| Operating margin | 18.8% | 15.3% | 18.6% | 13.7% |
| Net income from continuing operations | $36.4 million | $20.6 million | $65.8 million | $30.6 million |
| Net income attributable to common stockholders | $36.4 million | $73.2 million | $66.6 million | $123.2 million |
| Diluted EPS, continuing operations | $0.28 | $0.17 | $0.51 | $0.25 |
Sales increased 16.6% in Q2 and 16.7% for the half year. Management said core sales, excluding acquisitions and foreign currency, rose 15% in both periods; the prior-year acquisition contributed approximately 2% to sales growth. Q2 operating margin expanded 350 basis points and the six-month margin expanded 490 basis points. Management attributed improvement to sales growth and pricing, productivity, and lower stock compensation and intangible amortization, partly offset by higher material and transportation costs and growth and productivity investments.
Reported common-stockholder net income fell year over year because the 2021 comparison included substantial PMC discontinued-operations income: $52.6 million for Q2 and $92.6 million for the first half, versus zero and $0.8 million, respectively, in 2022. Continuing-operations income increased in both comparisons.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $12.0 million, versus positive $145.0 million in 2021. Management cited higher trade working capital and payment timing for payables and accruals. The periods are not directly comparable because 2021 cash flows include discontinued operations.
- Investing activities provided $35.4 million, including $35.0 million received from Regal Rexnord in the final settlement of the PMC spin-off. Capital expenditures were $2.0 million.
- Financing activities used $9.3 million, including $7.6 million of dividends and net debt repayments of $3.0 million. Cash and cash equivalents were $110.4 million at June 30, 2022.
- Total debt was $537.5 million, including $531.9 million of long-term debt. The term loan matures in 2028; the $200 million revolver had no borrowings, with $193.9 million available after letters of credit. The company reported compliance with credit-agreement covenants and a 2.08-to-1.00 net leverage ratio.
- Adjusted EBITDA for the six months was $116.3 million, a non-GAAP measure. The filing cautions that it is not a substitute for GAAP results or cash flow.
Outlook, material events and risks
- Backlog was $84.0 million at June 30. The company expected to recognize approximately 98% in the remainder of 2022 and 2% in 2023 and beyond. This is a backlog conversion estimate, not full-year earnings guidance.
- The July 1 Elkay merger consideration was estimated at approximately $1.4 billion, subject to purchase-accounting and working-capital adjustments. Former Elkay shareholders received approximately 51.6 million Zurn shares and owned about 29% of the combined company. Purchase accounting and pro forma results were not complete or presented in this filing.
- Management expected further restructuring actions and related costs after the merger, including workforce reductions, lease terminations and facility rationalization; potential costs were not yet estimable.
- Key risks include execution and integration of Elkay, realizing anticipated synergies, potential impairment of acquired goodwill and intangibles, and possible share-price pressure from sales by former Elkay shareholders. The company also identified exposure to interest-rate and foreign-currency movements.
- Asbestos-related claims totaled approximately 6,000 lawsuits representing about 7,000 claims. The recorded liability and insurance receivable were each $66.0 million. Management considered current claims insured, while noting uncertainty about future claims, coverage disputes and insurer solvency.
- The board declared a $0.07-per-share dividend payable September 7, 2022. Management reported disclosure controls were effective as of June 30.
Investor facts to verify
- Elkay’s final purchase-price allocation, acquired debt and post-merger leverage, and whether the transaction achieves expected synergies.
- Whether working-capital investment converts to operating cash flow and how margins respond to material and transportation costs.
- Backlog conversion, order trends and the combined company’s subsequent guidance and pro forma results.
- The durability and collectability of asbestos insurance recoveries, plus any material changes in litigation or coverage.