Zurn Elkay Water Solutions Corporation — Q1 2024 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023 unless stated otherwise. The company designs, manufactures and markets water-management products, including water safety and control, flow systems, hygienic and environmental, and filtered drinking-water solutions.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $373.8 million | $372.1 million | +0.5% |
| Gross profit / margin | $170.1 million / 45.5% | $148.8 million / 40.0% | Margin +5.5 percentage points |
| Operating income / margin | $53.2 million / 14.2% | $43.7 million / 11.7% | +21.7%; margin +2.5 points |
| Net income | $34.3 million | $22.8 million | +50.4% |
| Diluted EPS | $0.19 | $0.13 | +$0.06 |
| Operating cash flow | $53.9 million | $5.0 million | +$48.9 million |
| Capital expenditures | $3.7 million | $5.2 million | — |
| Adjusted EBITDA (non-GAAP) | $90.0 million | $72.4 million | +24.3% |
Core sales were flat year over year. Core growth across nearly all product categories was offset by an approximately 400-basis-point impact from the planned exit of certain residential sink products. Management attributed improved operating margin to Elkay-related productivity synergies and restructuring, and lower material and transportation costs, partly offset by higher restructuring expense. Net interest expense declined to $8.8 million from $9.6 million, primarily because of interest earned on higher cash balances. The effective tax rate was 20.9%, versus 28.7%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $157.1 million at March 31, 2024, compared with $136.7 million at December 31, 2023. Total assets were $2,664.2 million.
- Total debt, including finance leases, was $495.4 million; $0.9 million was current. The term loan balance was $473.9 million, with a stated maturity of October 2028. Its weighted-average effective interest rate for the quarter was 7.45%.
- No amounts were drawn on the $200 million revolving credit facility. Available borrowing capacity was $188.8 million after $11.2 million of outstanding letters of credit.
- Net First Lien Leverage Ratio was 1.06 to 1.00, below the 5.00-to-1.00 maximum covenant threshold. The company reported compliance with applicable credit-agreement covenants.
- Operating cash flow less capital expenditures was $50.2 million. Financing uses included $18.9 million of share repurchases and $13.9 million of dividends. Cash increased $20.4 million during the quarter.
Material changes and notable items
- Operating income rose $9.5 million despite nearly flat sales, reflecting the improved gross margin and operating leverage noted by management.
- Restructuring and similar charges increased to $6.3 million from $1.9 million. These actions include workforce reductions, lease termination and facility rationalization; $5.2 million of Q1 charges were non-cash, primarily asset impairments.
- The company repurchased 620,844 shares for $18.9 million at a weighted-average price of $30.41. Approximately $371.6 million remained authorized under the repurchase program.
- At March 31, backlog was $50.4 million. The company expects to recognize approximately 99% during the remaining nine months of 2024 and 1% in 2025 and beyond.
- The December 2023 sale of entities primarily holding asbestos liabilities removed those entities’ asbestos obligations, related insurance assets and associated deferred taxes from the company’s balance sheet. The company stated it no longer has obligations for pending and future asbestos claims related to the divested entities.
Outlook, risks and contingencies
The filing provides no quantified full-year sales, earnings or cash-flow guidance. Management expects to continue restructuring and footprint optimization, with additional costs possible for workforce reductions, asset impairments or accelerated depreciation, lease terminations and facility rationalization; the full amount is not yet estimable. Management stated that cash, operating cash flow and revolver availability are adequate for expected short- and long-term needs.
Risks and uncertainties discussed include foreign-currency and interest-rate exposure, tax examinations and valuation allowances, and ordinary-course legal claims involving product liability, commercial, employment, workers’ compensation, intellectual property and environmental matters. Management believes the unresolved legal matters are not expected to have a material adverse effect, based on current information. The company also noted that interim results are not necessarily indicative of full-year results. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether flat core sales and the planned residential sink exit continue to affect reported growth.
- Whether margin gains from productivity, lower input costs and restructuring persist, and how much further restructuring expense is incurred.
- Whether backlog converts as expected and supports sales in the rest of 2024.
- Operating cash flow sustainability, including the effects of working-capital movements, alongside continued dividends and repurchases.
- Debt-service exposure to floating interest rates, covenant headroom and the reported $1.06 leverage ratio.
- Developments in tax examinations, valuation allowances and ordinary-course contingencies.
Adjusted EBITDA is a non-GAAP measure and should be considered alongside, not as a substitute for, GAAP results and cash flows.