Zurn Elkay Water Solutions Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY2022. This is an annual filing, not a standalone Q4 earnings report. Zurn Elkay is a water-management products company serving mainly institutional and commercial construction markets. Elkay was included for all of FY2023, versus six months in FY2022.
Key financial results
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $1,530.5 million | $1,281.8 million |
| Gross profit / gross margin | $648.1 million / 42.4% | $465.5 million / 36.3% |
| Operating income / margin | $191.4 million / 12.5% | $107.1 million / 8.4% |
| Net income | $112.7 million | $61.7 million |
| Diluted EPS | $0.64 | $0.40 |
| Cash from operating activities | $253.9 million | $97.0 million |
| Capital expenditures | $21.3 million | $7.6 million |
Management-reported Adjusted EBITDA was $339.5 million for FY2023; this is a non-GAAP measure and should not be treated as cash flow or a substitute for GAAP earnings.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $136.7 million; available capacity under the $200 million revolver was $189.0 million, after letters of credit.
- Total debt, including finance leases, was $495.3 million, including a $473.6 million term loan. The term loan’s weighted-average effective rate was 7.47% at year-end; a 100-basis-point increase in Term SOFR would add approximately $4.9 million of annual interest expense.
- Net First Lien Leverage Ratio was 1.19x, below the 5.0x maximum covenant threshold; the company reported compliance with applicable covenants.
- FY2023 financing uses included $125.1 million for share repurchases, $50.4 million for dividends and $64.9 million of net debt repayments. The board raised the quarterly dividend to $0.08 per share in October 2023.
Changes, outlook and notable items
- Sales rose 19.4%, largely reflecting the full-year contribution from Elkay. Excluding acquisitions and other specified effects, core sales declined 1%; management cited planned exits from some residential sink products, weaker residential demand and prior-year backlog shipment timing.
- Operating margin expanded 410 basis points. Management attributed improvement to productivity synergies, restructuring and lower material and transportation costs; higher stock compensation and Elkay-related depreciation and amortization partly offset gains.
- Operating cash flow increased substantially, supported by higher net income, lower working-capital use and productivity actions. Inventory declined to $277.6 million from $366.7 million.
- Backlog was $50.8 million at year-end, up from $42.1 million, and was expected to ship during 2024. The filing provides no specific FY2024 revenue, earnings or margin guidance.
- Restructuring charges were $15.3 million in FY2023. Management expects further restructuring and footprint-optimization costs, with the full amount not yet estimable.
- A December 2023 sale transferred entities principally holding asbestos liabilities. The company reported no further obligation for pending or future asbestos claims related to those entities and recorded an $11.4 million divestiture loss.
Risks and contingencies
Key exposures include construction-market cyclicality, customer and distributor concentration, raw-material and transportation costs, competition, acquisition integration, restructuring execution, cybersecurity and ERP implementation, climate and severe-weather effects, and variable interest rates. One customer represented 20% of FY2023 sales; the five largest customers represented approximately 39%. Goodwill and intangible assets totaled $1.75 billion at year-end, creating potential impairment exposure. The company reported ongoing ordinary-course legal matters but did not expect their outcome, individually or collectively, to materially adversely affect its financial position, results or cash flows.
Investor facts to verify
- How much of reported growth and margin improvement is sustainable after separating Elkay’s contribution, synergies, restructuring and other nonrecurring items.
- Whether residential demand, product exits and shipment timing continue to weigh on core sales, and how 2024 backlog converts to revenue.
- Term-loan repayment plans and sensitivity of earnings and cash flow to SOFR rates.
- Execution and costs of planned restructuring, including any further asset impairments or facility actions.
- Customer concentration and the assumptions supporting goodwill and acquired intangible-asset valuations.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2023.