UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


(Mark one)

☒						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, ~~2022~~2023


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


Commission File Number:			001-35475


ZURN ELKAY WATER SOLUTIONS CORPORATION
(Exact name of registrant as specified in its charter)


Delaware		20-5197013
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

511 W. Freshwater Way		53204
Milwaukee,	Wisconsin	(Zip Code)
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (855) 480-5050

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $.01 par value	ZWS	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class						Outstanding at October ~~21, 2022~~27, 2023
Zurn Elkay Water Solutions Corporation Common Stock, $0.01 par value per share						~~177,794,600~~172,810,551 shares

Table of Contents

TABLE OF CONTENTS




Part I FINANCIAL INFORMATION

Item 1.	Financial Statements	4

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2824

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3632

Item 4.	Controls and Procedures	3733

Part II OTHER INFORMATION

Item 1.	Legal Proceedings	3834

~~Item 1A.~~	~~Risk Factors~~	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4034

Item 5.	Other Information

Item 6.	Exhibits	4135

Signatures		4236

Table of Contents

~~EXPLANATORY NOTE~~

As previously disclosed, on February 12, 2022, Zurn Elkay Water Solutions Corporation (formerly known as Zurn Water Solutions Corporation) (“Zurn Elkay” or the “Company”) entered into a definitive agreement to combine with Elkay Manufacturing Company (“Elkay”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among Zurn, Elkay, Zebra Merger Sub, Inc., a wholly owned subsidiary of Zurn (“Merger Sub”), and Elkay Interior Systems International, Inc., as representative of the stockholders of Elkay, providing for the merger of Elkay with and into Merger Sub, with Elkay surviving as a wholly owned subsidiary of Zurn (the “Merger”). On July 1, 2022, the Company and Elkay completed the Merger following which the Company changed its name to “Zurn Elkay Water Solutions Corporation”. Shares of the Company's common stock continue to trade on the New York Stock Exchange under the ticker symbol “ZWS”.

Private Securities Litigation Reform Act Safe Harbor Statement

Our disclosure and analysis in this report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in developing and expanding our business and the realization of sales from our backlog, include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flows, research and development costs, working capital and capital expenditures, they are subject to risks and uncertainties that are described more fully herein and in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, in Part I, Item 1A, “Risk Factors” and in Part I under the heading "Cautionary Notice Regarding Forward-Looking Statements", as well as in our other filings with the Securities and Exchange Commission. ~~In addition, our Merger with Elkay Manufacturing Company involves various risks, uncertainties, and factors including those described in Part II, Item 1A, "Risk Factors" in this report.~~ Accordingly, we can give no assurance that we will achieve the results anticipated or implied by our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Zurn Elkay Water Solutions Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in Millions, except share amounts)


		(Unaudited)					(Unaudited)
		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	71.9	$	96.6	Cash and cash equivalents	$	173.1	$	124.8
Receivables, net	Receivables, net	269.1		144.1		Receivables, net	233.9		219.7
Inventories, net		400.2		184.5
Inventories						Inventories	284.3		366.7
Income taxes receivable	Income taxes receivable	24.5		33.1		Income taxes receivable	4.0		18.3
Other current assets	Other current assets	34.8		16.5		Other current assets	26.0		28.0
Total current assets	Total current assets	800.5		474.8		Total current assets	721.3		757.5
Property, plant and equipment, net	Property, plant and equipment, net	203.0		64.4		Property, plant and equipment, net	189.1		183.8
Intangible assets, net	Intangible assets, net	1,019.1		179.1		Intangible assets, net	966.0		1,009.7
Goodwill	Goodwill	754.8		254.1		Goodwill	795.3		777.0
Insurance for asbestos claims	Insurance for asbestos claims	66.0		66.0		Insurance for asbestos claims	72.1		72.1
Other assets	Other assets	83.6		39.3		Other assets	69.1		63.9
Total assets	Total assets	$	2,927.0	$	1,077.7	Total assets	$	2,812.9	$	2,864.0
Liabilities and stockholders' equity	Liabilities and stockholders' equity					Liabilities and stockholders' equity
Current liabilities:	Current liabilities:					Current liabilities:
Current maturities of debt	Current maturities of debt	$	5.7	$	5.6	Current maturities of debt	$	6.3	$	5.7
Trade payables	Trade payables	144.5		105.1		Trade payables	60.7		116.9
Compensation and benefits	Compensation and benefits	27.4		22.0		Compensation and benefits	25.1		19.2
Current portion of pension and postretirement benefit obligations	Current portion of pension and postretirement benefit obligations	1.3		1.3		Current portion of pension and postretirement benefit obligations	1.6		1.6
Other current liabilities	Other current liabilities	149.8		106.4		Other current liabilities	136.1		145.9
Total current liabilities	Total current liabilities	328.7		240.4		Total current liabilities	229.8		289.3

Long-term debt	Long-term debt	531.3		533.9		Long-term debt	547.9		530.2
Pension and postretirement benefit obligations	Pension and postretirement benefit obligations	58.7		57.3		Pension and postretirement benefit obligations	53.2		50.5
Deferred income taxes	Deferred income taxes	229.8		3.1		Deferred income taxes	205.5		221.4
Operating lease liability	Operating lease liability	51.2		8.9		Operating lease liability	39.6		34.2
Reserve for asbestos claims	Reserve for asbestos claims	66.0		66.0		Reserve for asbestos claims	78.9		79.0
Other liabilities	Other liabilities	42.7		41.7		Other liabilities	46.4		44.4
Total liabilities	Total liabilities	1,308.4		951.3		Total liabilities	1,201.3		1,249.0

Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Common stock, $0.01 par value; 200,000,000 shares authorized; shares issued and outstanding: 177,759,553 at September 30, 2022 and 125,720,068 at December 31, 2021		1.8		1.3
Common stock, $0.01 par value; 200,000,000 shares authorized; shares issued and outstanding: 172,623,478 at September 30, 2023 and 176,876,406 at December 31, 2022						Common stock, $0.01 par value; 200,000,000 shares authorized; shares issued and outstanding: 172,623,478 at September 30, 2023 and 176,876,406 at December 31, 2022	1.7		1.8

Additional paid-in capital	Additional paid-in capital	2,850.2		1,436.9		Additional paid-in capital	2,850.4		2,853.1
Retained deficit	Retained deficit	(1,154.4)		(1,236.9)		Retained deficit	(1,166.9)		(1,164.9)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(79.0)		(74.9)		Accumulated other comprehensive loss	(73.6)		(75.0)

Total stockholders' equity	Total stockholders' equity	1,618.6		126.4		Total stockholders' equity	1,611.6		1,615.0
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	2,927.0	$	1,077.7	Total liabilities and stockholders' equity	$	2,812.9	$	2,864.0

See notes to the condensed consolidated financial statements.

Table of Contents

Zurn Elkay Water Solutions Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(in Millions, except share and per share amounts)

(Unaudited)


		Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Net sales	Net sales	$	417.7	$	229.7	$	941.5	$	678.6		Net sales	$	398.4	$	417.7	$	1,173.7	$	941.5
Cost of sales	Cost of sales	277.3		133.9		585.4		390.6			Cost of sales	228.5		277.3		681.5		585.4
Gross profit	Gross profit	140.4		95.8		356.1		288.0			Gross profit	169.9		140.4		492.2		356.1
Selling, general and administrative expenses	Selling, general and administrative expenses	124.3		56.8		236.6		174.9			Selling, general and administrative expenses	92.9		124.3		277.7		236.6
Restructuring and other similar charges	Restructuring and other similar charges	11.7		0.7		13.1		1.6			Restructuring and other similar charges	2.2		11.7		11.9		13.1
Amortization of intangible assets	Amortization of intangible assets	14.5		5.8		19.1		17.7			Amortization of intangible assets	14.7		14.5		44.0		19.1
(Loss) income from operations		(10.1)		32.5		87.3		93.8
Income (loss) from operations											Income (loss) from operations	60.1		(10.1)		158.6		87.3
Non-operating expense:	Non-operating expense:										Non-operating expense:
Interest expense, net	Interest expense, net	(8.0)		(9.9)		(18.0)		(29.6)			Interest expense, net	(9.9)		(8.0)		(29.8)		(18.0)

Other income (expense), net	Other income (expense), net	0.6		(0.8)		0.3		(0.9)			Other income (expense), net	(2.5)		0.6		(3.3)		0.3
(Loss) income before income taxes		(17.5)		21.8		69.6		63.3
Income (loss) before income taxes											Income (loss) before income taxes	47.7		(17.5)		125.5		69.6
Provision for income taxes	Provision for income taxes	(1.6)		(5.7)		(22.9)		(16.6)			Provision for income taxes	(12.5)		(1.6)		(34.8)		(22.9)

Net (loss) income from continuing operations		(19.1)		16.1		46.7		46.7
Net income (loss) from continuing operations											Net income (loss) from continuing operations	35.2		(19.1)		90.7		46.7
Income from discontinued operations, net of tax	Income from discontinued operations, net of tax	—		48.0		0.8		140.6			Income from discontinued operations, net of tax	6.2		—		8.1		0.8
Net income (loss)											Net income (loss)	$	41.4	$	(19.1)	$	98.8	$	47.5

Net (loss) income attributable to Zurn Elkay common stockholders		$	(19.1)	$	64.1	$	47.5	$	187.3

Basic net (loss) income per share:
Basic net income (loss) per share:											Basic net income (loss) per share:
Continuing operations	Continuing operations	$	(0.11)	$	0.13	$	0.33	$	0.39		Continuing operations	$	0.20	$	(0.11)	$	0.52	$	0.33
Discontinued operations	Discontinued operations	$	—	$	0.40	$	0.01	$	1.17		Discontinued operations	$	0.04	$	—	$	0.05	$	0.01
Net (loss) income		$	(0.11)	$	0.53	$	0.33	$	1.55
Diluted net (loss) income per share:
Net income (loss)											Net income (loss)	$	0.24	$	(0.11)	$	0.57	$	0.33
Diluted net income (loss) per share:											Diluted net income (loss) per share:
Continuing operations	Continuing operations	$	(0.11)	$	0.13	$	0.32	$	0.38		Continuing operations	$	0.20	$	(0.11)	$	0.51	$	0.32
Discontinued operations	Discontinued operations	$	—	$	0.38	$	0.01	$	1.13		Discontinued operations	$	0.04	$	—	$	0.05	$	0.01
Net (loss) income		$	(0.11)	$	0.51	$	0.33	$	1.50
Net income (loss)											Net income (loss)	$	0.24	$	(0.11)	$	0.56	$	0.33
Weighted-average number of shares outstanding (in thousands):	Weighted-average number of shares outstanding (in thousands):										Weighted-average number of shares outstanding (in thousands):
Basic	Basic	174,867		121,385		142,699		120,558			Basic	173,276		174,867		174,632		142,699
Effect of dilutive equity awards	Effect of dilutive equity awards	—		3,703		2,004		3,968			Effect of dilutive equity awards	2,866		—		2,803		2,004
Diluted	Diluted	174,867		125,088		144,703		124,526			Diluted	176,142		174,867		177,435		144,703

See notes to the condensed consolidated financial statements.

Table of Contents

Zurn Elkay Water Solutions Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in Millions)

(Unaudited)
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net (loss) income $ (19.1) $ 64.1 $ 47.5 $ 187.3
Other comprehensive income (loss):
Foreign currency translation adjustments (4.1) (10.3) (4.1) (6.6)
Change in pension and postretirement defined benefit plans, net of tax — — — (0.2)
Other comprehensive loss, net of tax (4.1) (10.3) (4.1) (6.8)
Total comprehensive (loss) income $ (23.2) $ 53.8 $ 43.4 $ 180.5


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Net income (loss)	$	41.4	$	(19.1)	$	98.8	$	47.5
Other comprehensive income (loss):
Foreign currency translation adjustments	(2.1)		(4.1)		1.4		(4.1)



Other comprehensive income (loss), net of tax	(2.1)		(4.1)		1.4		(4.1)

Total comprehensive income (loss)	$	39.3	$	(23.2)	$	100.2	$	43.4

See notes to the condensed consolidated financial statements.

Table of Contents

Zurn Elkay Water Solutions Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Millions)

(Unaudited)


		Nine Months Ended					Nine Months Ended
		September 30, 2022		September 30, 2021			September 30, 2023		September 30, 2022
Operating activities	Operating activities					Operating activities
Net income	Net income	$	47.5	$	187.3	Net income	$	98.8	$	47.5
Adjustments to reconcile net income to cash provided by operating activities:	Adjustments to reconcile net income to cash provided by operating activities:					Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	Depreciation	11.8		41.8		Depreciation	22.3		11.8
Amortization of intangible assets	Amortization of intangible assets	19.1		27.6		Amortization of intangible assets	44.0		19.1

Non-cash asset impairment						Non-cash asset impairment	2.5		—

Loss (gain) on dispositions of long-lived assets		0.3		(10.1)
Loss on dispositions of long-lived assets						Loss on dispositions of long-lived assets	—		0.3
Deferred income taxes	Deferred income taxes	4.1		(6.6)		Deferred income taxes	(7.1)		4.1
Other non-cash expenses	Other non-cash expenses	5.3		1.7		Other non-cash expenses	1.8		5.3

Stock-based compensation expense	Stock-based compensation expense	15.5		38.3		Stock-based compensation expense	30.5		15.5
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Receivables		(34.4)		(67.5)
Receivables, net						Receivables, net	(14.0)		(34.4)
Inventories	Inventories	(50.9)		(58.7)		Inventories	57.7		(50.9)
Other assets	Other assets	34.8		(7.1)		Other assets	17.1		34.8
Accounts payable	Accounts payable	9.7		82.4		Accounts payable	(56.4)		9.7
Accruals and other	Accruals and other	(50.2)		16.7		Accruals and other	(1.5)		(50.2)
Cash provided by operating activities	Cash provided by operating activities	12.6		245.8		Cash provided by operating activities	195.7		12.6

Investing activities	Investing activities					Investing activities
Expenditures for property, plant and equipment	Expenditures for property, plant and equipment	(4.3)		(21.6)		Expenditures for property, plant and equipment	(15.9)		(4.3)
Acquisitions, net of cash acquired	Acquisitions, net of cash acquired	(44.8)		(3.4)		Acquisitions, net of cash acquired	—		(44.8)
Proceeds from dispositions of long-lived assets	Proceeds from dispositions of long-lived assets	1.3		14.3		Proceeds from dispositions of long-lived assets	0.3		1.3

Proceeds from insurance claims						Proceeds from insurance claims	9.0		—
Proceeds associated with divestiture of discontinued operations	Proceeds associated with divestiture of discontinued operations	35.0		4.2		Proceeds associated with divestiture of discontinued operations	—		35.0
Cash used for investing activities	Cash used for investing activities	(12.8)		(6.5)		Cash used for investing activities	(6.6)		(12.8)

Financing activities	Financing activities					Financing activities
Proceeds from borrowings of debt	Proceeds from borrowings of debt	85.0		—		Proceeds from borrowings of debt	13.0		85.0
Repayments of debt	Repayments of debt	(89.4)		(1.7)		Repayments of debt	(17.7)		(89.4)

Proceeds from exercise of stock options	Proceeds from exercise of stock options	1.9		23.5		Proceeds from exercise of stock options	1.9		1.9
Taxes withheld and paid on employees' share-based payment awards	Taxes withheld and paid on employees' share-based payment awards	(0.5)		(1.4)		Taxes withheld and paid on employees' share-based payment awards	(1.9)		(0.5)
Repurchase of common stock	Repurchase of common stock	—		(0.9)		Repurchase of common stock	(100.2)		—
Payment of common stock dividends	Payment of common stock dividends	(20.1)		(32.6)		Payment of common stock dividends	(36.6)		(20.1)

Cash used for financing activities	Cash used for financing activities	(23.1)		(13.1)		Cash used for financing activities	(141.5)		(23.1)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	Effect of exchange rate changes on cash, cash equivalents and restricted cash	(1.4)		(4.2)		Effect of exchange rate changes on cash, cash equivalents and restricted cash	0.7		(1.4)
(Decrease) increase in cash, cash equivalents and restricted cash		(24.7)		222.0
Increase (decrease) in cash, cash equivalents and restricted cash						Increase (decrease) in cash, cash equivalents and restricted cash	48.3		(24.7)
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	96.6		255.6		Cash, cash equivalents and restricted cash at beginning of period	124.8		96.6
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	71.9	$	477.6	Cash, cash equivalents and restricted cash at end of period	$	173.1	$	71.9

See notes to the condensed consolidated financial statements.

Table of Contents

Zurn Elkay Water Solutions Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, ~~2022~~2023

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements included herein have been prepared by Zurn Elkay Water Solutions Corporation ~~(formerly known as Zurn Water Solutions Corporation)~~ (“Zurn Elkay” or the “Company”) in accordance with accounting principles generally accepted in the United States ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, the condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods. Results for the interim periods are not necessarily indicative of results that may be expected for the year ending December 31, ~~2022.~~2023. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

The Company

~~As previously disclosed, on~~On July 1, 2022, ~~the Company~~Zurn Water Solutions Corporation ("Zurn") completed its combination with Elkay Manufacturing Company (“Elkay”) through the ~~merger~~Merger of Elkay with and into a newly created subsidiary of the Company, with Elkay surviving as a wholly owned subsidiary of Zurn Elkay (the “Merger” or "Elkay Transaction"). The Company's results of operations ~~includes~~include the acquired operations subsequent to July 1, 2022. See Note 2, ~~Acquisitions,~~Acquisition, for additional information on the Elkay Transaction.

Zurn Elkay Water Solutions Corporation is a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets what the Company believes to be the broadest sustainable product portfolio of specification-driven water management solutions to improve health, human safety and the environment. The Company's product portfolio includes professional grade water safety and control products, flow system products, hygienic and ~~safety, water distribution~~environmental products, and ~~drainage,~~ drinking water ~~finish plumbing, hygienic, environmental and site works~~ products for public and private spaces that deliver superior value to building owners, positively impact the environment and human hygiene and reduce product installation time. The Company's heritage of innovation and specification has allowed it to provide highly-engineered, mission-critical solutions to customers for decades and affords ~~the Company~~it the privilege of having long-term, valued relationships with market leaders. The Company operates in a disciplined way and the Zurn Elkay Business System (“ZEBS”)~~, described below,~~ is its operating philosophy. Grounded in the spirit of continuous improvement, ZEBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of ~~the Company's~~its business.

~~Following the Merger with Elkay, the Company continues~~Reclassifications

Certain prior year amounts have been reclassified to manage and evaluate its operations as a single operating segment and reporting unit structure primarily due to similarities in its products, production process, geographical footprint, customers, and methods of distribution. The Company’s chief operating decision-maker is the Chief Executive Officer who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

~~Spin-Off of Process & Motion Control Segment~~

On October 4, 2021, the Company completed a Reverse Morris Trust tax-free spin-off transaction (the “Spin-off Transaction”) in which (i) substantially all the assets and liabilities of the Company's Process & Motion Control ("PMC") business were transferred to a newly created subsidiary, Land Newco, Inc. (“Land”), (ii) the shares of Land were distributedconform to the ~~Company's stockholders pro rata, and (iii) Land was merged with a subsidiary of Regal Rexnord Corporation (formerly known as Regal Beloit Corporation), in which~~presentation used for the ~~stock of Land was converted into a specified number of shares of Regal Rexnord Corporation.~~

As a result of the Spin-Off Transaction, in accordance with authoritative guidance, the operating results of PMC are reported as discontinued operations in the condensed consolidated statements of operations for all prior periods presented. The condensed consolidated statements of cash flows has not been adjusted to separately disclose cash flows related to the discontinued operations. See Note 4, Discontinued Operations for additional information.nine months ended September 30, 2023.

Table of Contents

~~Recent Accounting Pronouncements~~

~~In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04,~~ ~~Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~ ("ASU 2020-04"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate that is expected to be discontinued because of reference rate reform. The amendments in this update provide optional expedients and exceptions for applying GAAP to instruments affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this ASU are effective for all entities as of March 12, 2020, through December 31, 2022. The Company did not modify any material contracts due to reference rate reform during the nine months ended September 30, 2022. The Company will continue to evaluate the impact this guidance will have on its consolidated financial statements for all future transactions affected by reference rate reform during the time period referenced above.

2. ~~Acquisitions~~

~~Nine Months Ended September 30, 2022~~Acquisition

Elkay Merger

On July 1, 2022, the Company ~~and Elkay~~ completed the Elkay Merger for a ~~preliminary~~ purchase price of ~~$1,462.9~~$1,457.8 million. Elkay, a market leader of ~~commercial sinks and~~ drinking water solutions and commercial sinks, complements the Company's existing product portfolio. The ~~preliminary~~ purchase price includes ~~$1,417.0~~$1,411.9 million of Zurn's common stock based on Zurn's closing stock price of $27.48 on July 1, 2022, and $45.9 million of net cash payments for the repayment of Elkay's ~~existing~~ term loan and Elkay's transaction related costs outstanding that were in excess of Elkay's cash and cash equivalents ~~balance~~ at the time of closing. Pursuant to the terms of the ~~Merger Agreement, Zurn~~merger agreement, the Company issued 51,564,524 shares of its common stock, ~~$0.01 par value per share, of the Company ("Company common stock"),~~ which represented approximately 29% of ~~the 177,746,770~~ outstanding shares ~~of the Company common stock~~ immediately following the Merger closing. The total shares of Company common stock issued is preliminary and subject to change upon finalization of customary post-closing adjustments with respect to cash, indebtedness and working capital. The Company incurred transaction-related costs of approximately $33.7 million forMerger. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2022. These costs were associated with legal~~2023, we completed the final price adjustments and ~~professional services and were recognized as selling, general and administrative expenses~~the adjusted purchase price is reflected in the ~~condensed consolidated statements~~purchase price amounts above, following the return of ~~operations.~~186,020 of the shares issued at closing to the Company as a result of lower working capital and cash balances at closing compared to targets stipulated in the merger agreement. The shares returned to the Company were canceled upon receipt.

~~As previously announced, upon the Merger closing and in~~In accordance with the ~~terms and conditions of the Merger Agreement,~~merger agreement, at closing the Company increased the size of its Board of Directors to eleven members and appointed two directors designated by ~~Elkay were appointed to~~Elkay. As of September 30, 2023, the ~~board.~~Board of Directors consisted of ten members, including one director designated by Elkay. Zurn senior management immediately prior to the consummation of the Elkay ~~Transaction~~Merger remained as the executive officers of the Company immediately after the Elkay ~~Transaction.~~Merger. The Company's management determined that the Company is the accounting acquirer in the Elkay ~~Transaction~~Merger based on the facts and circumstances noted within this section and other relevant factors. As such, the Company applied the acquisition method of accounting to the identifiable assets and liabilities of the Elkay business, which have been measured at estimated fair value as of the date of the business combination. The excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill, which is not expected to be deductible for tax purposes.

Elkay’s assets and liabilities were measured at estimated fair values at July 1, 2022, primarily using Level 3 inputs. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the Merger date. ~~See Note 14, Fair Value Measurements, for additional information. Due to the timing~~

As of ~~the business combination and the nature of the net assets acquired, at September~~June 30, ~~2022,~~2023, the valuation process to determine the fair values ~~is not complete and further adjustments are expected. The Company has estimated~~of the ~~preliminary fair value of~~ net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price allocation adjustments will be recorded during the measurement period ~~but no later than one year from the date of the Merger.~~was complete. The ~~Company will reflect measurement period adjustments in the period in which the adjustments are determined.~~

~~Table of Contents~~

~~The preliminary~~final fair value of the assets acquired and liabilities assumed were as follows (in millions):

Table of Contents

As Reported
June 30, 2023

Assets acquired:

~~Assets acquired:~~Receivables, net

~~Receivables, net~~

~~92.1~~92.0

Inventories

~~165.9~~139.5

Other current assets

~~9.9~~8.5

Property, plant and equipment, net

~~147.1~~127.1

Intangible assets, net

~~860.5~~865.5

Goodwill

~~505.0~~546.2

Other assets

~~73.8~~56.9

Total assets acquired

~~1,854.3~~1,835.7

Liabilities assumed:

Trade payables

~~30.4~~

30.5

Compensation and benefits

~~39.1~~39.3

Current portion of pension and postretirement benefit obligations

17.3

Other current liabilities

~~30.1~~45.8

Operating lease liability

~~40.5~~24.2

Pension and postretirement benefit obligations

3.6

Deferred income taxes

~~222.6~~206.7

Other liabilities

~~7.8~~10.5

Total liabilities assumed

~~391.4~~377.9

Total ~~preliminary~~ purchase price

~~1,462.9~~1,457.8

Unaudited Pro Forma Information

The following unaudited supplemental pro forma financial information presents the financial results from continuing operations for the nine months ended September 30, 2022 ~~and 2021~~ as if the Elkay Merger had occurred on January 1, ~~2021.~~2022. The pro forma financial information includes, where applicable, adjustments for: (i) additional amortization expense that would have been recognized related to the acquired intangible assets, (ii) additional depreciation expense that would have been recognized related to the acquired property, plant, and equipment, (iii) ~~transaction~~removing Elkay Merger-Related costs ~~and other one-time non-recurring costs which reduced expenses~~recognized by ~~$33.7 million for~~Elkay during the nine months ended September 30, 2022 as these costs will not affect the combined operations, and increased expenses by $33.7 million for the nine months ended September 30, 2021, (v) additional cost of sales related to the inventory valuation adjustment which reduced expenses by $14.6 million for the nine months ended September 30, 2022 and increased expenses by $18.3 million for the nine months ended September 30, 2021, and (vi)(iv) the estimated income tax effect on the pro forma adjustments. The pro forma financial information excludes adjustments for estimated cost synergies or other effects of the integration of the Elkay Merger.

The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the Elkay Merger been completed as of the date indicated or the results that may be obtained in the future.

Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Net sales $ 1,240.2 $ 1,102.5
Net income (loss) from continuing operations $ 71.4 $ (3.8)
Earnings per share from continuing operations
Basic $ 0.50 $ (0.03)
Assuming dilution $ 0.49 $ (0.03)

For the period from July 1, 2022 through September 30, 2022, Elkay had net sales and a net loss of $149.9 million and $9.4 million, respectively, which amounts include the impact of purchase accounting adjustments, and are included in the condensed consolidated statements of operations for the period from July 1, 2022 through September 30, 2022.

~~Table of Contents~~

~~Fiscal Year 2021~~

On November 17, 2021, the Company completed the acquisition of the Wade Drains business ("Wade Drains") from McWane, Inc. for a cash purchase price of $12.6 million, excluding transaction costs and net of cash acquired. During the nine months ended September 30, 2022, the Company received a $1.1 million cash payment from the sellers of Wade Drains in connection with finalizing the acquisition date trade working capital, which is included in the total cash purchase price above. Wade Drains manufactures a wide range of specified commercial plumbing products for customers across North America and complements the Company's existing flow systems product portfolio.

On April 16, 2021, the Company acquired substantially all of the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch") for a cash purchase price of $4.5 million, excluding transaction costs and net of cash acquired. The Company paid $3.8 million to the sellers at closing, with the remaining $0.7 million payable to the sellers upon settlement of certain indemnities within two years of closing, ATS GREASEwatch develops, manufactures and markets remote tank monitoring devices, alarms, software and services for various applications and provides technology to enhance and expand our current product offerings.

The acquisitions have been accounted for as business combinations and were recorded by allocating the purchase prices to the fair value of assets acquired and liabilities assumed at the acquisition dates. The excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The preliminary purchase price allocations associated with these acquisitions resulted in tax deductible goodwill of $7.5 million, customer relationship intangibles assets of $1.6 million, trade working capital of $9.0 million and $(1.0) million of other net liabilities. During the nine months ended September 30, 2022, the preliminary purchase price allocations for Wade Drains were adjusted, resulting in a $1.3 million decrease to goodwill, primarily related to the aforementioned cash payment received from the sellers of Wade Drains. The preliminary purchase price allocations for Wade Drains will be completed within the one-year period following the acquisition date.

The Company's results of operations include the acquired operations subsequent to the acquisition dates. Pro-forma results of operations and certain other U.S. GAAP disclosures related to these acquisitions have not been presented because the acquisitions did not significantly impact the Company's condensed consolidated statements of operations or financial position.


	Nine Months Ended
	September 30, 2022
Net sales	$	1,240.2
Net income from continuing operations	$	71.4
Earnings per share from continuing operations
Basic	$	0.50
Assuming dilution	$	0.49

3. Restructuring and Other Similar Charges

During the three and nine months ended September 30, ~~2022,~~2023, the Company continued to execute various restructuring actions. These initiatives were implemented to drive efficiencies and reduce operating costs while also modifying the Company's footprint to reflect changes in the markets it serves, the impact of acquisitions, including Elkay, on the Company's overall manufacturing capacity and the refinement of its overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs and other facility rationalization costs. ~~The~~Management expects to continue executing similar initiatives to optimize its operating margin and manufacturing footprint. As such, the Company expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of assets, lease termination costs and other facility rationalization costs. ~~Since~~The Company's restructuring plans are preliminary and the ~~Company’s evaluation~~full extent of ~~other potential restructuring actions are in process,~~ related ~~restructuring~~ expenses ~~if any,~~ are not yet estimable.

Table of Contents

The following table summarizes the Company's restructuring and other similar charges during the three and nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, (in millions):

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Employee termination benefits $ 10.5 $ 0.7 $ 11.8 $ 1.6
Contract termination and other associated costs 1.2 — 1.3 —
Total restructuring and other similar costs $ 11.7 $ 0.7 $ 13.1 $ 1.6

~~Table of Contents~~


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Employee termination benefits	$	0.5	$	10.5	$	3.4	$	11.8
Contract termination and other associated costs	1.7		1.2		8.5		1.3
Total restructuring and other similar costs	$	2.2	$	11.7	$	11.9	$	13.1

The following table summarizes the activity in the Company's restructuring accrual for the nine months ended September 30, ~~2022~~2023 (in millions):

Employee termination benefits Contract termination and other associated costs Total
Accrued Restructuring Costs, December 31, 2021 (1) $ 2.4 $ — $ 2.4
Elkay opening balance sheet accrual 4.7 — 4.7
Charges 11.8 1.3 13.1
Cash payments (8.0) (0.1) (8.1)
Accrued Restructuring Costs, September 30, 2022 (1) $ 10.9 $ 1.2 $ 12.1


	Employee termination benefits		Contract termination and other associated costs		Total
Accrued Restructuring Costs, December 31, 2022 (1)	$	7.8	$	1.2	$	9.0

Charges	3.4		8.5		11.9
Cash payments	(9.2)		(7.0)		(16.2)
Non-cash charges (2)	—		(2.5)		(2.5)
Accrued Restructuring Costs, September 30, 2023 (1)	$	2.0	$	0.2	$	2.2

____________________

(1)As of September 30, 2022, $11.2 million of the restructuring accrual is included in other current liabilities and $0.9 million is included in other liabilities in the condensed consolidated balance sheets. As of December 31, 2021,2023, the restructuring accrual is included in other current liabilities in the condensed consolidated balance sheets. As of December 31, 2022, $8.4 million of the restructuring accrual is included in other current liabilities and $0.6 million is included in other liabilities in the condensed consolidated balance sheets.

(2)Non-cash charges consist of asset impairments based on Level 3 inputs.

4. Discontinued Operations

~~During the year ended December 31,~~On October 4, 2021, the Company completed a Reverse Morris Trust tax-free spin-off transaction (the “Spin-Off Transaction”) in which (i) substantially all the ~~Spin-Off Transaction~~assets and liabilities of ~~PMC.~~the Company's Process & Motion Control ("PMC") business were transferred to a newly created subsidiary, Land Newco, Inc. (“Land”), (ii) the shares of Land were distributed to the Company's stockholders pro rata, and (iii) Land was merged with a subsidiary of Regal Rexnord Corporation (formerly known as Regal Beloit Corporation), in which the stock of Land was converted into a specified number of shares of Regal Rexnord Corporation in accordance with the exchange ratio. The operating results of PMC are reported as discontinued operations in the condensed consolidated statements of operations for all ~~prior~~ periods presented, as the Spin-Off Transaction of PMC represented a strategic shift that had a major impact on operations and financial results. The condensed consolidated statements of cash flows for the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021~~2022 have not been adjusted to separately disclose cash flows related to the discontinued operations. During ~~the nine months ended September 30,~~ 2022, the Company received $35.0 million from Regal Rexnord Corporation as a result of the final working capital and cash balances at closing exceeding the targets stipulated in the Spin-Off Transaction agreement.

The major components of the Income from discontinued operations, net of tax presented in the condensed consolidated statements of operations for the three and nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, are as follows (in millions):

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net sales $ — $ 327.5 $ — $ 973.0
Cost of sales — (204.5) — (598.5)
Selling, general and administrative expenses — (61.0) — (184.2)
Restructuring and other similar charges — (1.3) — (2.1)
Amortization of intangible assets — (3.3) — (9.9)
Interest expense, net — (1.1) — (4.1)
Other non-operating income, net — 3.9 — 5.3
Income from discontinued operations before income tax — 60.2 — 179.5
Income tax (provision) benefit — (12.2) 0.8 (39.0)
Equity method investment income — — — 0.3
Non-controlling interest income — — — 0.2
Income from discontinued operations, net of tax $ — $ 48.0 $ 0.8 $ 140.6


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022


Selling, general and administrative expenses (1)	$	6.6	$	—	$	8.4	$	—








Income from discontinued operations before income tax	6.6		—		8.4		—

Income tax (expense) benefit	(0.4)		—		(0.3)		0.8


Income from discontinued operations, net of tax	$	6.2	$	—	$	8.1	$	0.8

(1)Selling, general and administrative expenses include the reversal of certain accruals as a result of costs the Company will no longer incur related to the Spin-Off Transaction.

1211

Table of Contents

The condensed consolidated statements of cash flows for the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021~~2022 have not been adjusted to separately disclose cash flows related to discontinued operations. However, the significant investing and financing cash flows and other significant non-cash operating items associated with the discontinued operations were as follows (in millions):

Nine Months Ended
September 30, 2022 September 30, 2021
Depreciation $ — $ 34.9
Amortization of intangible assets — 9.9
Gain on disposition of assets — (10.1)
Deferred income taxes — 0.5
Other non-cash charges — (0.3)
Stock-based compensation — 13.9
Expenditures for property, plant and equipment — (17.5)
Proceeds from dispositions of long-lived assets — 14.3
Proceeds associated with divestiture of discontinued operations 35.0 4.2
Repayments of debt — (1.6)
Proceeds from exercise of stock options — 12.8
Taxes withheld and paid on employees' shared-based payment awards — (0.5)

During the fiscal year ended March 31, 2019, the Company completed the sale of its VAG business, which was previously included in its Water Management platform. The sale agreement provided for contingent consideration based on Earn-out EBITDA, as defined in the sale agreement. During the three months ended September 30, 2021, the Company received a $4.2 million cash payment as a result of the VAG business performance in its fiscal year ended March 31, 2021, which represented the final period of the earn-out, which was recorded in income from discontinued operations, net of tax in the Company's condensed consolidated statements of operations.


	Nine Months Ended
	September 30, 2023		September 30, 2022











Proceeds associated with divestiture of discontinued operations	$	—	$	35.0

5. Revenue Recognition

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when obligations under the terms of a contract with the customer are satisfied. For the majority of the Company's product sales, revenue is recognized at a point-in-time when control of the product is transferred to the customer, which generally occurs when the product is shipped from the Company's manufacturing facility to the customer. When contracts include multiple products to be delivered to the customer, generally each product is separately priced and is determined to be distinct within the context of the contract. Other than a standard assurance-type warranty that the product will conform to agreed-upon specifications, there are generally no other significant post-shipment obligations. The expected costs associated with standard warranties ~~continues~~continue to be recognized as an expense when the products are sold.

When the contract provides the customer the right to return eligible products or when the customer is part of a sales rebate program, the Company reduces revenue at the point of sale using current facts and historical experience by using an estimate for expected product returns and rebates associated with the transaction. The Company adjusts these estimates at the earlier of when the most likely amount of consideration that is expected to be received changes or when the consideration becomes fixed. Accordingly, an increase or decrease to revenue is recognized at that time.

Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has elected to recognize the cost for freight and shipping when control of products has transferred to the customer as a component of cost of sales in the consolidated statements of operations. The Company classifies shipping and handling fees billed to customers as net sales and the corresponding costs are classified as cost of sales in the condensed consolidated statements of operations.

1312

Table of Contents

Revenue by Category

The Company designs, procures, manufactures, and markets a comprehensive portfolio of water management solutions. The Company disaggregates its sales by customer type and geographic location, which the Company believes best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows may be impacted differently by certain economic factors. The following tables present ~~the Company's~~ revenue disaggregated by customer type and the geographic region of the end customer ~~geography~~ (in millions):


		Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
Customer Type	Customer Type	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021			Customer Type	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Institutional	Institutional	$	169.8	$	86.8	$	366.2	$	255.9		Institutional	$	179.8	$	169.8	$	531.6	$	366.2
Commercial	Commercial	127.9		70.2		287.8		208.0			Commercial	115.2		127.9		339.1		287.8
All other	All other	120.0		72.7		287.5		214.7			All other	103.4		120.0		303.0		287.5
Total	Total	$	417.7	$	229.7	$	941.5	$	678.6		Total	$	398.4	$	417.7	$	1,173.7	$	941.5


		Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
Geography	Geography	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021			Geography	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
United States	United States	$	383.6	$	209.6	$	860.7	$	614.9		United States	$	366.6	$	383.6	$	1,082.6	$	860.7
Canada	Canada	21.8		16.7		57.4		49.4			Canada	21.5		21.8		59.6		57.4
Rest of world	Rest of world	12.3		3.4		23.4		14.3			Rest of world	10.3		12.3		31.5		23.4
Total	Total	$	417.7	$	229.7	$	941.5	$	678.6		Total	$	398.4	$	417.7	$	1,173.7	$	941.5

Contract Balances

For substantially all of the Company's product sales, the customer is billed 100% of the contract value when the product ships and payment is generally due 30 days from shipment. Certain contracts include longer payment periods; however, the Company has elected to utilize the practical expedient in which the Company will only recognize a financing component to the sale if payment is due more than one year from the date of shipment.

Billings are recorded as accounts receivable when an unconditional right to the contractual consideration exists. Contract assets arise when the Company performs by transferring goods or services to a customer before the customer pays consideration, or before the customer’s payment is due. A contract liability exists when the Company has received consideration or the amount is due from the customer in advance of revenue recognition. Contract liabilities and contract assets as of September 30, ~~2022~~2023 and ~~September 30, 2021~~December 31, 2022 were not material.

Backlog

The Company had backlog of ~~$65.8~~$45.8 million as of September 30, ~~2022,~~2023, which represents the most likely amount of consideration expected to be received in satisfying the remaining backlog under open contracts. The Company has elected to use the optional exemption provided by ASC 606-10-50-14A for variable consideration, and has not included estimated rebates in the amount of unsatisfied performance obligations. The Company expects to recognize approximately ~~94%~~95% of the backlog in the remaining three months of the year ending December 31, ~~2022,~~2023, and the remaining approximately 6%5% in ~~2023~~2024 and beyond.

Timing of Performance Obligations Satisfied at a Point in Time

The Company determined that the customer is able to control the product when it is delivered to them; thus, depending on the shipping terms, control will transfer at different points between the Company's manufacturing facility or warehouse and the customer’s location. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset and the customer has significant risks and rewards of ownership of the asset.

Variable Consideration

The Company provides volume-based rebates and the right to return product to certain customers, which are accrued for based on current facts and historical experience. Rebates are paid either on an annual or quarterly basis. There are no other significant variable consideration elements included in the Company's contracts with customers.

1413

Table of Contents

Contract Costs

The Company has elected to expense contract costs as incurred if the amortization period is expected to be one year or less. If the amortization period of these costs is expected to be greater than one year, the costs would be subject to capitalization. As of September 30, ~~2022~~2023 and ~~September 30, 2021,~~December 31, 2022, the contract assets capitalized, as well as amortization recognized in the three and nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, are not significant and no impairment losses were recognized.

Allowance for ~~Doubtful Accounts~~Credit Losses

The Company assesses the collectability of customer receivables based on the credit worthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for ~~doubtful accounts,~~credit losses, the Company also considers various factors, including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors, including forward-looking information when establishing ~~adequate~~ allowances for ~~doubtful accounts,~~credit losses, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables.

6. Income Taxes

The provision for income taxes for all periods presented is based on an estimated effective income tax rate for the respective fiscal years. The estimated annual effective income tax rate is determined excluding the effect of significant discrete items or items that are reported net of their related tax effects. The tax effect of significant discrete items is reflected in the period in which they occur. The Company's income tax expense is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are generally higher than the U.S. federal statutory rate, state tax rates in the jurisdictions where the Company does business and the Company's ability to utilize various tax credits, capital loss and net operating loss (“NOL”) carryforwards.

The Company regularly reviews its deferred tax assets for recoverability and valuation allowances are established based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences, as deemed appropriate.In addition, all other available positive and negative evidence is taken into consideration for purposes of determining the proper balances of such valuation allowances. As a result of this review, the Company continues to maintain a full valuation allowance against U.S. federal and state capital loss carryforwards and a partial valuation allowance against certain foreign NOL carryforwards and other related foreign deferred tax assets, as well as certain U.S. state NOL carryforwards. Future changes to the balances of these valuation allowances, as a result of this continued review and analysis by the Company, could impact the financial statements for such period of change.

The income tax provision was $12.5 million for the three months ended September 30, 2023, compared to $1.6 million for the three months ended September 30, ~~2022, compared to $5.7 million for the three months ended September 30, 2021.~~2022. The effective income tax rate for the three months ended September 30, ~~2022~~2023 was 26.2% versus (9.1)% ~~versus 26.1%~~ for the three months ended September 30, ~~2021.~~2022. The effective income tax rate for the three months ended September 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments. The income tax provision recognized on the loss from operations for the three months ended September 30, 2022 was primarily due to non-deductible transactions costs associated with the Merger, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the reduction in the valuation allowance associated with certain state NOL carryforwards.

The income tax provision was $34.8 million for the nine months ended September 30, 2023, compared to $22.9 million for the nine months ended September 30, 2022. The effective income tax rate for the nine months ended September 30, 2023 was 27.7% versus 32.9% for the nine months ended September 30, 2022. The effective income tax rate for the nine months ended September 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, ~~and~~ the accrual of various state income taxes partially offset by the reduction in the valuation allowance associated with certain state NOL carryforwards. The effective income tax rate for the three months ended September 30, 2021 was above the U.S. federal statutory rate of 21% primarily due toand the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, ~~the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, and the accrual of various state income taxes,~~ partially offset by the recognition of income tax benefits associated with share-based payments.

The income tax provision was $22.9 million for the three months ended September 30, 2022, compared to $16.6 million for the nine months ended September 30, 2021. The effective income tax rate for the nine months ended September 30, 2022 was 32.9% versus 26.2% for the nine months ended September 30, 2021. The effective income tax rate for the nine months ended September 30, 2022 was above the U.S. federal statutory rate of 21% primarily due to non-deductible transactions costs associated with the Merger, the accrual of ~~foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of~~ additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, ~~and~~ the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments and the reduction in the valuation allowance associated with certain state NOL carryforwards. The effective income tax rate for the nine months ended September 30, 2021 was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments.

1514

Table of Contents

The Company’s total liability for net unrecognized tax benefits as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$6.7 million and $5.9 million, respectively.~~$5.5 million. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in income tax expense. As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the total amount of ~~gross,~~ unrecognized ~~income~~ tax benefits ~~included~~includes gross accrued interest and penalties of ~~$0.5 million.~~$1.0 million and $0.7 million, respectively. The Company recognized ~~$0.0~~$0.3 million and ~~$0.1~~$0.0 million of net interest and penalties as income tax expense during the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, respectively.

The Company conducts business in multiple locations within and outside the U.S. Consequently, the Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Currently, the Company is undergoing routine, periodic income tax examinations in foreign jurisdictions. During the nine month Transition Period ended December 31, 2020, the Internal Revenue Service (the “IRS”) completed an income tax examination of the Company’s U.S. consolidated federal income tax returns for the tax years ended March 31, 2016 and 2017. The Company paid approximately $1.5 million upon the conclusion of such examination, all of which was previously accrued in the Company’s financial statements. In accordance with the terms of the ~~VAG~~ sale agreement relating to a group of certain previously owned legal entities (the parent of which was VAG Holding GbmH, “VAG”), the Company is required to indemnify the purchaser for any future income tax liabilities associated with all open tax years ending prior to, and including, the short period ended on the date of the Company's sale of VAG. VAG was notified by the German tax authorities of its intention to conduct an income tax examination of the VAG German entities’ corporate income and trade tax returns for the tax years ended March 31, 2014 through ~~2019.~~2020. Similarly, in accordance with the Spin-Off Transaction, the Company is required to indemnify Regal Rexnord Corporation for any future income tax liabilities associated with PMC entities relating to all open tax years ending prior to, and including, the short period ended on the date of the Spin-Off. There are currently a number of ongoing ~~income~~ tax examinations being conducted by the applicable tax authorities in ~~various foreign tax jurisdictions~~Germany with respect to certain PMC entities. It appears reasonably possible that the amounts of unrecognized income tax benefits and indemnification liabilities could change in the next twelve months upon conclusion of the current ongoing examinations; however, any potential payments of income tax, interest and penalties are not expected to be significant to the Company's consolidated financial statements. With certain exceptions, the Company is no longer subject to U.S. federal income tax examinations for tax years ending prior to March 31, ~~2019,~~2020, state and local income tax examinations for years ending prior to March 31, ~~2018~~2019 or significant foreign income tax examinations for years ending prior to March 31, ~~2017.~~2018.

7. Earnings per Share

Basic net income per share from continuing and discontinued operations ~~attributable to Zurn Elkay common stockholders~~ is computed by dividing net income from continuing operations and income from discontinued operations, ~~attributable to Zurn Elkay common stockholders,~~ respectively, by the corresponding weighted average number of common shares outstanding for the period. Diluted net income per share from continuing and discontinued operations ~~attributable to Zurn Elkay common stockholders~~ is computed based on the weighted average number of common shares outstanding, increased by the number of incremental shares that would have been outstanding if the potential dilutive shares were issued through the exercise of outstanding stock options to purchase common shares, except when the effect would be anti-dilutive.

The computation for diluted net income per share for the three and nine months ended September 30, ~~2022~~2023 excludes ~~2.3~~0.3 million ~~and 0.8 million common~~ shares due to their anti-dilutive ~~effects, respectively.~~effects. The computation for diluted net income per share for the three and nine months ended September 30, ~~2021~~2022 excludes ~~0.0~~2.3 million and ~~0.2~~0.8 million ~~common~~ shares due to their anti-dilutive effects, respectively.

1615

Table of Contents

8. Stockholders' Equity

Stockholders' equity consists of the following (in millions):
Common stock (1) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Non-controlling interest (2) Total stockholders’ equity
Balance at December 31, 2020 $ 1.2 $ 1,392.9 $ 116.0 $ (73.8) $ 3.0 $ 1,439.3
Total comprehensive income (loss) — — 50.0 (1.8) 0.1 48.3
Stock-based compensation expense — 14.2 — — — 14.2
Proceeds from exercise of stock options — 2.8 — — — 2.8
Repurchase of common stock — — (0.9) — — (0.9)
Common stock dividends ($0.09 per share) — — (10.8) — — (10.8)
Balance at March 31, 2021 $ 1.2 $ 1,409.9 $ 154.3 $ (75.6) $ 3.1 $ 1,492.9
Total comprehensive income — — 73.2 5.3 0.1 78.6
Stock-based compensation expense — 11.6 — — — 11.6
Proceeds from exercise of stock options — 16.6 — — — 16.6
Taxes withheld and paid on employees' share-based payment awards — (1.4) — — — (1.4)
Common stock dividends ($0.09 per share) — — (10.8) — — (10.8)
Balance at June 30, 2021 $ 1.2 $ 1,436.7 $ 216.7 $ (70.3) $ 3.2 $ 1,587.5
Total comprehensive income (loss) — — 64.1 (10.3) — 53.8
Stock-based compensation expense — 11.3 — — — 11.3
Proceeds from exercise of stock options — 4.1 — — — 4.1
Common stock dividends ($0.09 per share) — — (11.0) — — (11.0)
Balance at September 30, 2021 $ 1.2 $ 1,452.1 $ 269.8 $ (80.6) $ 3.2 $ 1,645.7
Common stock (1) Additional
paid-in
capital Retained
deficit Accumulated
other
comprehensive
loss Non-controlling interest (2) Total
stockholders’
equity
Balance at December 31, 2021 $ 1.3 $ 1,436.9 $ (1,236.9) $ (74.9) $ — $ 126.4
Total comprehensive income — — 30.2 2.0 — 32.2
Stock-based compensation expense — 3.9 — — — 3.9
Proceeds from exercise of stock options — 0.5 — — — 0.5
Taxes withheld and paid on employees' share-based payment awards — (0.5) — — — (0.5)
Proceeds associated with divestiture of discontinued operations — — 35.0 — — 35.0
Common stock dividends ($0.03 per share) — (3.8) — — — (3.8)
Balance at March 31, 2022 $ 1.3 $ 1,437.0 $ (1,171.7) $ (72.9) $ — $ 193.7
Total comprehensive income (loss) — — 36.4 (2.0) — 34.4
Stock-based compensation expense — 3.8 — — — 3.8
Proceeds from exercise of stock options — 1.3 — — — 1.3
Common stock dividends ($0.03 per share) — (3.8) — — — (3.8)
Balance at June 30, 2022 $ 1.3 $ 1,438.3 $ (1,135.3) $ (74.9) $ — $ 229.4
Total comprehensive loss — — (19.1) (4.1) — (23.2)
Stock-based compensation expense — 7.8 — — — 7.8
Proceeds from exercise of stock options — 0.1 — — — 0.1
Elkay Merger (3) 0.5 1,416.5 — — — 1,417.0
Common stock dividends ($0.07 per share) — (12.5) — — — (12.5)
Balance at September 30, 2022 $ 1.8 $ 2,850.2 $ (1,154.4) $ (79.0) $ — $ 1,618.6


	Common stock (1)		Additional paid-in capital		Retained deficit		Accumulated other comprehensive loss		Total stockholders’ equity
Balance at December 31, 2021	$	1.3	$	1,436.9	$	(1,236.9)	$	(74.9)	$	126.4
Total comprehensive income	—		—		30.2		2.0		32.2
Stock-based compensation expense	—		3.9		—		—		3.9
Proceeds from exercise of stock options	—		0.5		—		—		0.5
Taxes withheld and paid on employees' share-based payment awards	—		(0.5)		—		—		(0.5)

Proceeds associated with divestiture of discontinued operations	—		—		35.0		—		35.0
Common stock dividends ($0.03 per share)	—		(3.8)		—		—		(3.8)

Balance at March 31, 2022	$	1.3	$	1,437.0	$	(1,171.7)	$	(72.9)	$	193.7
Total comprehensive income (loss)	—		—		36.4		(2.0)		34.4
Stock-based compensation expense	—		3.8		—		—		3.8
Proceeds from exercise of stock options	—		1.3		—		—		1.3




Common stock dividends ($0.03 per share)	—		(3.8)		—		—		(3.8)

Balance at June 30, 2022	$	1.3	$	1,438.3	$	(1,135.3)	$	(74.9)	$	229.4
Total comprehensive loss	—		—		(19.1)		(4.1)		(23.2)
Stock-based compensation expense	—		7.8		—		—		7.8
Proceeds from exercise of stock options	—		0.1		—		—		0.1




Elkay Merger (2)	0.5		1,416.5		—		—		1,417.0
Common stock dividends ($0.07 per share)	—		(12.5)		—		—		(12.5)

Balance at September 30, 2022	$	1.8	$	2,850.2	$	(1,154.4)	$	(79.0)	$	1,618.6


	Common stock (1)		Additional paid-in capital		Retained deficit		Accumulated other comprehensive loss		Total stockholders’ equity
Balance at December 31, 2022	$	1.8	$	2,853.1	$	(1,164.9)	$	(75.0)	$	1,615.0
Total comprehensive income (loss)	—		—		22.8		(0.1)		22.7
Stock-based compensation expense	—		11.2		—		—		11.2
Proceeds from exercise of stock options	—		0.6		—		—		0.6

Elkay Merger (2)	—		(5.1)		—		—		(5.1)
Common stock issued to fund defined contribution plans	—		0.8		—		—		0.8
Repurchase of common stock	—		—		(37.0)		—		(37.0)

Common stock dividends ($0.07 per share)	—		(8.7)		—		—		(8.7)

Balance at March 31, 2023	$	1.8	$	2,851.9	$	(1,179.1)	$	(75.1)	$	1,599.5
Total comprehensive income	—		—		34.6		3.6		38.2
Stock-based compensation expense	—		10.2		—		—		10.2
Proceeds from exercise of stock options	—		0.6		—		—		0.6


Repurchase of common stock	(0.1)		—		(50.8)		—		(50.9)

Common stock dividends ($0.07 per share)	—		(9.0)		—		—		(9.0)

Balance at June 30, 2023	$	1.7	$	2,853.7	$	(1,195.3)	$	(71.5)	$	1,588.6
Total comprehensive income (loss)	—		—		41.4		(2.1)		39.3
Stock-based compensation expense	—		10.0		—		—		10.0
Proceeds from exercise of stock options	—		0.7		—		—		0.7
Taxes withheld and paid on employees' share-based payment awards	—		(1.9)		—		—		(1.9)

Repurchase of common stock	—		—		(13.0)		—		(13.0)


Common stock dividends ($0.07 per share)	—		(12.1)		—		—		(12.1)

Balance at September 30, 2023	$	1.7	$	2,850.4	$	(1,166.9)	$	(73.6)	$	1,611.6

____________________

Table of Contents

(1)During the three and nine months ended September 30, 2023, the Company issued 135,502 and 462,738 shares of common stock, respectively, upon the exercise of stock options, vesting of restricted stock units, and for other common stock issuances. During the three and nine months ended September 30, 2022, the Company issued 51,577,307 and 52,039,485 shares of common stock, respectively, upon the exercise of stock options, vesting of restricted stock units, the Elkay ~~merger,~~Merger, and for other common stock ~~awards, respectively.~~issuances.

(2)~~Non-controlling interest through~~During the ~~Spin-Off Transaction represented a 5% non-controlling interest in a PMC joint venture relationship. The Company has no remaining non-controlling interest subsequent~~nine months ended September 30, 2023, 186,020 of the shares issued at closing of the Elkay Merger were returned to the ~~Spin-Off Transaction.~~

~~Table~~Company as a result of ~~Contents~~

~~(3)~~lower working capital and cash balances at closing compared to targets stipulated in the Merger Agreement. The shares returned to the Company were canceled upon receipt. Refer to Note 2, ~~Acquisitions~~Acquisition for additional ~~information regarding the Elkay acquisition.~~information.

~~Prior year amounts disclosed within this note include amounts attributable to the Company's discontinued operations, unless otherwise noted. Refer to Note 4 Discontinued Operations for further detail.~~

Share Repurchase Program

During fiscal 2015, the Company's Board of Directors approved a common stock repurchase program (the "Repurchase Program") authorizing the repurchase of up to $200.0 million of the Company's common stock from time to time on the open market or in privately negotiated transactions. On January 27, 2020, the Company's Board of Directors approved increasing the remaining share repurchase authority under the Repurchase Program to $300.0 million. On February 8, 2023, the Company's Board of Directors approved increasing the remaining share repurchase authority under the Repurchase Program to $500.0 million. The Repurchase Program does not require the Company to acquire any particular amount of common stock and does not specify the timing of purchases or the prices to be paid; however, the program will continue until the maximum amount of dollars authorized have been expended or until it is modified or terminated by the ~~Board. The Company did not repurchase any shares during~~Board of Directors. During the three ~~and nine~~ months ended September 30, ~~2022. During the nine months ended September 30, 2021,~~2023, the Company repurchased ~~22,300~~444,606 shares of common stock at a total cost of ~~$0.9~~$13.0 million at a weighted average price of ~~$39.27~~$29.24 per share. During the nine months ended September 30, 2023, the Company repurchased 4,434,475 shares of common stock at a total cost of $100.1 million at a weighted average price of $22.55 per share. The repurchased shares were canceled by the Company upon receipt. ~~A total~~During the three and nine months ended September 30, 2022, the Company did not repurchase any shares of ~~approximately $162.8~~common stock. Approximately $415.5 million of the existing authority remained under the Repurchase Program at September 30, ~~2022.~~2023.

9. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, ~~2022,~~2023, are as follows (in millions):

Foreign Currency Translation and Other Pension and Postretirement Plans Total
Balance at December 31, 2021 $ (70.9) $ (4.0) $ (74.9)
Other comprehensive loss before reclassifications (4.1) — (4.1)
Amounts reclassified from accumulated other comprehensive loss — — —
Net current period other comprehensive loss (4.1) — (4.1)
Balance at September 30, 2022 $ (75.0) $ (4.0) $ (79.0)


	Foreign Currency Translation and Other		Pension and Postretirement Plans		Total
Balance at December 31, 2022	$	(75.1)	$	0.1	$	(75.0)
Other comprehensive income before reclassifications	1.4		—		1.4

Net current period other comprehensive income	1.4		—		1.4
Balance at September 30, 2023	$	(73.7)	$	0.1	$	(73.6)

There were no amounts reclassified from accumulated other comprehensive loss to net income during the three and nine months ended September 30, ~~2022. The following table summarizes the amounts reclassified from accumulated other comprehensive loss to net income during the three~~2023 and ~~nine months ended September 30, 2021 (in millions):~~2022.

~~Three Months Ended~~

~~Nine Months Ended~~

~~September 30, 2021~~

~~Income Statement Line~~

~~Pension and other postretirement plans~~

~~Amortization of prior service credit~~

—

~~(0.2)~~

~~Other income (expense), net~~

~~Provision for income taxes~~

—

~~Total net of tax~~

—

~~(0.2)~~

10. Inventories

The major classes of inventories are summarized as follows (in millions):


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Finished goods	Finished goods	$	282.6	$	169.1	Finished goods	$	221.4	$	285.9
Work in progress	Work in progress	18.5		5.1		Work in progress	14.0		19.1

Raw materials	Raw materials	107.4		14.6		Raw materials	51.0		75.7
Inventories at First-in, First-Out ("FIFO") cost	Inventories at First-in, First-Out ("FIFO") cost	408.5		188.8		Inventories at First-in, First-Out ("FIFO") cost	286.4		380.7
Adjustment to state inventories at Last-in, First-Out ("LIFO") cost	Adjustment to state inventories at Last-in, First-Out ("LIFO") cost	(8.3)		(4.3)		Adjustment to state inventories at Last-in, First-Out ("LIFO") cost	(2.1)		(14.0)
		$	400.2	$	184.5		$	284.3	$	366.7

1817

Table of Contents

11. Goodwill and Intangible Assets

The changes in the net carrying value of goodwill for the nine months ended September 30, ~~2022,~~2023, are presented below (in millions):


Net carrying amount as of December 31, ~~2021~~2022	$	~~254.1~~777.0
Currency translation adjustments	~~(3.0)~~(0.7)
~~Acquisition (1)~~	~~505.0~~
Purchase accounting adjustments (1)	~~(1.3)~~19.0
Net carrying amount as of September 30, ~~2022~~2023	$	~~754.8~~795.3

(1)Refer to Note 2, ~~Acquisitions~~Acquisition for additional information regarding the ~~acquisition and purchase accounting adjustments.~~acquisition.

The gross carrying amount and accumulated amortization for each major class of identifiable intangible assets as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows (in millions):


			September 30, 2022								September 30, 2023
		Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets subject to amortization:	Intangible assets subject to amortization:								Intangible assets subject to amortization:
Patents	Patents	9 years	$	25.5	$	(22.5)	$	3.0	Patents	9 years	$	25.9	$	(22.7)	$	3.2
Customer relationships (including distribution network)	Customer relationships (including distribution network)	16 years	1,040.8		(285.1)		755.7		Customer relationships (including distribution network)	16 years	1,069.6		(336.0)		733.6
Tradenames	Tradenames	19 years	180.2		(6.8)		173.4		Tradenames	19 years	156.8		(14.6)		142.2
Intangible assets not subject to amortization - trademarks and tradenames	Intangible assets not subject to amortization - trademarks and tradenames		87.0		—		87.0		Intangible assets not subject to amortization - trademarks and tradenames		87.0		—		87.0
Total intangible assets, net	Total intangible assets, net	16 years	$	1,333.5	$	(314.4)	$	1,019.1	Total intangible assets, net	16 years	$	1,339.3	$	(373.3)	$	966.0

			December 31, 2021								December 31, 2022
		Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets subject to amortization:	Intangible assets subject to amortization:								Intangible assets subject to amortization:
Patents	Patents	9 years	$	24.9	$	(22.4)	$	2.5	Patents	9 years	$	25.5	$	(22.5)	$	3.0
Customer relationships (including distribution network)	Customer relationships (including distribution network)	15 years	351.1		(269.1)		82.0		Customer relationships (including distribution network)	16 years	1,069.5		(298.2)		771.3
Tradenames	Tradenames	13 years	11.5		(4.0)		7.5		Tradenames	19 years	156.8		(8.5)		148.3
Intangible assets not subject to amortization - trademarks and tradenames	Intangible assets not subject to amortization - trademarks and tradenames		87.1		—		87.1		Intangible assets not subject to amortization - trademarks and tradenames		87.1		—		87.1
Total intangible assets, net	Total intangible assets, net	15 years	$	474.6	$	(295.5)	$	179.1	Total intangible assets, net	16 years	$	1,338.9	$	(329.2)	$	1,009.7

Intangible asset amortization expense totaled ~~$14.5~~$14.7 million and ~~$5.8~~$14.5 million for the three months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, respectively. Intangible asset amortization expense totaled ~~$19.1~~$44.0 million and ~~$17.7~~$19.1 million for the nine months ended September 30, ~~2022~~2023 and September 30, 2021, respectively. Customer relationships acquired during the year ended December 31, 2021 were assigned a weighted-average useful life of 10 years. Customer relationships and tradenames acquired during the nine months ended September 30, 2022, ~~were assigned weighted average useful lives of 16 years and 20 years ,~~ respectively.

~~Based on preliminary purchase accounting, the~~The Company expects to recognize amortization expense on the intangible assets subject to amortization of ~~$33.6~~$58.7 million in the year ending December 31, ~~2022~~2023 (inclusive of the ~~$19.1~~$44.0 million of amortization expense recognized in the nine months ended September 30, ~~2022)~~2023), ~~$58.1 million in 2023, $58.1~~$58.7 million in 2024, ~~$58.0~~$58.7 million in 2025, ~~$57.9~~$58.5 million in 2026, ~~and $57.9~~$58.5 million in ~~2027.~~2027 and $58.5 million in 2028.

1918

Table of Contents

12. Other Current Liabilities

Other current liabilities are summarized as follows (in millions):


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Commissions	Commissions	$	11.6	$	8.1	Commissions	$	11.3	$	9.0

Current portion of operating lease liability	Current portion of operating lease liability	8.3		6.1		Current portion of operating lease liability	10.4		9.4
Income taxes payable	Income taxes payable	1.4		2.1		Income taxes payable	3.2		2.3

Legal and environmental	Legal and environmental	2.3		3.0		Legal and environmental	0.9		2.3
Product warranty (1)	Product warranty (1)	5.5		1.3		Product warranty (1)	4.6		4.2
Restructuring and other similar charges (2)	Restructuring and other similar charges (2)	11.2		2.4		Restructuring and other similar charges (2)	2.2		8.4
Risk management (3)	Risk management (3)	16.6		11.3		Risk management (3)	16.0		16.3
Sales rebates	Sales rebates	58.2		38.6		Sales rebates	64.5		56.0
Tax indemnities	Tax indemnities	20.7		21.9		Tax indemnities	13.4		19.0
Taxes, other than income taxes	Taxes, other than income taxes	2.9		1.8		Taxes, other than income taxes	3.6		2.5
Other	Other	11.1		9.8		Other	6.0		16.5
		$	149.8	$	106.4		$	136.1	$	145.9

____________________

(1)See more information related to the product warranty obligations within Note 15, Commitments and Contingencies.

(2)See more information related to the restructuring obligations within Note 3, Restructuring and Other Similar Charges.

(3)Includes projected liabilities related to losses arising from automobile, general and product liability claims.

13. Long-Term Debt

Long-term debt is summarized as follows (in millions):


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Term loan (1)	Term loan (1)	$	536.3	$	539.2	Term loan (1)	$	532.4	$	535.3

Finance leases ~~(2)~~	Finance leases ~~(2)~~	0.7		0.3		Finance leases ~~(2)~~	21.8		0.6
Total	Total	537.0		539.5		Total	554.2		535.9
Less current maturities	Less current maturities	5.7		5.6		Less current maturities	6.3		5.7
Long-term debt	Long-term debt	$	531.3	533.9		Long-term debt	$	547.9	$	530.2

____________________

(1)Includes unamortized debt issuance costs of ~~$9.6~~$8.0 million and ~~$10.8~~$9.2 million at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

~~(2)Refer to Note 18, Leases, for further information regarding leases.~~

Senior Secured Credit Facility

On October 4, 2021, ZBS Global, Inc. (“Holdings”), Zurn Holdings, Inc., Zurn LLC (together, the ~~“Borrowers”~~“Original Borrowers”), the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative agent for the lenders (in such capacity, the “Administrative Agent”) entered into a Fourth Amended and Restated First Lien Credit Agreement, which was amended by that certain Amendment No. 1 to Fourth Amended and Restated First Lien Credit Agreement dated as of July 1, 2022 (the "2022 Amendment") (as so amended, the “Credit Agreement”). Pursuant to the 2022 Amendment, Elkay joined the Credit Agreement as a borrower (Elkay and the Original Borrowers, collectively, the "Borrowers"). The Credit Agreement is funded by a syndicate of banks and other financial institutions and provides for (i) a $550.0 million term loan facility (the “Term Loan”) and (ii) a $200.0 million revolving credit facility (the “Revolving Credit Facility”).

The obligations under the Credit Agreement and related documents are secured by liens on substantially all of the assets of Holdings, the Borrowers, and certain subsidiaries of the Borrowers pursuant to a Third Amended and Restated Guarantee and Collateral Agreement, dated as of October 4, 2021, ~~(the "Collateral Agreement"),~~ among Holdings, the Borrowers, the subsidiaries of the Borrowers party thereto, and the Administrative Agent, as supplemented pursuant to that certain Supplement No. 1 dated as of July 1, 2022, executed by Elkay and its domestic subsidiaries, and certain other collateral documents.

The Credit Agreement contains representations, warranties, covenants and events of default, including, without limitation, a financial covenant under which the Borrowers are, if certain conditions are met, obligated to maintain on a consolidated basis, as of the end of each fiscal quarter, a certain maximum Net First Lien Leverage Ratio (as defined in the

Table of Contents

Credit Agreement). As of September 30, ~~2022,~~2023, the Borrowers were in compliance with all applicable covenants under the Credit Agreement.

Term Debt

~~Table~~The Credit Agreement provides for the issuance of ~~Contents~~

Ina term loan facility in an aggregate principal amount of $550.0 million. The proceeds of the Term Loan were, together with the dividend received by the Company in connection with the ~~consummation~~Spin-Off Transaction and cash on hand, used to (i) repay in full a $625 million term loan, together with accrued interest thereon, (ii) redeem the $500 million of outstanding principal amount of the ~~Merger, on July 1, 2022, Holdings, the Borrowers, Elkay~~4.875% notes, and ~~the other loan parties party thereto entered into that certain Amendment No. 1 (the “Amendment”) to the Fourth Amended~~(iii) pay related fees and Restated First Lien Credit Agreement (the “Credit Agreement”) pursuant to which Elkay joined the Credit Agreement as a Borrower. Elkay and its domestic subsidiaries also granted security interests in substantially all of their personal property assets to secure the obligations under the Credit Agreement pursuant to that certain Supplement No. 1 dated as of July 1, 2022 to the Collateral Agreement and certain other collateral documents.

~~Term Debt~~expenses.

The Term Loan has a maturity date of October 4, 2028. The Borrowers are required to make quarterly payments of principal in an amount equal to $1.4 million on each quarter until the maturity date.

~~The~~For purposes of the Term Loan, effective July 1, 2023, the secured overnight financing rate ("SOFR") replaced LIBOR, and accordingly, beginning July 1, 2023 the Term Loan bears interest at the ~~Borrowers’~~Borrowers' option, by reference to a base rate or a rate based on ~~LIBOR, in either case~~Term SOFR, plus a Term SOFR adjustment of 0.115%, 0.262%, or 0.428% for interest periods of one month, three months, and six months, respectively, plus an applicable margin ~~determined quarterly~~ based on the ~~Borrowers’~~Borrowers' Net First Lien Leverage Ratio as of the last day of each fiscal quarter. If the Net First Lien Leverage Ratio is greater than 1.80 to 1.00, the applicable margin shall equal 1.25% in the case of base rate borrowings and 2.25% in the case of ~~LIBOR~~SOFR borrowings. In the event the Borrowers’ Net First Lien Leverage Ratio is less than or equal to 1.80 to 1.00, the applicable margin on both base rate and ~~LIBOR~~SOFR borrowings would decrease by 0.25%. The Borrowers’ Net First Lien Leverage Ratio was ~~1.61~~1.26 to 1.00 as of September 30, ~~2022, as such, the Company expects~~2023, and therefore the applicable margin ~~for LIBOR borrowings~~is 2.00%.

Prior to ~~decrease by 0.25% to 2.00% on a go forward basis.~~

~~At September 30, 2022 and for the nine months then ended, the borrowings under~~July 1, 2023, the Term Loan ~~had weighted-average effective interest rates of 5.39% and 4.41%, respectively.~~

~~Revolving Credit Facility~~

~~The Credit Agreement includes a $200.0 million revolving credit facility that has a maturity date of October 2, 2026. Borrowings under the Revolving Credit Facility bear~~bore interest at the Borrowers’ option, by reference to a base rate or a rate based on LIBOR, in either case plus an applicable margin determined quarterly based on the Borrowers’ Net First Lien Leverage Ratio as of the last day of each fiscal quarter as illustrated above.

At September 30, 2023 and for the nine months then ended, the borrowings under the Term Loan had weighted-average effective interest rates of 7.43% and 6.97%, respectively.

On October 11, 2023 the Company made a voluntary principal repayment of the Term Loan in the amount of $60.0 million.

Revolving Credit Facility

The Credit Agreement includes a $200.0 million revolving credit facility that has a maturity date of October 2, 2026. Similar to the Term Loan, effective July 1, 2023, the SOFR replaced LIBOR, and accordingly, beginning July 1, 2023 the Revolving Credit Facility bears interest by reference to a base rate or a rate based on Term SOFR, plus a Term SOFR adjustment of 0.115%, 0.262%, or 0.428% for interest periods of one month, three months, and six months, respectively, plus an applicable margin based on the Borrowers' Net First Lien Leverage Ratio as of the last day of each fiscal quarter. If the Net First Lien Leverage Ratio is greater than 2.00 to 1.00, the applicable margin shall equal 1.00% in the case of base rate borrowings and 2.00% in the case of ~~LIBOR~~SOFR borrowings. In the event the Borrowers' Net First Lien Leverage Ratio is less than or equal to 2.00 to 1.00, the applicable margin on both base rate and ~~LIBOR~~SOFR borrowings would decrease by 0.25%. The Borrowers’ Net First Lien Leverage Ratio was ~~1.61~~1.26 to 1.00 as of September 30, ~~2022.~~2023. The Borrowers are also required to pay a quarterly commitment fee on the average daily unused portion of the Revolving Credit Facility for each fiscal quarter and fees in connection with the issuance of letters of credit. If the Net First Lien Leverage Ratio is greater than 2.00 to 1.00, the commitment fee shall equal 0.50%, and if the Company's Net First Lien Leverage Ratio is less than or equal to 2.00 to 1.00, the commitment fee shall equal 0.375%.

Prior to July 1, 2023, borrowings under the Revolving Credit Facility bore interest at the Borrowers’ option, by reference to a base rate or a rate based on LIBOR, in either case, plus an applicable margin determined quarterly based on the Borrowers’ Net First Lien Leverage Ratio as of the last day of each fiscal quarter as illustrated above.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, there were no amounts borrowed under the Revolving Credit Facility. As of September 30, ~~2022~~2023 and December 31, ~~2021, $7.6~~2022, $5.8 million and ~~$6.1~~$7.5 million of the Revolving Credit Facility was considered utilized in connection with outstanding letters of credit, respectively.

Finance Leases ~~and Other Subsidiary Debt~~

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had finance lease obligations of ~~$0.7~~$21.8 million and ~~$0.3~~$0.6 million, respectively. ~~See Note 18, Leases for further information regarding leases.~~

14. Fair Value Measurements

Table of Contents

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed assumptions about the assumptions a market participant would use.

In accordance with ASC 820, fair value measurements are classified under the following hierarchy:

•Level 1 - Quoted prices for identical instruments in active markets.

•Level 2 - Quoted prices for similar instruments; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.

•Level 3 - Model-derived valuations in which one or more inputs or value-drivers are both significant to the fair value measurement and unobservable.

~~Table of Contents~~

If applicable, the Company uses quoted market prices in active markets to determine fair value, and therefore classifies such measurements within Level 1. In some cases where market prices are not available, the Company makes use of observable ~~market based~~market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters. These measurements are classified within Level 3 if they use significant unobservable inputs.

Fair Value of Financial Instruments

The Company has a nonqualified deferred compensation plan where assets are invested in mutual funds and corporate-owned life insurance contracts held in a Rabbi Trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for the mutual funds, which are measured using quoted prices of identical instruments in active markets categorized as Level 1. Corporate-owned life insurance contracts are recorded at cash surrender value, which is provided by a third party and reflects the net asset value of the underlying publicly traded mutual funds categorized as Level 2. The deferred compensation plan assets are classified within other assets on the condensed consolidated balance sheets. Deferred compensation plan liabilities are measured at fair value based on quoted prices of identical instruments to the investment vehicles selected by the participants categorized as Level 1. Deferred compensation plan liabilities are classified within other liabilities on the condensed consolidated balance sheets.

The following table provides a summary of the Company's assets and liabilities that were recognized at fair value on a recurring basis as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 (in millions):


		Fair Value as of September 30, 2022									Fair Value as of September 30, 2023
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Deferred compensation plan assets	Deferred compensation plan assets	$	—	$	10.8	$	—	$	10.8	Deferred compensation plan assets	$	0.1	$	12.1	$	—	$	12.2
Deferred compensation plan liabilities	Deferred compensation plan liabilities	11.3		—		—		11.3		Deferred compensation plan liabilities	13.3		—		—		13.3

		Fair Value as of December 31, 2021									Fair Value as of December 31, 2022
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Deferred compensation plan assets	Deferred compensation plan assets	$	0.9	$	14.4	$	—	$	15.3	Deferred compensation plan assets	$	0.2	$	11.3	$	—	$	11.5
Deferred compensation plan liabilities	Deferred compensation plan liabilities	16.3		—		—		16.3		Deferred compensation plan liabilities	12.1		—		—		12.1

There were no transfers of assets between levels at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Fair Value of Non-Derivative Financial Instruments

The carrying amounts of cash, receivables, payables and accrued liabilities approximated fair value at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, due to the short-term nature of those instruments. The fair value of long-term debt as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, was approximately ~~$539.1~~$562.2 million and ~~$552.4~~$543.1 million, respectively. The fair value is based on quoted market prices for the same instruments.

~~Acquisition Method of Accounting~~

~~The methods used to determine the fair value of significant identifiable assets and liabilities included in the allocation of the Elkay purchase price are discussed below.~~

~~Inventories~~ - Acquired inventory was comprised of finished goods, work in process and raw materials. The fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. The fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The fair value of raw materials and supplies was determined based on replacement cost which approximates historical carrying value.

~~Property, Plant and Equipment~~ ~~- The preliminary fair value of property, plant, and equipment was determined based on assumptions that market participants would use in pricing an asset.~~

~~Leases, including Right-Of-Use ("ROU") Assets and Lease Liabilities~~ - Lease liabilities were measured as of the acquisition date at the present value of future minimum lease payments over the remaining lease term and the incremental borrowing rate of the Company as if the acquired leases were new leases as of the acquisition date. ROU assets recorded are equal to the amount of the lease liability at the acquisition date adjusted for any off-market terms of the lease. The remaining lease term was based on the remaining term at the acquisition date plus any renewal or extension options that the Company is reasonably certain will be exercised.

Table of Contents

~~Identifiable Intangible Assets~~ - The fair value estimates of the identifiable intangible assets are based upon assumptions that market participants would use in pricing an asset. The preliminary fair value and weighted average useful life of the identifiable intangible assets are as follows (in millions):

Fair Value Weighted Average Useful Life
(in years)
Trade name (1) $ 168.7 20
Customer relationships (2) 691.8 16
Fair value of intangible assets acquired 860.5

~~____________________~~

~~(1)The Elkay trade name was valued using the relief from royalty method, which considers both the market approach and the income approach.~~

~~(2)~~The fair value of customer relationships was valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from Elkay's existing customer base.

~~Deferred Income Tax Assets and Liabilities~~ - The acquisition was structured as a merger and therefore, the Company assumed the historical tax basis of the Elkay business’s assets and liabilities. The deferred income tax assets and liabilities include the expected future federal, state, and foreign tax consequences associated with temporary differences between the fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates at the effective date of the acquisition in the jurisdictions in which legal title of the underlying asset or liability resides.

~~Other Assets Acquired and Liabilities Assumed (excluding Goodwill)~~ - The Company utilized the carrying values, net of allowances, to value accounts receivable and accounts payable as well as other current assets and liabilities as it was determined that carrying values represented the fair value of those items at the acquisition date.

~~Goodwill~~ - The excess of the consideration for the acquisition over the fair value of net assets acquired was recorded as goodwill. The goodwill is attributable to expected synergies and expanded market opportunities from combining the Company’s operations with those of Elkay. The goodwill created in the acquisition is not expected to be deductible for tax purposes.

15. Commitments and Contingencies

Warranties:

The Company offers warranties on the sales of certain of its products and records an accrual for estimated future claims. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The following table presents changes in the Company’s product warranty liability (in millions):


		Nine Months Ended					Nine Months Ended
		September 30, 2022		September 30, 2021			September 30, 2023		September 30, 2022
Balance at beginning of period	Balance at beginning of period	$	1.3	$	1.2	Balance at beginning of period	$	4.2	$	1.3
Acquired obligations	Acquired obligations	3.4		—		Acquired obligations	—		3.4
Charged to operations	Charged to operations	2.8		1.2		Charged to operations	2.0		2.8
Claims settled	Claims settled	(2.0)		(1.0)		Claims settled	(1.6)		(2.0)
Balance at end of period	Balance at end of period	$	5.5	$	1.4	Balance at end of period	$	4.6	$	5.5

Contingencies:

The Company's subsidiaries are involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business involving, among other things, product liability, commercial, employment, workers' compensation, intellectual property claims and environmental matters. The Company establishes accruals in a manner that is consistent with accounting principles generally accepted in the United States for costs associated with such matters when liability is probable and those costs are capable of being reasonably estimated. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss or recovery, based upon current information, management believes the eventual outcome of these unresolved legal actions, either individually or in the aggregate, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

~~Table of Contents~~

Certain Company subsidiaries are subject to asbestos litigation. As of September 30, ~~2022,~~2023, Zurn and numerous other unrelated companies were defendants in approximately 6,000 asbestos related lawsuits representing approximately ~~7,000~~7,500 claims. Plaintiffs' claims allege personal injuries caused by exposure to asbestos used primarily in industrial boilers formerly manufactured by a segment of Zurn. Zurn did not manufacture asbestos or asbestos components. Instead, Zurn purchased them from suppliers. These claims are being handled pursuant to a defense strategy funded by insurers.

As of September 30, ~~2022,~~2023, the Company estimates the potential liability for the asbestos-related claims described above, as well as the claims expected to be filed in the next ten years, to be approximately ~~$66.0~~$79.0 million, of which Zurn expects ~~its insurance carriers~~approximately $58.0 million to ~~pay approximately $49.0 million~~be paid in the next ten years on such claims, with the balance of the estimated liability being paid in subsequent years. The ~~$66.0~~$79.0 million was developed based on actuarial studies and represents the projected indemnity payout for current and future claims. There are inherent uncertainties involved in estimating the number of future asbestos claims, future settlement costs, and the effectiveness of defense strategies and settlement initiatives. As a result, actual liability could differ from the estimate described herein and could be substantial. The liability for the asbestos-related claims is recorded in reserve for asbestos claims within the condensed consolidated balance sheets.

Management estimates that ~~its~~the available insurance to cover this ten year estimated potential asbestos liability as of September 30, ~~2022~~2023 is ~~in excess of the ten year estimated exposure, and accordingly, believes that all current claims are covered by insurance.~~$72.1 million.

~~As of September 30, 2022, the~~The Company ~~had~~recorded a ~~recorded~~ receivable from its insurance carriers, ~~of $66.0 million,~~ which corresponds to the amount of this potential asbestos liability that is covered by available insurance and is currently determined to be probable of recovery. However, there is no assurance the Company's current insurance coverage will ultimately be available or that this asbestos liability will not ultimately exceed the Company's coverage limits. Factors that could cause a decrease in the amount of available coverage or create gaps in coverage include: changes in law governing the policies, potential disputes and settlements with the carriers regarding the scope of coverage, and insolvencies of one or more of the Company's carriers. The receivable for probable asbestos-related recoveries is recorded in insurance for asbestos claims within the condensed consolidated balance sheets.

Table of Contents

16. Retirement Benefits

The components of net periodic ~~benefit~~(benefit) cost are as follows (in millions):


		Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Pension Benefits:	Pension Benefits:										Pension Benefits:
Service cost		$	—	$	0.2	$	—	$	0.4

Interest cost	Interest cost	2.1		3.7		6.4		11.2			Interest cost	$	3.0	$	2.1	$	9.0	$	6.4
Expected return on plan assets	Expected return on plan assets	(2.4)		(4.9)		(7.2)		(14.7)			Expected return on plan assets	(1.9)		(2.4)		(5.6)		(7.2)

Net periodic benefit cost		$	(0.3)	$	(1.0)	$	(0.8)	$	(3.1)
Net periodic cost (benefit)											Net periodic cost (benefit)	$	1.1	$	(0.3)	$	3.4	$	(0.8)
Other Postretirement Benefits:	Other Postretirement Benefits:										Other Postretirement Benefits:
Interest cost	Interest cost	$	0.1	$	—	$	0.2	$	0.2		Interest cost	$	0.2	$	0.1	$	0.5	$	0.2
Amortization:
Prior service credit		—		—		—		(0.2)

Net periodic benefit cost		$	0.1	$	—	$	0.2	$	—

Net periodic cost											Net periodic cost	$	0.2	$	0.1	$	0.5	$	0.2

The service cost component of net periodic benefits is presented within Cost of sales and Selling, general and administrative expenses in the condensed consolidated statements of operations, while the other components of net periodic ~~benefit~~ cost (benefit) are presented within Other income (expense), net. The Company recognizes the net actuarial gains or losses in excess of the corridor in operating results during the final quarter of each fiscal year (or upon any required re-measurement event).

During the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, the Company made contributions of ~~$1.0~~$0.2 million and ~~$1.9~~$1.0 million, respectively, to its U.S. qualified pension plan trusts. In addition, during the nine months ended September 30, 2022, the Company liquidated a defined benefit plan acquired in the Elkay Merger with a $17.3 million cash payment to the participants. The Company has no future obligations under the Elkay defined benefit plan following this cash payment.

See Note 16, Retirement Benefits, to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 for further information regarding retirement benefits.

~~Table of Contents~~

17. Stock-Based Compensation

The Zurn Elkay Water Solutions Corporation Performance Incentive Plan (the "Plan") is utilized to provide performance incentives to the Company's officers, employees, directors and certain others by permitting grants of equity awards (for common stock), as well as performance-based cash awards, to such persons to encourage them to maximize the Company's performance and create value for the Company's stockholders. For the three months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, the Company recognized ~~$7.8~~$10.0 million and ~~$7.0~~$7.8 million of stock-based compensation expense, respectively. For the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, the Company recognized ~~$15.5~~$30.5 million and ~~$23.2~~$15.5 million of stock-based compensation expense, respectively.

During the nine months ended September 30, ~~2022,~~2023, the Company granted the following stock options, restricted stock units, performance stock units and common stock to directors, executive officers, and certain other employees:


Award Type	Award Type	Number of Awards	Weighted Average Grant-Date Fair Value		Award Type	Number of Awards	Weighted Average Grant-Date Fair Value
Stock options	Stock options	98,718	$	9.85	Stock options	125,283	$	8.25
Restricted stock units	Restricted stock units	382,582	$	28.91	Restricted stock units	306,081	$	23.30
Performance stock units	Performance stock units	177,724	$	30.91	Performance stock units	425,246	$	23.25
Common stock	Common stock	47,966	$	28.40	Common stock	171,089	$	24.25

See Note 15, Stock-Based Compensation, to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, for further information regarding stock-based compensation.

18. ~~Leases~~

The Company determines if a contract is (or contains) a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset. The Company has operating and finance leases primarily associated with real estate, automobiles and manufacturing and office equipment.

The Company has lease agreements that include lease and non-lease components, which the Company has elected to account for as a single lease component for all classes of the underlying assets. The term of the Company’s leases generally reflects the non-cancellable period of the lease. Some of the Company’s lease agreements include options to extend or terminate the lease, which are excluded from the minimum lease terms unless the Company is reasonably certain the option will be exercised. Lease expense for operating leases and amortization expense for finance leases is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets and are instead recognized on a straight-line basis over the lease term.

Right-of-use (“ROU”) assets and liabilities are recognized in the condensed consolidated balance sheets based on the present value of remaining lease payments over the lease term. Additionally, ROU assets include any lease payments made at or before the lease commencement date, any initial direct costs incurred, and are reduced by lease incentives received. As most of the Company’s leases do not provide an implicit rate, the present value of lease payments is determined using the Company’s incremental borrowing rate at the commencement date of the lease. Lease payments included in the measurement of the lease liabilities are comprised of fixed payments, variable payments that depend on an index or rate, and amounts probable to be paid if an option is reasonably certain to be exercised. Variable lease payments, typically based on usage of the asset or changes in an index or rate, are excluded from the lease liabilities and are recognized in the period in which the obligation for those payments is incurred.

~~Table of Contents~~

~~ROU assets and lease liability balances recorded on the condensed consolidated balance sheets are summarized as follows (in millions):~~
Leases Classification September 30, 2022 December 31, 2021
Assets:
Operating ROU assets Other assets $ 58.7 $ 14.1
Finance ROU assets Property, plant and equipment, net (1) 0.9 0.5
Total ROU assets $ 59.6 $ 14.6

Liabilities:
Current
Operating Other current liabilities $ 8.3 $ 6.1
Finance Current maturities of debt 0.2 0.1
Non-current
Operating Operating lease liability 51.2 8.9
Finance Long-term debt 0.5 0.2
Total lease liabilities $ 60.2 $ 15.3

~~____________________~~

~~(1)Finance lease assets are recorded net of accumulated amortization of $0.2 million and $0.2 million as of September 30, 2022 and~~ ~~December 31, 2021, respectively.~~

~~The components of lease expense reported in the condensed consolidated statements of operations are as follows (in millions):~~

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Operating lease expenses (1) $ 3.4 $ 1.5 $ 6.5 $ 4.6
Finance lease expenses:
Depreciation of finance ROU assets (1) 0.1 — 0.1 0.1
Interest on lease liabilities (2) — — — —
Total finance lease expense 0.1 — 0.1 0.1
Variable and short-term lease expense (1) 1.7 0.8 4.0 2.6
Total lease expense $ 5.2 $ 2.3 $ 10.6 $ 7.3

~~____________________~~

~~(1)Included in cost of sales and selling, general and administrative expenses.~~

~~(2)Included in interest expense, net.~~

~~Future minimum lease payments under operating and finance leases as of September 30, 2022 are as follows (in millions):~~

Years ending December 31,
Operating Leases (1)
Finance Leases (1)
2022 (through December 31, 2022) $ 3.2 $ 0.1
2023 12.2 0.3
2024 10.1 0.2
2025 7.4 0.2
2026 6.9 —
Thereafter 47.4 —
Total future minimum lease payments 87.2 0.8
Less: imputed interest (26.2) (0.1)
Total lease liabilities $ 61.0 $ 0.7

~~____________________~~

~~(1)Excludes legally binding minimum lease payments for leases signed but not yet commenced.~~

~~Table of Contents~~

~~The weighted-average remaining lease terms and discount rates for leases are as follows:~~

Nine Months Ended
Lease Term and Discount Rate September 30, 2022 September 30, 2021
Weighted-average remaining lease terms (years):
Operating leases 10.2 3.0
Finance leases 3.3 3.5
Weighted-average discount rate:
Operating leases 6.5 % 3.4 %
Finance leases 5.2 % 3.4 %

~~Cash paid for amounts included in the measurement of lease liabilities are as follows (in millions):~~
Nine Months Ended
September 30, 2022 September 30, 2021
Operating cash flows from operating leases $ 6.5 $ 4.8
Operating cash flows from finance leases — —
Financing cash flows from finance leases 0.1 0.1

~~ROU assets obtained in exchange for lease liabilities are as follows (in millions):~~
Nine Months Ended
September 30, 2022 September 30, 2021
Operating leases $ 51.3 $ 0.4
Finance leases $ 0.5 $ 0.1

~~19.~~ Subsequent Events

On October ~~20, 2022,~~19, 2023, the Company's Board of Directors declared a quarterly cash dividend on the Company's common stock of ~~$0.07~~$0.08 per-share to be paid on December 7, ~~2022,~~2023, to stockholders of record as of November ~~18, 2022.~~20, 2023.

2723

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

~~As previously disclosed, on~~On July 1, 2022, we completed our combination with Elkay Manufacturing Company (“Elkay”) through the ~~merger~~Merger of Elkay with and into a newly created subsidiary of ~~the Company,~~Zurn, with Elkay surviving as a wholly owned subsidiary of Zurn Elkay (the “Merger” or "Elkay Transaction"). In conjunction with the Merger, we changed our name from Zurn Water Solutions Corporation to Zurn Elkay Water Solutions Corporation. Our results of operations include the acquired operations subsequent to July 1, 2022. See Item 1, Note 2, ~~Acquisitions,~~Acquisition, for additional information on the Elkay ~~Transaction.~~Merger.

~~Following the merger with Elkay,~~ Zurn Elkay Water Solutions Corporation is a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets what we believe to be the broadest sustainable product portfolio of specification-driven water management solutions to improve health, human safety and the environment. Our product portfolio includes professional grade water safety and control products, flow system products, hygienic and ~~safety, water distribution~~environmental products, and ~~drainage,~~ drinking water ~~finish plumbing, hygienic, environmental and site works~~ products for public and private spaces that deliver superior value to building owners, positively impact the environment and human hygiene and reduce product installation time. Our heritage of innovation and specification has allowed us to provide highly-engineered, mission-critical solutions to customers for decades and affords us the privilege of having long-term, valued relationships with market leaders. We operate in a disciplined way and the Zurn Elkay Business System (“ZEBS”)~~, described below,~~ is our operating philosophy. Grounded in the spirit of continuous improvement, ZEBS creates a scalable, process-based framework that focuses on driving superior customer satisfaction and financial results by targeting world-class operating performance throughout all aspects of our business.

The following information should be read in conjunction with the audited consolidated financial statements and notes thereto, along with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Critical Accounting Policies and Estimates

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities on the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Refer to Item 7, MD&A, of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 for information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management. Except for the items reported below, management believes that as of September 30, ~~2022,~~2023, and during the period from January 1, ~~2022~~2023 through September 30, ~~2022,~~2023, there has been no material change to this information.

Recent Accounting Pronouncements

See Item 1, Note 1, Basis of Presentation and Significant Accounting Policies regarding recent accounting pronouncements.

Table of Contents

Acquisitions

On July 1, 2022, we completed the Elkay Merger for a ~~preliminary~~ purchase price of ~~$1,462.9~~$1,457.8 million. Elkay, a market leader of ~~commercial sinks and~~ drinking water solutions and commercial sinks, complements our existing product portfolio. The ~~preliminary~~ purchase price includes ~~$1,417.0~~$1,411.9 million of ~~our~~Zurn's common stock based on ~~the~~Zurn's closing stock price of $27.48 on July 1, 2022, and $45.9 million of net cash payments for the repayment of Elkay's ~~existing~~ term loan and Elkay's transaction related costs outstanding that were in excess of Elkay's cash and cash equivalents ~~balance~~ at the time of closing. Pursuant to the ~~Merger Agreement,~~terms of the merger agreement, we issued 51,564,524 shares of common stock, ~~$0.01 par value per share, of our common stock,~~ which represented approximately 29% of ~~the 177,746,770~~ outstanding shares ~~of our common stock~~ immediately following the Merger closing. The total shares of our common stock issued is preliminary and subject to change upon finalization of customary post-closing adjustments with respect to cash, indebtedness and working capital. We incurred transaction-related costs of approximately $33.7 million forMerger. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2022. These costs were associated with legal and professional services and were recognized as selling, general and administrative expenses in our condensed consolidated statements of operations.~~

~~Table of Contents~~

~~On November 17, 2021,~~2023, we completed the ~~acquisition~~final price adjustments and the adjusted purchase price is reflected in the purchase price amounts above, following the return of 186,020 of the ~~Wade Drains business ("Wade Drains") from McWane, Inc. for~~shares we issued at closing as a ~~cash purchase price~~result of $12.6 million, excluding transaction costs and net of cash acquired. During the nine months ended September 30, 2022, we received a $1.1 million cash payment from the sellers of Wade Drains in connection with finalizing the acquisition date tradelower working capital ~~which is included~~and cash balances at closing compared to targets stipulated in the ~~total cash purchase price above. Wade Drains manufactures a wide range~~merger agreement. The shares returned were canceled upon receipt. As of ~~specified commercial plumbing products~~June 30, 2023, the measurement period was complete. Our results of operations include Elkay subsequent to the Merger date. See Item 1, Note 2, Acquisition for ~~customers across North America and complements our existing flow systems product portfolio.~~

~~On April 16, 2021, we acquired substantially all of~~additional information on the assets of Advance Technology Solutions, LLC (d/b/a ATS GREASEwatch) ("ATS GREASEwatch") for a total cash purchase price of $4.5 million. ATS GREASEwatch, headquartered in Saginaw, Michigan, develops, manufactures and markets remote tank monitoring devices, alarms, software and services for various applications and provides technology to enhance and expand our current product offerings within our existing product portfolio.Elkay Merger.

Spin-Off of Process & Motion Control Segment

On October 4, 2021, we completed a Reverse Morris Trust tax-free spin-off transaction (the “Spin-off Transaction”) in which (i) substantially all the assets and liabilities of our Process & Motion Control ("PMC") business were transferred to a newly created subsidiary, Land Newco, Inc. (“Land”), (ii) the shares of Land were distributed to our stockholders pro rata, and (iii) Land was merged with a subsidiary of Regal Rexnord Corporation (formerly known as Regal Beloit Corporation), in which the stock of Land was converted into a specified number of shares of Regal Rexnord Corporation. During ~~the nine months ended September 30,~~ 2022, we received $35.0 million from Regal Rexnord Corporation as a result of the final working capital and cash balances at closing exceeding the targets stipulated in the Spin-Off Transaction agreement.

The operating results of PMC are reported as discontinued operations in our condensed consolidated statements of operations for all periods presented. The condensed consolidated statements of cash flows for the period ended September 30, ~~2021 has~~2023 have not been adjusted to separately disclose cash flows related to ~~the discontinued operations. See Item 1, Note 4, Discontinued Operations for additional information on cash flows associated with~~ the discontinued operations.


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022


Selling, general and administrative expenses (1)	$	6.6	$	—	$	8.4	$	—








Income from discontinued operations before income tax	6.6		—		8.4		—

Income tax (expense) benefit	(0.4)		—		(0.3)		0.8


Income from discontinued operations, net of tax	$	6.2	$	—	$	8.1	$	0.8

(1)Selling, general and administrative expenses include the reversal of certain accruals as a result of costs the Company will no longer incur related to the Spin-Off Transaction.

See Item 1, Note 4, Discontinued Operations for additional information.

Restructuring and Other Similar Costs

During the three and nine months ended September 30, ~~2022, we executed~~2023, the Company continued to execute various restructuring actions. These initiatives ~~focused on driving~~were implemented to drive efficiencies ~~reducing~~and reduce operating costs bywhile also modifying ~~our~~the Company's footprint to reflect changes in the markets ~~we serve and~~it serves, the impact of acquisitions, including Elkay, on ~~our~~the Company's overall manufacturing capacity and the refinement of ~~our~~its overall product portfolio. These restructuring actions primarily resulted in workforce reductions, lease termination costs and other facility rationalization costs. Management expects to continue executing similar initiatives to optimize its operating margin and manufacturing footprint. As such, the Company expects further expenses related to workforce reductions, potential impairment or accelerated depreciation of ~~related manufacturing facilities, equipment and intangible~~ assets, lease termination costs and other facility rationalization costs. ~~We expect to continue executing similar initiatives to optimize our operating margin~~For the three and ~~manufacturing footprint. As such, we expect further expenses related to workforce reductions, lease termination costs,~~nine months ended September 30, 2023, restructuring charges totaled $2.2 million and ~~other facility rationalization costs on our overall manufacturing capacity, and refining our overall product portfolio.~~$11.9 million, respectively. For the three and nine months ended September 30, 2022, restructuring charges totaled $11.7 million and $13.1 million, respectively. ~~For the three and nine months ended September 30, 2021, restructuring charges totaled $0.7 million and $1.6 million, respectively.~~ Refer to Item 1, Note 3, Restructuring and Other Similar Charges for further information.

Table of Contents

Results of Operations

Three Months Ended September 30, ~~2022~~2023 compared with the Three Months Ended September 30, ~~2021:~~2022:

Net sales

(Dollars in Millions)
Three Months Ended
September 30, 2022 September 30, 2021 Change % Change
Net Sales $ 417.7 $ 229.7 $ 188.0 81.8 %


	Three Months Ended
	September 30, 2023		September 30, 2022		Change		% Change
Net Sales	$	398.4	$	417.7	$	(19.3)	(4.6)	%

Net sales were ~~$417.7~~$398.4 million and ~~$229.7~~$417.7 million during the three months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, respectively, ~~an increase~~a decrease of ~~82%~~5% year-over-year. ~~Excluding~~Core sales decreased 5% year over year as a ~~67 % increase in sales~~result of lower year-over-year demand associated with our combination with Elkay and prior year acquisition of Wade Drains and a 1% decrease in sales associated with foreign currency translation, core sales increased 16% year-over-year as nearly all of our product categories, with the exception of products sold into ~~the~~our residential end ~~market, contributed to~~markets, the ~~sales growth.~~planned exit of certain residential sink products as well as timing of shipments in the prior year as we continued working down an elevated backlog during the three months ended September 30, 2022.

Income (loss) from operations

(Dollars in Millions)


		Three Months Ended												Three Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
(Loss) income from operations		$	(10.1)		$	32.5		$	(42.6)		(131.1)	%
Income (loss) from operations													Income (loss) from operations	$	60.1		$	(10.1)		$	70.2		(695.0)	%
% of net sales	% of net sales	(2.4)		%	14.1		%	(16.6)		%			% of net sales	15.1		%	(2.4)		%	17.5		%

During the three months ended September 30, ~~2022, we generated a loss~~2023, income from operations ~~of $(10.1)~~was $60.1 million compared to ~~income from operations~~a loss of ~~$32.5~~$10.1 million during the three months ended September 30, ~~2021. The year-over-year change is primarily~~2022. Income from operations as a percentage of net sales increased by 1750 basis points year over year due to the ~~result of transaction related costs~~benefits resulting from productivity synergies and restructuring actions related to the Elkay Merger, lower material and ~~higher intangible asset~~transportation costs, and ~~other acquisition~~lower restructuring charges. Additionally, income from operations for the three months ended September 30, 2022 included merger costs of $33.7 million and a purchase accounting fair value adjustment of $14.6 million related ~~amortization and restructuring costs following our combination with Elkay. These costs were partially offset by~~to the ~~favorable impact of year-over-year sales growth (inclusive of price realization) and productivity savings.~~Elkay Merger.

Interest expense, net

Interest expense, net was $9.9 million for the three months ended September 30, 2023, compared to $8.0 million for the three months ended September 30, ~~2022, compared to $9.9 million for the three months ended September 30, 2021.~~2022. The ~~decrease~~increase in interest expense as compared to the prior year period is primarily a result of ~~the lower outstanding borrowings following the Spin-Off Transaction refinancing, partially offset by a~~ higher year-over-year interest ~~rate.~~rates. See Item 1, Note 13 Long-Term Debt for more information.

Other income (expense), net

Other ~~income (expense),~~expense, net for the three months ended September 30, ~~2022 and 2021,~~2023, was $2.5 million compared to other income of $0.6 million ~~and $(0.8) million, respectively.~~for the three months ended September 30, 2022. Other income (expense), net consists primarily of foreign currency transaction gains and losses, ~~and~~ the non-service cost components associated with our defined benefit plans and other non-operational gains and losses. The year-over-year change is primarily driven by higher interest cost within the non-service cost components of our defined benefit plans.

Provision for income taxes

The income tax provision was $12.5 million for the three months ended September 30, 2023, compared to $1.6 million for the three months ended September 30, ~~2022, compared to $5.7 million for the three months ended September 30, 2021.~~2022. The effective income tax rate for the three months ended September 30, ~~2022~~2023 was 26.2% versus (9.1)% ~~versus 26.1%~~ for the three months ended September 30, ~~2021.~~2022. The effective income tax rate for the three months ended September 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments. The income tax provision recognized on the loss from operations for the three months ended September 30, 2022 was primarily due to non-deductible transactions costs associated with the Merger, the accrual of ~~foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of~~ additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, ~~and~~ the accrual of various state income taxes partially offset by the reduction in the valuation allowance associated with certain state net operating loss ("NOL") carryforwards. The effective income tax rate for the three months ended September 30, 2021 was above the U.S. federal statutory rate of 21% primarily due toand the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, ~~the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, and the accrual of various state income taxes,~~ partially offset by the ~~recognition of income tax benefits~~reduction in the valuation allowance associated with ~~share-based payments.~~

certain state NOL carryforwards.

On a quarterly basis, we review and analyze our valuation allowances associated with deferred tax assets relating to certain foreign and state net operating loss carryforwards as well as U.S. federal and state capital loss carryforwards. In conjunction with this analysis, we weigh both positive and negative evidence for purposes of determining the proper balances

3026

Table of Contents

of such valuation allowances. Future changes to the balances of these valuation allowances, as a result of our continued review and analysis, could impact the financial statements for such period of change.

Net ~~(loss)~~ income ~~attributable to Zurn Elkay common stockholders~~(loss)

Net ~~loss attributable to Zurn Elkay common stockholders~~income for the three months ended September 30, ~~2022,~~2023, was ~~$19.1~~$41.4 million compared to a net ~~income~~loss of ~~$64.1~~$19.1 million for the three months ended September 30, ~~2021.~~2022. Diluted net income (loss) ~~income~~ per share ~~attributable to Zurn Elkay common stockholders~~ for the three months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, was ~~$(0.11)~~$0.24 and ~~$0.51,~~$(0.11), respectively. The ~~year over year~~year-over-year change is the result of the ~~PMC operations classified as discontinued operations in the prior year and the other~~ factors described above. Net income from discontinued operations, net of tax, was $6.2 million for the three months ended September 30, 2023 compared to $0.0 million for the three months ended September 30, ~~2022 compared to $48.0 million for the three months ended September 30, 2021.~~2022. Diluted net income per share from discontinued operations for the three months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, was $0.04 and $0.00, ~~and $0.38,~~ respectively.

Nine Months Ended September 30, ~~2022~~2023 compared with the Nine Months Ended September 30, ~~2021:~~2022:

Net sales

(Dollars in Millions)
Nine Months Ended
September 30, 2022 September 30, 2021 Change % Change
Net Sales $ 941.5 $ 678.6 $ 262.9 38.7 %


	Nine Months Ended
	September 30, 2023		September 30, 2022		Change		% Change
Net Sales	$	1,173.7	$	941.5	$	232.2	24.7	%

Net sales were ~~$941.5~~$1,173.7 million during the nine months ended September 30, ~~2022,~~2023, an increase of ~~39% year over year.~~25% year-over-year. Excluding a ~~24%~~28% increase in sales associated with our combination with Elkay, ~~and prior year acquisition of Wade Drains,~~ core sales ~~increased 15%~~decreased 3% year over year as ~~nearly all~~a result of lower year-over-year demand associated with products sold into our ~~product categories contributed to~~residential end markets, the ~~sales growth.~~planned exit of certain residential sink products as well as timing of shipments in the prior year as we continued working down an elevated backlog during the second and third quarter of 2022.

Income from operations

(Dollars in Millions)


		Nine Months Ended									Nine Months Ended
		September 30, 2022		September 30, 2021		Change		% Change			September 30, 2023		September 30, 2022		Change		% Change
Income from operations	Income from operations	87.3		93.8		(6.5)		(6.9)	%	Income from operations	158.6		87.3		71.3		81.7	%
% of net sales	% of net sales	9.3	%	13.8	%	(4.6)	%			% of net sales	13.5	%	9.3	%	4.2	%

Income from operations during the nine months ended September 30, 2023 was $158.6 million compared to $87.3 million during the nine months ended September 30, ~~2022, or 9.3%~~2022. Income from operations as a percentage of net ~~sales. The~~sales increased by 420 basis points year over year ~~change is primarily~~due to the ~~result~~benefits of ~~transaction related~~productivity synergies and restructuring actions, partially offset by higher non-cash stock-based compensation expense, and incremental depreciation and intangible asset amortization resulting from the Elkay Merger during the nine months ended September 30, 2023. Additionally, income from operations for the nine months ended September 30, 2022 included merger costs of $33.7 million and a purchase accounting fair value adjustment of $14.6 million related to the Elkay merger and higher intangible asset and other acquisition related amortization and restructuring costs following our combination with Elkay as well as higher year-over-year costs within transportation and material inputs. These costs were partially offset by the favorable impact of year-over-year sales growth (inclusive of price realization) and productivity savings.Merger.

Interest expense, net

Interest expense, net was $29.8 million during the nine months ended September 30, 2023, compared to $18.0 million during the nine months ended September 30, ~~2022, compared to $29.6 million during the nine months ended September 30, 2021.~~2022. The ~~decrease~~increase in interest expense as compared to the prior year period is primarily a result of ~~the lower outstanding borrowings following the Spin-Off Transaction refinancing, partially offset by a~~ higher ~~year over year~~year-over-year interest ~~rate.~~rates. See Item 1, Note 13 Long-Term Debt for more information.

Other income (expense), net

Other ~~income (expense),~~expense, net during the nine months ended September 30, ~~2022 and 2021~~2023 was $3.3 million compared to other income of $0.3 million ~~and $(0.9) million, respectively.~~during the nine months ended September 30, 2022. Other income (expense), net consists primarily of foreign currency transaction gains and losses, ~~and~~ the non-service cost components associated with our defined benefit ~~plans.~~plans and other non-operational gains and losses. The year-over-year change is primarily driven by higher interest cost within the non-service cost components of our defined benefit plans and accruals for estimated environmental remediation costs, partially offset by income recognized in connection with an insurance settlement.

3127

Table of Contents

Provision for income taxes

The income tax provision was $34.8 million for the nine months ended September 30, 2023, compared to $22.9 million for the nine months ended September 30, ~~2022, compared to $16.6 million for the nine months ended September 30, 2021.~~2022. The effective income tax rate for the nine months ended September 30, ~~2022~~2023 was ~~32.9%~~27.7% versus ~~26.2%~~32.9% for the nine months ended September 30, ~~2021.~~2022. The effective income tax rate for the nine months ended September 30, 2023 was above the U.S. federal statutory rate of 21% primarily due to the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments. The effective income tax rate for the nine months ended September 30, 2022 was above the U.S. federal statutory rate of 21% primarily due to non-deductible transactions costs associated with the Merger, the accrual of ~~foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of~~ additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, ~~and~~ the accrual of various state income taxes and the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, partially offset by the recognition of income tax benefits associated with share-based payments and the reduction in the valuation allowance associated with certain state NOL carryforwards. ~~The effective~~

Net income ~~tax rate~~

Net income for the nine months ended September 30, ~~2021~~2023, was above the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally above the U.S. federal statutory rate, the accrual of additional income taxes associated with compensation deduction limitations under Section 162(m) of the Internal Revenue Code, and the accrual of various state income taxes, partially offset by the recognition of income tax benefits associated with share-based payments.

~~Net income attributable to Zurn Elkay common stockholders~~

~~Net income attributable to Zurn Elkay common stockholders for the nine months ended September 30, 2022, was $47.5~~$98.8 million compared to ~~$187.3~~$47.5 million for the nine months ended September 30, ~~2021.~~2022. Diluted net income per share ~~attributable to Zurn Elkay common stockholders~~ for the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, was $0.56 and $0.33, ~~and $1.50,~~ respectively. ~~The year-over-year change is the result of the PMC operations classified as discontinued operations in the prior year and the other factors described above.~~ Net income from discontinued operations, net of tax, was $8.1 million for the nine months ended September 30, 2023 compared to $0.8 million for the nine months ended September 30, ~~2022 compared to $140.6 million for the nine months ended September 30, 2021.~~2022. Diluted net income per share from discontinued operations for the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, was ~~$0.01~~$0.05 and ~~$1.13,~~$0.01, respectively.

Non-GAAP Financial Measures

Non-GAAP financial measures are intended to supplement and not replace financial measures prepared in accordance with GAAP. The following non-GAAP financial measures are utilized by management in comparing our operating performance on a consistent basis. We believe that these financial measures are appropriate to enhance an overall understanding of our underlying operating performance trends compared to historical and prospective periods and our peers. Management also believes that these measures are useful to investors in their analysis of our results of operations and provide improved comparability between fiscal periods as well as insight into the compliance with our debt covenants. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.

Core sales

Core sales excludes the impact of acquisitions (such as the ~~Wade Drains and~~ Elkay ~~acquisitions)~~Merger), divestitures and foreign currency translation. Management believes that core sales facilitates easier and more meaningful comparisons of our net sales performance with prior and future periods and to our peers. We exclude the effect of acquisitions and divestitures because the nature, size and number can vary dramatically from period to period and between us and our peers and can also obscure underlying business trends and make comparisons of long-term performance difficult. We exclude the effect of foreign currency translation from this measure because the volatility of currency translation is not under management's control.

EBITDA

EBITDA represents earnings before interest and other debt related activities, taxes, depreciation and amortization. EBITDA is presented because it is an important supplemental measure of performance and it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA is also presented and compared by analysts and investors in evaluating our ability to meet debt service obligations. Other companies in our industry may calculate EBITDA differently. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. Because EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business.

3228

Table of Contents

Adjusted EBITDA

Adjusted EBITDA ~~(as described below~~is the term we use to describe EBITDA as defined and adjusted in ~~“Covenant Compliance”)~~our credit agreement, which is net income, adjusted for the items summarized in the table below. Adjusted EBITDA is an important measure because, under our credit agreement, our ability to incur certain types of acquisition debt and certain types of subordinated debt, make certain types of acquisitions or asset exchanges, operate our business and make dividends or other distributions, all of which will impact our financial performance, is impacted by our Adjusted EBITDA, as our lenders measure our performance with a net first lien leverage ratio by comparing our senior secured bank indebtedness to our Adjusted EBITDA (see “Covenant Compliance” for additional discussion of this ratio, including a reconciliation to our net income). We reported net income attributable to Zurn Elkay common stockholders in the nine months ended September 30, 2022, of $47.5 million and Adjusted EBITDA for the same period of $200.0 million. See “Covenant Compliance” for a reconciliation of Adjusted EBITDA to GAAP net income.

~~Covenant Compliance~~

Our credit agreement, which governs our senior secured credit facilities, contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the credit agreement may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to comply with a maximum total net leverage ratio of 5.00 to 1.00 as of the end of each fiscal quarter. At September 30, 2022, our net leverage ratio was 1.61 to 1.00. Failure to comply with these covenants could limit our long-term growth prospects by hindering our ability to borrow under the revolver, to obtain future debt and/or to make acquisitions.

~~“Adjusted EBITDA” is the term we use to describe EBITDA as defined and adjusted in our credit agreement, which is net income, adjusted for the items summarized in the table below. Adjusted EBITDA~~EBITDA. It also is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. It is also provided to aid investors in understanding our compliance with our debt covenants. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; or (f) the impact of earnings or charges resulting from matters that we and the lenders under our credit agreement may not consider indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA ~~adds~~allows us to add back certain non-cash, non-operating or non-recurring charges that are deducted in calculating net income, even though these are expenses that may recur, vary greatly and are difficult to predict and can represent the effect of long-term strategies as opposed to short-term results.

In addition, certain of these excluded expenses added back in calculating Adjusted EBITDA can represent the reduction of cash that could be used for other corporate purposes. Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times allow us to add estimated cost savings and operating synergies related to operational changes ranging from acquisitions or dispositions to restructuring, and/or exclude one-time transition expenditures that we anticipate we will need to incur to realize cost savings before such savings have occurred.

For the nine months ended September 30, 2023, we had net income of $98.8 million and Adjusted EBITDA for the same period of $255.4 million. The calculation of Adjusted EBITDA under our credit agreement as of September 30, ~~2022,~~2023, is presented in the table below. However, the results of such calculation could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time.

Covenant Compliance

Our credit agreement, which governs our senior secured credit facilities, contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the credit agreement may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Certain covenants contained in the credit agreement restrict our ability to take certain actions, such as incurring additional debt or making acquisitions, if we are unable to comply with a maximum total Net First Lien Leverage Ratio (consolidated indebtedness to Adjusted EBITDA) of 5.00 to 1.00 as of the end of each fiscal quarter. At September 30, 2023, our Net First Lien Leverage Ratio was 1.26 to 1.00. Failure to comply with these covenants could limit our long-term growth prospects by hindering our ability to borrow under the revolver, to obtain future debt and/or to make acquisitions.

Table of Contents

Set forth below is a reconciliation of net income ~~attributable to Zurn Elkay common stockholders~~ to Adjusted EBITDA for the periods indicated below.


(in millions)	(in millions)	Nine months ended September 30, 2021		Twelve months ended December 31, 2021		Nine months ended September 30, 2022		Twelve months ended September 30, 2022		(in millions)	Nine months ended September 30, 2022		Twelve months ended December 31, 2022		Nine months ended September 30, 2023		Twelve months ended September 30, 2023
Net income (loss) attributable to Zurn Elkay common stockholders		$	187.3	$	120.9	$	47.5	$	(18.9)
Income (loss) from discontinued operations, net of tax (1)		(140.6)		(71.2)		(0.8)		68.6
Net income										Net income	$	47.5	$	61.7	$	98.8	$	113.0
Income from discontinued operations, net of tax (1)										Income from discontinued operations, net of tax (1)	(0.8)		(4.7)		(8.1)		(12.0)
Provision for income taxes	Provision for income taxes	16.6		2.7		22.9		9.0		Provision for income taxes	22.9		26.8		34.8		38.7
Actuarial gain on pension and postretirement benefit obligations	Actuarial gain on pension and postretirement benefit obligations	—		(1.2)		—		(1.2)		Actuarial gain on pension and postretirement benefit obligations	—		(1.9)		—		(1.9)
Other expense (income), net (2)	Other expense (income), net (2)	0.9		0.7		(0.3)		(0.5)		Other expense (income), net (2)	(0.3)		(1.7)		3.3		1.9
Loss on the extinguishment of debt		—		20.4		—		20.4

Interest expense	Interest expense	29.6		34.7		18.0		23.1		Interest expense	18.0		26.9		29.8		38.7
Depreciation and amortization	Depreciation and amortization	24.6		32.7		30.9		39.0		Depreciation and amortization	30.9		54.5		66.3		89.9
EBITDA	EBITDA	118.4		139.7		118.2		139.5		EBITDA	118.2		161.6		224.9		268.3
Adjustments to EBITDA	Adjustments to EBITDA									Adjustments to EBITDA
Restructuring and other similar charges (3)	Restructuring and other similar charges (3)	1.6		3.7		13.1		15.2		Restructuring and other similar charges (3)	13.1		15.4		11.9		14.2
Stock-based compensation expense	Stock-based compensation expense	23.2		37.5		15.5		29.8		Stock-based compensation expense	15.5		25.0		30.5		40.0
Merger costs (4)	Merger costs (4)	—		—		33.7		33.7		Merger costs (4)	33.7		33.7		—		—
LIFO expense (5)		6.9		14.1		4.0		11.2
Last-in first-out ("LIFO") adjustments (5)										Last-in first-out ("LIFO") adjustments (5)	4.0		9.7		(11.9)		(6.2)
Acquisition-related fair value adjustment	Acquisition-related fair value adjustment	0.6		0.8		15.2		15.4		Acquisition-related fair value adjustment	15.2		18.9		—		3.7
Other, net (6)	Other, net (6)	—		—		0.3		0.3		Other, net (6)	0.3		0.3		—		—
Subtotal of adjustments to EBITDA	Subtotal of adjustments to EBITDA	32.3		56.1		81.8		105.6		Subtotal of adjustments to EBITDA	81.8		103.0		30.5		51.7
Adjusted EBITDA	Adjusted EBITDA	$	150.7	$	195.8	$	200.0	$	245.1	Adjusted EBITDA	$	200.0	$	264.6	$	255.4	$	320.0
Pro forma adjustment for acquisitions (7)								52.3
Pro forma Adjusted EBITDA								297.4

Consolidated indebtedness ~~(8)~~(7)	Consolidated indebtedness ~~(8)~~(7)							$	478.7	Consolidated indebtedness ~~(8)~~(7)							$	401.8
Total net leverage ratio (9)								1.61
Total Net First Lien Leverage Ratio (8)										Total Net First Lien Leverage Ratio (8)							1.26

(1)Income from discontinued operations, net of tax is not included in Adjusted EBITDA in accordance with the terms of our credit agreement.

(2)Other expense (income), net for the periods indicated, consists primarily of gains and losses from foreign currency transactions, ~~and~~ the non-service cost components of net periodic benefit costs associated with our defined benefit ~~plans.~~plans and other non-operational gains and losses.

(3)Restructuring and other similar charges is comprised of costs associated with workforce reductions, asset impairments, lease termination costs, and other facility rationalization costs. See Item 1, Note 3,, Restructuring and Other Similar Charges for more information.

(4)Merger costs is comprised of costs associated with legal and other professional services incurred in connection with completing the ~~merger with~~ Elkay Merger, which are excluded in calculating Adjusted EBITDA as defined in our credit agreement.

(5)~~Last-in first-out (LIFO) inventory~~LIFO adjustments are excluded in calculating Adjusted EBITDA as defined in our credit agreement.

(6)Other, net consists of gains and losses on the disposition of long-lived assets.

(7)Represents a pro forma adjustment to include Adjusted EBITDA related to the acquisition of Wade Drains and Elkay, which was permitted by our credit agreement. The pro forma adjustment includes the period from October 1, 2021, through the date of the Wade Drains and Elkay acquisitions. See Item 1, Note 2~~, Acquisitions for more information.~~

~~(8)~~Our credit agreement defines our consolidated indebtedness as the sum of all indebtedness (other than letters of credit or bank guarantees, to the extent undrawn) consisting of indebtedness for borrowed money and capitalized lease obligations, less unrestricted cash, which was ~~$58.3~~$152.4 million (as defined by the credit agreement) at September 30, ~~2022.~~2023.

~~(9)~~(8)Our credit agreement defines the total ~~net leverage ratio~~Net First Lien Leverage Ratio as the ratio of consolidated indebtedness (as described above) to Adjusted EBITDA for the trailing four fiscal quarters.

3430

Table of Contents

Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents, cash flow from operations, and borrowing availability of up to $200.0 million under our revolving credit facility.

As of September 30, ~~2022,~~2023, we had ~~$71.9~~$173.1 million of cash and cash equivalents and ~~$192.4~~$194.2 million of additional borrowing capacity. As of September 30, ~~2022,~~2023, the available borrowings under our credit facility were reduced by ~~$7.6~~$5.8 million due to outstanding letters of credit. As of December 31, ~~2021,~~2022, we had ~~$96.6~~$124.8 million of cash and cash equivalents and approximately ~~$193.9~~$192.5 million of additional borrowing capacity under our revolving credit facility.

Our revolving credit facility is available to fund our working capital requirements, capital expenditures and for other general corporate purposes. We believe this resource is adequate for our expected short-term and long-term needs.

Cash Flows

Cash flows for the period ended September 30, 2021 include our continuing operations and discontinued operations for the entire period, while the period ended September 30, 2022 only includes the cash flows associated with continuing operations. Refer to Item 1, Note 4, Discontinued Operations for further information.

Cash provided by operating activities was ~~$12.6~~$195.7 million and ~~$245.8~~$12.6 million during the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The change in year-over-year operating cash flows was primarily the result of ~~higher~~a lower use of cash for trade working capital, an increase in net income, and the ~~impact of~~ timing of ~~payments on accounts payable and~~ accrued expenses ~~including the payment of merger related costs in connection with the acquisition of Elkay~~ during the nine months ended September 30, ~~2022. In addition, cash provided by operating~~2023.

Cash used for investing activities ~~for~~was $6.6 million during the nine months ended September 30, ~~2021 includes cash flows associated with our discontinued operations that are not included in the nine months ended September 30, 2022.~~

~~Cash used for investing activities was~~2023 and $12.8 million during the nine months ended September 30, ~~2022 and $6.5 million~~2022. Investing activities during the nine months ended September 30, ~~2021.~~2023, consisted of $15.9 million of capital expenditures, which were partially offset by the receipt of $9.0 million in connection with an insurance settlement and $0.3 million from the sale of certain long-lived assets. Investing activities during the nine months ended September 30, 2022, included $4.3 million of capital expenditures and net cash payments of $44.8 million in connection with acquisitions, which ~~were partially~~was offset by the receipt of $35.0 million from Regal Rexnord Corporation in connection with the final net assets transferred in the PMC Spin-Off ~~Translation~~Transaction and the receipt of $1.3 million in connection with the sale of certain long-lived assets. ~~Investing~~

Cash used for financing activities was $141.5 million during the nine months ended September 30, 2021, primarily included $21.6 million of capital expenditures and net cash payments of $3.4 million in connection with our acquisition of ATS GREASEwatch and our 2020 acquisition of Hadrian, partially offset by the receipt of $18.5 million in connection with the sale of certain long-lived assets associated with our discontinued operations.

~~Cash used for financing activities was~~2023, compared to $23.1 million during the nine months ended September 30, ~~2022, compared to $13.1 million during~~2022. During the nine months ended September 30, ~~2021.~~2023, we utilized a net $4.7 million of cash for payments on outstanding debt, $100.2 million to repurchase outstanding shares of our common stock and $36.6 million for the payment of common stock dividends. During the nine months ended September 30, 2022, we utilized a net $4.4 million of cash for payments on outstanding debt and $20.1 million for the payment of common stock dividends, which was partially offset by $1.4 million of proceeds from the exercise of stock options, net of taxes withheld and paid on employees' share-based awards. During the nine months ended September 30, 2021, we utilized $1.7 million of cash for payments on outstanding debt, $32.6 million for the payment of common stock dividends and $0.9 million to repurchase common stock, which was partially offset by $22.1 million of cash proceeds from the exercise of stock options, net of taxes withheld and paid on employees' share-based awards.

Indebtedness

As of September 30, ~~2022,~~2023, we had ~~$537.0~~$554.2 million of total indebtedness outstanding as follows (in millions):


		Total Debt at September 30, 2022		Current Maturities of Debt		Long-term Portion			Total Debt at September 30, 2023		Current Maturities of Debt		Long-term Portion
Term loan (1)	Term loan (1)	$	536.3	$	5.5	$	530.8	Term loan (1)	$	532.4	$	5.5	$	526.9

Finance leases	Finance leases	0.7		0.2		0.5		Finance leases	21.8		0.8		21.0
Total	Total	$	537.0	$	5.7	$	531.3	Total	$	554.2	$	6.3	$	547.9

(1)Includes unamortized debt issuance costs of ~~$9.6~~$8.0 million at September 30, ~~2022.~~2023.

See Item 1, Note 13, Long-Term Debt for a description of our outstanding indebtedness.

3531

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk during the normal course of business from changes in foreign currency exchange rates and interest rates. The exposure to these risks is managed through a combination of normal operating and financing activities and at times derivative financial instruments in the form of foreign currency forward contracts to cover certain known foreign currency transactional risks. We also have historically entered into interest rate derivatives to manage interest rate fluctuations.

3632

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Based on that evaluation as of September 30, ~~2022,~~2023, the Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company's disclosure controls and procedures are adequate and effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, in a manner allowing timely decisions regarding required disclosure. As such, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the period covered by this report.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of the changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As discussed above, on July 1, 2022, we completed the Elkay Merger. As part of our ongoing integration of the Elkay business, we continue to incorporate our controls and procedures into the acquired business and to expand our company-wide controls to reflect the risks inherent in an acquisition of this size and complexity.

3733

Table of Contents

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See the information under the heading "Commitments and Contingencies" in Note 15 to the condensed consolidated financial statements contained in Part I, Item 1 of this report, which is incorporated in this Part II, Item 1 by reference.

~~ITEM 1A. RISK FACTORS~~

In addition to the risks and uncertainties discussed in this quarterly report on Form 10-Q, particularly those disclosed in the MD&A, see Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the Risk Factors except as set forth below:

~~Risks Related to the Merger with Elkay~~

~~We recorded substantial goodwill and other intangible assets as a result of the Merger that could become impaired and result in material non-cash charges to our results of operations in the future.~~

We account for the Merger as an acquisition of a business in accordance with GAAP. Under the acquisition method of accounting, the assets and liabilities of Elkay and its subsidiaries have been recorded, as of the completion of the Merger, at their respective fair values. Our reported financial condition and results of operations for periods after completion of the Merger reflect Elkay’s balances and results after completion of the Merger but have not been restated retroactively to reflect the historical financial position or results of operations of Elkay and its subsidiaries for periods prior to the Merger.

Under the acquisition method of accounting, the total purchase price was allocated to Elkay’s tangible assets and liabilities and identifiable intangible assets based on their fair values as of the date of completion of the Merger. The excess of the purchase price over those fair values, if any, was recorded as goodwill. To the extent the value of goodwill or intangibles, if any, becomes impaired in the future, we may be required to incur material non-cash charges relating to such impairment. Our operating results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the impairment.

~~We may be unable to successfully integrate Elkay’s business into our business or achieve the anticipated benefits of the Merger.~~

The success of the Merger depends, in part, on our ability to realize the anticipated benefits and cost savings from adding Elkay’s businesses, and we cannot assure successful integration or realization of the anticipated benefits of the Merger. Potential difficulties that may be encountered in the integration process which may result in Zurn Elkay performing differently than expected include, among others:

~~• the inability to successfully integrate Elkay in a manner that permits the achievement of full revenue, expected cash flows and cost savings anticipated from the Merger;~~

~~• not realizing anticipated synergies;~~

~~• integrating personnel from Elkay and the loss of key employees;~~

~~• potential unknown liabilities and unforeseen expenses;~~

~~• integrating relationships with customers, vendors and business partners;~~

~~• performance shortfalls as a result of the diversion of management’s attention caused by completing the Merger and integrating Elkay’s operations; and~~

~~• the disruption of, or the loss of momentum in, our ongoing business or inconsistencies in standards, controls, procedures and policies.~~

~~Our results may suffer if we do not effectively manage our expanded operations following the Merger.~~

Following the Merger, the size of our business has increased significantly beyond its previous size. Our future success will depend, in part, on our ability to manage this expanded business, resulting in risks and uncertainties, including the need to efficiently and timely integrate the operations and business of Elkay, to combine systems and management controls, and to integrate relationships with customers, vendors and business partners.

~~The market price of Zurn Elkay Common Stock following the Merger may be affected by different or additional factors.~~

~~Zurn’s businesses differ somewhat from Elkay's which may cause the results of operations of Zurn following the Merger to be affected differently by economic, market and other factors.~~

~~Table of Contents~~

~~Sales of substantial amounts of the Zurn Elkay Common Stock in the open market by the former Elkay stockholders could depress the trading price of our common stock.~~

The former Elkay stockholders may wish to dispose of some or all of the Zurn Elkay Common Stock that they received in the Merger. These sales (or the perception that these sales may occur), coupled with the increase in the outstanding number of shares of our Common Stock, may adversely affect the trading price of our Common Stock.

~~Certain former stockholders of Elkay have registration rights, the exercise of which could adversely affect the market price of our Common Stock.~~

In connection with the Merger, the Company and certain stockholders of Elkay entered into a Registration Rights Agreement, pursuant to which such stockholders have a right to demand registration of one public offering within the first three years after the closing of the Merger, subject to certain minimum and maximum thresholds and other customary conditions. The existence and potential or actual exercise of such rights could adversely impact the market price of our Common Stock.

~~Table of Contents~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In fiscal 2015, the Company's Board of Directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchase of up to $200.0 million of the Company's common stock from time to time on the open market or in privately negotiated transactions. On January 27, 2020, the Company's Board of Directors increased the remaining share repurchase authority under the Repurchase Program to $300.0 million. On February 8, 2023, the Company's Board of Directors approved increasing the remaining share repurchase authority under the Repurchase Program to $500.0 million. The Repurchase Program does not require the Company to acquire any particular amount of common stock and does not specify the timing of purchases or the prices to be paid; however, the program will continue until the maximum amount of dollars authorized have been expended or until it is modified or terminated by the ~~Board. The Company did not repurchase any shares during~~Board of Directors. During the three months ended September 30, ~~2022. A~~2023, the Company repurchased 444,606 shares of common stock at a total cost of ~~approximately $162.8~~$13.0 million at a weighted average price of $29.24 per share. The repurchased shares were canceled by the Company upon receipt. Approximately $415.5 million of the existing ~~repurchase~~ authority remained under the Repurchase Program at September 30, ~~2022.~~2023.


ISSUER PURCHASES OF EQUITY SECURITIES
	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Approximate Dollar Value that may yet be Purchased Under the Plans or Programs (1)
Period
July 1 - July 31, 2023	—	$	—	—	$	428,482,327
August 1 - August 31, 2023	318,857	$	29.42	318,857	$	419,752,079
September 1 - September 30, 2023	125,749	$	28.77	125,749	$	415,473,453
Total/Average	444,606	$	29.24	444,606

(1)See explanation of the Repurchase Program above.

ITEM 5.OTHER INFORMATION

During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.

Table of Contents

ITEM 6. EXHIBITS

Exhibit
No.

Description

Filed
Herewith

~~10.1~~

Registration Rights Agreement, dated as of July 1, 2022, by and between Zurn and certain stockholders of Elkay party thereto (includes amendments to the Standstill and Lock-Up Agreements, dated as of February 12, 2022, between the Company and certain former stockholders of Elkay)*

~~10.2~~

Amendment No. 1 to Fourth Amended and Restated First Lien Credit Agreement, dated as of July 1, 2022, by and between ZBS Global, Inc., Zurn Holdings, Inc., Zurn LLC, Elkay and the other loan parties party thereto*

~~10.3~~

Zurn Elkay Water Solutions Corporation Performance Incentive Plan (as amended and restated)*

~~10.4~~

~~Schedule of Compensation and Stock Ownership Guidelines for Outside Members of the Board, effective July 2022~~

~~10.5~~

~~Form of Restricted Stock Unit Agreement (Deferred RSUs) for Directors Under the Performance Incentive Plan~~

~~10.6~~

~~Form of Restricted Stock Unit Election Agreement (RSUs in Lieu of Cash Fees) for Directors Under the Performance Incentive Plan~~

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101.INS

Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.)

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Inline XBRL data (contained in Exhibit 101)

*Incorporated by reference to the same exhibit number in the Company's Current Report on Form 8-K, dated July 1, 2022.

4135

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, Zurn Elkay Water Solutions Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ZURN ELKAY WATER SOLUTIONS CORPORATION

Date:

October ~~25, 2022~~31, 2023

By:

/S/ MARK W. PETERSON

Name:

Mark W. Peterson

Title:

Senior Vice President and Chief Financial Officer

4236


	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Net sales	$	1,240.2	$	1,102.5
Net income (loss) from continuing operations	$	71.4	$	(3.8)
Earnings per share from continuing operations
Basic	$	0.50	$	(0.03)
Assuming dilution	$	0.49	$	(0.03)


	Common stock (1)		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interest (2)		Total stockholders’ equity
Balance at December 31, 2020	$	1.2	$	1,392.9	$	116.0	$	(73.8)	$	3.0	$	1,439.3
Total comprehensive income (loss)	—		—		50.0		(1.8)		0.1		48.3
Stock-based compensation expense	—		14.2		—		—		—		14.2
Proceeds from exercise of stock options	—		2.8		—		—		—		2.8


Repurchase of common stock	—		—		(0.9)		—		—		(0.9)
Common stock dividends ($0.09 per share)	—		—		(10.8)		—		—		(10.8)

Balance at March 31, 2021	$	1.2	$	1,409.9	$	154.3	$	(75.6)	$	3.1	$	1,492.9
Total comprehensive income	—		—		73.2		5.3		0.1		78.6
Stock-based compensation expense	—		11.6		—		—		—		11.6
Proceeds from exercise of stock options	—		16.6		—		—		—		16.6
Taxes withheld and paid on employees' share-based payment awards	—		(1.4)		—		—		—		(1.4)


Common stock dividends ($0.09 per share)	—		—		(10.8)		—		—		(10.8)

Balance at June 30, 2021	$	1.2	$	1,436.7	$	216.7	$	(70.3)	$	3.2	$	1,587.5
Total comprehensive income (loss)	—		—		64.1		(10.3)		—		53.8
Stock-based compensation expense	—		11.3		—		—		—		11.3
Proceeds from exercise of stock options	—		4.1		—		—		—		4.1



Common stock dividends ($0.09 per share)	—		—		(11.0)		—		—		(11.0)

Balance at September 30, 2021	$	1.2	$	1,452.1	$	269.8	$	(80.6)	$	3.2	$	1,645.7


	Fair Value		Weighted Average Useful Life (in years)
Trade name (1)	$	168.7	20
Customer relationships (2)	691.8		16
Fair value of intangible assets acquired	860.5


Leases	Classification	September 30, 2022		December 31, 2021
Assets:
Operating ROU assets	Other assets	$	58.7	$	14.1
Finance ROU assets	Property, plant and equipment, net (1)	0.9		0.5
Total ROU assets		$	59.6	$	14.6

Liabilities:
Current
Operating	Other current liabilities	$	8.3	$	6.1
Finance	Current maturities of debt	0.2		0.1
Non-current
Operating	Operating lease liability	51.2		8.9
Finance	Long-term debt	0.5		0.2
Total lease liabilities		$	60.2	$	15.3


Years ending December 31,	Operating Leases (1)		Finance Leases (1)
2022 (through December 31, 2022)	$	3.2	$	0.1
2023	12.2		0.3
2024	10.1		0.2
2025	7.4		0.2
2026	6.9		—
Thereafter	47.4		—
Total future minimum lease payments	87.2		0.8
Less: imputed interest	(26.2)		(0.1)
Total lease liabilities	$	61.0	$	0.7


	Nine Months Ended
Lease Term and Discount Rate	September 30, 2022		September 30, 2021
Weighted-average remaining lease terms (years):
Operating leases	10.2		3.0
Finance leases	3.3		3.5
Weighted-average discount rate:
Operating leases	6.5	%	3.4	%
Finance leases	5.2	%	3.4	%