10-Q: Zurn Elkay Water Solutions Reports Improved Profitability in Second Quarter 2024

Zurn Elkay Water Solutions Corporation saw a 2% increase in net sales and a significant improvement in profitability in the second quarter of 2024 compared to the same period last year.

Summary

• Zurn Elkay Water Solutions Corporation reported a 2% increase in net sales for the three months ended June 30, 2024, reaching $412.0 million compared to $403.2 million in the same period of 2023.
• The company's income from operations increased by 31.2% to $71.9 million for the quarter, up from $54.8 million in the prior year.
• Net income for the quarter was $46.0 million, a significant increase from $34.6 million in the second quarter of 2023.
• Diluted net income per share rose to $0.27 from $0.20 year-over-year.
• For the six months ended June 30, 2024, net sales increased by 1.4% to $785.8 million, compared to $775.3 million in the same period of 2023.
• Income from operations for the first half of 2024 was $125.1 million, a 27% increase from $98.5 million in the first half of 2023.
• Net income for the first six months of 2024 was $80.3 million, compared to $57.4 million in the same period of 2023.
• Diluted net income per share for the six months ended June 30, 2024, was $0.46, up from $0.32 in the prior year period.
• The company's backlog was $59.6 million as of June 30, 2024, with approximately 99% expected to be recognized in the remaining six months of 2024.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong financial results, improved profitability, and a healthy balance sheet. The company's strategic initiatives and restructuring efforts are yielding positive outcomes, making it a favorable investment prospect.

Positives

• The company experienced core sales growth of 2% in the second quarter, indicating strong demand for its products.
• Income from operations as a percentage of net sales increased by 390 basis points year-over-year, demonstrating improved profitability.
• The company's restructuring actions and productivity synergies related to the Elkay merger are contributing to improved financial results.
• Lower material costs and reduced restructuring expenses also contributed to the improved profitability.
• The company's strong cash position and low leverage ratio provide financial flexibility.
• The company has a robust share repurchase program, returning value to shareholders.
• The company is in compliance with all applicable covenants under its credit agreement.

Negatives

• The planned exit of certain residential sink products had a negative impact on net sales, reducing growth by 100 basis points in the second quarter and 200 basis points in the first six months.
• Other income (expense), net was a loss of $1.6 million for the three months ended June 30, 2024, compared to a gain of $1.6 million in the same period of 2023, primarily due to higher income recognized in connection with an insurance settlement in the prior year.
• Other expense, net during the six months ended June 30, 2024 was $3.0 million compared to $0.8 million during the six months ended June 30, 2023, primarily driven by higher income recognized in connection with an insurance settlement in the prior year.

Risks

• The company is exposed to market risks from changes in foreign currency exchange rates and interest rates.
• The company's restructuring plans are preliminary, and the full extent of related expenses are not yet estimable.
• The company is subject to periodic income tax examinations by domestic and foreign income tax authorities.
• 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, although the company has divested its asbestos liabilities.
• Failure to comply with debt covenants could limit the company's long-term growth prospects.

Future Outlook

Management expects to continue executing restructuring initiatives to optimize its operating margin and manufacturing footprint, and anticipates recognizing approximately 99% of the current backlog in the remaining six months of 2024.

Management Comments

• 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.
• Management expects to continue executing similar initiatives to optimize its operating margin and manufacturing footprint.
• Management believes the eventual outcome of unresolved legal actions will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Industry Context

The company's performance reflects a broader trend in the water management industry, where companies are focusing on sustainable solutions and operational efficiencies. The merger with Elkay has positioned Zurn Elkay as a major player in the sector, offering a comprehensive product portfolio.

Comparison to Industry Standards

• Zurn Elkay's performance is strong compared to industry peers, particularly in terms of profitability growth.
• Companies like Pentair and Xylem, which also operate in the water solutions space, have seen similar trends in focusing on operational efficiencies and strategic acquisitions.
• Zurn Elkay's Net First Lien Leverage Ratio of 0.98 to 1.00 is significantly lower than the industry average, indicating a strong financial position.
• The company's focus on specification-driven water management solutions aligns with the industry's move towards more sustainable and efficient products.

Corporate Governance

Legal Proceedings

• The company's subsidiaries are involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business.
• The company has divested its asbestos liabilities and no longer has any obligation with respect to pending and future asbestos claims related to the divested entities.

Stakeholder Impact

• Shareholders will benefit from the increased profitability and share repurchase program.
• Employees may be affected by ongoing restructuring actions, including potential workforce reductions.
• Customers will benefit from the company's focus on innovation and sustainable water management solutions.
• Creditors will be reassured by the company's strong financial position and low leverage ratio.

Next Steps

• The company will continue to execute restructuring initiatives to optimize its operating margin and manufacturing footprint.
• The company expects to recognize approximately 99% of the current backlog in the remaining six months of 2024.
• The company will pay a quarterly cash dividend of $0.08 per share on September 6, 2024.

Key Dates

Keywords

water management, net sales, profitability, restructuring, Elkay merger, financial results, EBITDA, share repurchase, debt, leverage ratio