Business context and reporting period
Filing identity: The supplied filing is Rexnord Corporation’s Form 10-Q for the quarter ended June 30, 2021—not a filing under the name Zurn Elkay Water Solutions Corp. Rexnord reports Process & Motion Control and Water Management segments, the latter including Zurn-branded businesses. Rexnord had transitioned to a December 31 fiscal year-end; comparisons are to the same quarter and six-month periods in 2020.
Rexnord planned to spin off Process & Motion Control and combine it with Regal Beloit in a Reverse Morris Trust transaction, then expected to close in the second half of 2021, subject to approvals and other conditions.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $568.3 million | $449.1 million | $1,094.4 million | $996.1 million |
| Gross profit | $235.8 million | $176.9 million | $443.7 million | $393.4 million |
| Operating income | $103.6 million | $66.0 million | $182.2 million | $154.0 million |
| Net income attributable to Rexnord | $73.2 million | $35.6 million | $123.2 million | $64.1 million |
| Diluted EPS | $0.59 | $0.29 | $0.99 | $0.52 |
| Cash from operating activities | — | — | $145.0 million | $171.5 million |
- Q2 sales rose 26.5%; operating income rose 57.0%. Gross margin was approximately 41.5%, versus 39.4%; operating margin was 18.2%, versus 14.7%.
- Q2 Process & Motion Control sales increased 18.3%, with core sales up 16%; Water Management sales increased 39.5%, with core sales up 29%. Six-month sales increased 1.2% and 25.4%, respectively.
- Six-month operating cash flow declined $26.5 million year over year, despite higher net income. Management cited higher trade working capital and payment timing. Receivables and inventories used $61.7 million and $30.7 million of cash, respectively.
- Capital expenditures were $14.0 million for the six months. Investing cash outflow was $4.4 million, including $13.0 million in proceeds from asset dispositions and $3.4 million for the ATS GREASEwatch acquisition.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $390.7 million, up from $255.6 million at December 31, 2020. Current assets were $1,144.9 million and current liabilities $382.7 million.
- Total debt was $1,191.9 million, including a $622.0 million term loan and $496.7 million of 4.875% senior notes due 2025. Cash less total debt was approximately $801 million.
- No revolving-credit borrowings were outstanding; the $264 million facility had $255.8 million of available capacity after letters of credit. The company reported compliance with covenants and a 1.9-to-1.0 net leverage ratio against a 6.75-to-1.0 maximum.
- The company terminated its $100 million receivables securitization facility in May 2021.
Material changes, outlook and risks
- Q2 sales growth reflected broad demand recovery, foreign currency effects and, in Water Management, the prior-year Hadrian acquisition. Aerospace remained weaker: Process & Motion Control aerospace core sales fell 15% in Q2 and 33% for the six-month period.
- Process & Motion Control’s Q2 operating margin rose to 20.6%, partly due to asset-disposal gains, cost initiatives and higher volume. Water Management’s margin fell to 21.7%, with acquisition mix, LIFO inventory effects and comparison with prior-year temporary cost reductions cited as offsets.
- Q2 results included $9.4 million of net gains on disposal of long-lived assets, recorded in cost of sales. Six-month 2020 results included a $35.8 million non-cash pension actuarial loss, making year-over-year net-income comparisons less directly comparable.
- Management expected to continue restructuring and footprint/product rationalization, with further costs possible but not yet estimable. Backlog was $435.2 million; the company expected to recognize about 83% in the rest of 2021 and 17% in 2022 and beyond.
- COVID-19 continued to pose uncertain risks, though essentially all facilities were operating with only intermittent interruptions and management reported no significant supply-chain or distribution issues as of June 30.
- The proposed Regal transaction remained subject to shareholder, regulatory, financing and other closing conditions. The filing identifies possible transaction costs and a potential $150 million termination fee in specified circumstances, as well as risks to intended tax-free treatment and possible material tax consequences.
- Asbestos-related claims were estimated at $59 million over ten years and beyond; management expected insurance to cover the estimated exposure, but noted coverage availability and adequacy are not assured. Other disclosed legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer: this is a Rexnord filing, not a Zurn Elkay Water Solutions Corp. filing; verify which company and securities the requested analysis concerns.
- Check subsequent filings for the Regal transaction’s completion, final financing, separation terms and any transaction-related costs or tax developments.
- Assess whether sales growth and margins persisted after Q2, particularly in Water Management and aerospace, and distinguish operating trends from the $9.4 million asset-disposal gain.
- Monitor working-capital conversion and operating cash flow, along with debt, liquidity and covenant headroom.
- Review developments in asbestos claims and insurance recoveries, and the scope and cost of planned restructuring actions.