Filing summary
Entity and period: The supplied filing is Rexnord Corporation’s Form 10-Q for the three months ended March 31, 2021—not a filing by Zurn Elkay Water Solutions Corp. Rexnord included Zurn within its Water Management segment. Rexnord had transitioned to a December 31 fiscal year-end, so the reported quarter is January 1–March 31, 2021; the comparable period is the three months ended March 31, 2020.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $526.1 million | $547.0 million |
| Gross profit / margin | $207.9 million / 39.5% | $216.5 million / 39.6% |
| Operating income / margin | $78.6 million / 14.9% | $88.0 million / 16.1% |
| Net income attributable to Rexnord | $50.0 million | $28.5 million |
| Diluted earnings per share | $0.40 | $0.23 |
| Cash provided by operating activities | $71.3 million | $123.9 million |
| Capital expenditures | $9.2 million | $15.9 million |
Revenue fell 3.8% year over year. Gross margin was nearly flat, while operating margin declined 1.2 percentage points. Net income increased despite lower sales and operating income, primarily because the prior-year quarter included a $35.8 million non-cash pension actuarial loss; the 2021 quarter had no such charge.
Cash and cash equivalents were $307.3 million at March 31, 2021, up from $255.6 million at December 31, 2020. Current assets were $1,013.0 million and current liabilities were $356.3 million. Total debt was $1,191.8 million, including $2.5 million of current maturities. Rexnord reported a 2.2-to-1.0 total net leverage ratio, below its 6.75-to-1.0 maximum covenant. It also reported $355.8 million of additional borrowing capacity at quarter-end, including the receivables facility scheduled for termination in May.
Segment results and changes
- Process & Motion Control: Sales declined 11.7% to $320.9 million; operating income decreased 10.4% to $55.0 million. Management cited lower starting backlog and customer buying-pattern changes amid COVID-19. Aerospace sales fell 46%; non-aerospace sales fell 5%. Core sales decreased 13%, excluding currency and divestiture impacts.
- Water Management: Sales rose 11.9% to $205.2 million, including an 8% contribution from prior-year acquisitions; core sales increased 4%. Operating income declined 2.9% to $40.6 million, and operating margin fell from 22.8% to 19.8%, reflecting restructuring, stock compensation and amortization costs, Hadrian acquisition mix, and LIFO inventory effects.
- Operating cash flow decreased by $52.6 million. Management attributed the decline to higher trade working capital and timing of accrued-expense payments, partly offset by higher net income. Investing cash use fell to $8.1 million from $74.1 million, as the prior-year period included the Just Manufacturing acquisition.
- Interest expense declined to $11.0 million from $13.4 million, which management attributed mainly to lower borrowings and average interest rates. The effective tax rate increased to 25.6% from 18.2%.
Outlook, transactions, and risks
- Rexnord expected to recognize approximately 88% of its $373.4 million backlog in the remaining nine months of 2021, with the balance in 2022 and beyond. This is a backlog estimate, not formal earnings guidance.
- Rexnord and Regal Beloit had agreed to spin off Process & Motion Control and combine it with Regal in a Reverse Morris Trust transaction, then expected to close in Q4 2021, subject to shareholder, regulatory, financing, tax, and other closing conditions. The filing describes potential transaction costs, financing and completion risks, possible tax consequences, and a potential $150 million termination fee in specified circumstances.
- COVID-19 continued to present uncertainty, though essentially all global facilities were operating with only intermittent interruptions and management reported no significant distribution or supply-chain issues at quarter-end. Further restructuring charges were possible but not yet estimable.
- Asbestos-related claims were estimated at $59.0 million, with a corresponding $59.0 million insurance receivable recorded as probable of recovery. The company cautioned that actual liability and insurance recovery could differ, including due to coverage disputes or insurer insolvency. Other ordinary-course legal matters were not expected by management to have a material adverse effect.
- After quarter-end, Rexnord gave notice to terminate its accounts receivable securitization facility effective May 17, 2021, and acquired ATS GREASEwatch for a preliminary cash purchase price of approximately $4.5 million.
Investor verification points
- Confirm the intended issuer: the supplied 10-Q is for Rexnord Corporation, not Zurn Elkay Water Solutions Corp.
- Assess the durability of Water Management’s 4% core sales growth and the drivers of its margin decline, including acquisition-related mix and added costs.
- Track Process & Motion Control recovery, especially aerospace demand, and compare subsequent results with management’s backlog conversion estimate.
- Monitor operating cash flow and working-capital movements, debt and leverage, and liquidity after the receivables facility termination.
- Follow completion conditions, financing, tax treatment, costs, and timing of the proposed Regal transaction.
- Review asbestos claims and insurance coverage developments, including whether the recorded recovery remains probable.