Filing summary
Period and entity: The supplied filing is Rexnord Corporation’s Form 10-K for the fiscal year ended March 31, 2020—not a 2019 Q4 filing by Zurn Elkay Water Solutions Corp. It reports Rexnord’s two platforms, Process & Motion Control and Water Management, with Zurn as a Water Management brand. Fiscal 2020 covers April 1, 2019 to March 31, 2020. The company subsequently changed its year-end to December 31, creating a nine-month transition period in 2020.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $2,068.3 million | $2,050.9 million | Up 0.8% |
| Gross profit / margin | $818.0 million / 39.5% | $784.8 million / 38.3% | Margin up 1.2 percentage points |
| Operating income / margin | $334.3 million / 16.2% | $305.6 million / 14.9% | Income up 9.4% |
| Continuing-operations net income | $182.2 million | $189.0 million | Down 3.6% |
| Net income attributable to common stockholders | $165.7 million; diluted EPS $1.45 | $11.1 million; diluted EPS $0.28 | Prior year included a $154.7 million discontinued-operations loss |
| Operating cash flow | $298.6 million | $258.1 million | Up $40.5 million |
| Capital expenditures | $41.4 million | $44.9 million | Down $3.5 million |
| Cash and working capital at year-end | $573.4 million; $808.8 million | $292.5 million; $585.9 million | Cash up $280.9 million |
| Total debt at year-end | $1,473.4 million | $1,238.0 million | Up $235.4 million |
Operating cash flow less capital expenditures was approximately $257.2 million in FY2020 (calculated). Gross and operating margins improved despite nearly flat sales. The $36.6 million non-cash pension actuarial loss reduced continuing-operations earnings; interest expense declined to $58.6 million from $69.9 million.
Segment results
- Process & Motion Control: Sales of $1,358.2 million, down 1.6%; operating income of $228.4 million and a 16.8% margin, versus 16.4%. Core sales declined 1%, excluding acquisition and currency effects, reflecting softer industrial demand and product-line simplification.
- Water Management: Sales of $710.1 million, up 5.9%; operating income of $163.1 million and a 23.0% margin, versus 20.8%. Core sales rose 4%, supported by North American building-construction demand.
Material changes and capital structure
- FY2020 acquisitions added StainlessDrains.com ($24.8 million) and Just Manufacturing (preliminary purchase price $59.4 million) to Water Management. Acquisition spending net of cash acquired was $84.5 million.
- Cash provided by financing activities was $114.9 million, versus $116.7 million used in FY2019. The company drew $250 million on its revolving facility and $75 million through its receivables securitization program, while making a $100 million voluntary term-loan prepayment.
- Year-end debt included a $620.8 million term loan, $495.7 million of 4.875% senior notes due 2025, $249.2 million drawn on the revolver, and $74.9 million of securitization borrowings. Only $28.6 million of additional borrowing capacity was available, including $9.3 million on the revolver and $19.3 million under the securitization program.
- The company reported a 2.1x total net leverage ratio against a 6.75x maximum covenant threshold and stated it was in compliance with applicable covenants. Approximately 59% of debt was variable-rate; a 100-basis-point rate increase was estimated to raise annual term-loan interest expense by about $8.8 million.
Outlook, risks and unusual items
- Management provided no quantified earnings or sales guidance. It said the full impact of COVID-19 was uncertain; the pandemic had disrupted some manufacturing, distribution and supply-chain operations. The company implemented furloughs, workforce reductions and spending cuts, and warned that further restructuring could follow.
- The company identified exposure to cyclical industrial, aerospace and construction markets; customer and distributor concentration; raw-material costs and tariffs; foreign exchange; cybersecurity and ERP implementation; acquisition integration; environmental matters; and substantial debt.
- Backlog was $380.7 million at March 31, 2020, with approximately 89% expected to convert to revenue in FY2021 and 11% in FY2022 or later. Backlog is subject to customer and economic risks.
- FY2020 common-stock repurchases totaled $100.7 million, and the company initiated a $0.08-per-share quarterly dividend. Repurchases were temporarily suspended on April 8, 2020 due to pandemic uncertainty; a further $0.08 dividend was declared in May.
- VAG was sold in FY2019 and reported as discontinued operations; FY2020 included a further $1.8 million loss related to final sale adjustments. The $165.7 million of FY2020 common-stockholder income is therefore not directly comparable with FY2019’s $11.1 million, which was heavily affected by VAG impairment and sale losses.
- Pension underfunding increased to $176.3 million from $143.6 million, primarily due to lower discount rates and lower-than-expected asset returns. The filing also reports approximately $6,000 asbestos-related lawsuits against Zurn and related estimated liability and insurance-recovery amounts of $50 million each; recovery depends on insurance coverage.
Important facts for investors to verify
- Confirm the intended issuer and reporting period: this source is Rexnord FY2020, not a Zurn Elkay Water Solutions Corp. 2019 Q4 report.
- Assess COVID-19’s subsequent effects on orders, operations, cash flow, restructuring costs and the conversion of backlog.
- Reconcile debt and liquidity, including the limited undrawn facilities, variable-rate exposure, covenant terms and upcoming maturities.
- Evaluate the sustainability of Water Management growth and margin expansion versus weakness in Process & Motion Control, separating organic performance from acquisitions and currency.
- Review the assumptions behind pension obligations, acquired-asset valuations, goodwill and intangible assets, asbestos insurance recoveries, and other legal or environmental contingencies.
- Note that the auditor issued unqualified opinions on the financial statements and internal control over financial reporting as of March 31, 2020.