Filing summary
Entity and period: The supplied filing is Rexnord Corporation’s Form 10-Q for the quarter ended December 31, 2019 (fiscal 2020 third quarter), not a filing for Zurn Elkay Water Solutions Corp. It reports Rexnord’s two platforms, including Water Management, which markets Zurn products. The distinction matters when attributing these consolidated results.
Financial performance
| Metric | Quarter ended Dec. 31, 2019 | Prior-year quarter | Nine months ended Dec. 31, 2019 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $491.7 million | $485.0 million | $1,521.3 million | $1,513.4 million |
| Gross profit / margin | $191.7 million / 39.0% | $184.3 million / 38.0% | $601.5 million / 39.5% | $583.0 million / 38.5% |
| Operating income / margin | $77.6 million / 15.8% | $70.9 million / 14.6% | $246.3 million / 16.2% | $224.4 million / 14.8% |
| Continuing-operations net income | $48.4 million | $52.9 million | $153.6 million | $141.3 million |
| Diluted EPS from continuing operations | $0.39 | $0.43 | $1.24 | $1.15 |
| Operating cash flow | Not separately stated | Not separately stated | $174.7 million | $145.3 million |
Quarterly common-stockholder net income was $45.7 million, or $0.39 diluted EPS, compared with $19.6 million, or $0.21, a year earlier. The prior-year quarter included a $27.8 million discontinued-operations loss. For the nine-month period, common-stockholder net income was $137.2 million versus a $30.3 million loss, with the prior-year result heavily affected by a $154.3 million discontinued-operations loss.
- Segment sales: Process & Motion Control sales were $327.5 million for the quarter, up 0.2%; Water Management sales were $164.2 million, up 3.7%. Nine-month sales were $994.6 million for Process & Motion Control, down 1.3%, and $526.7 million for Water Management, up 4.2%.
- Cash and liquidity: Cash was $277.0 million at December 31, 2019, versus $292.5 million at March 31, 2019. Current assets were $968.6 million and current liabilities $347.3 million. The company reported $348.0 million of additional borrowing capacity, including $258.9 million under its revolver and $89.1 million under its receivables facility; neither facility had borrowings outstanding.
- Debt: Total debt was $1,148.6 million, down from $1,238.0 million at March 31, 2019. The company prepaid $100 million of term debt in December and refinanced its term loan at a lower margin. Its reported net leverage ratio was 2.0x, against a 6.75x maximum covenant.
- Cash uses: Nine-month investing cash outflow was $49.0 million, including $25.5 million of capital expenditures and $25.1 million for acquisitions. Financing cash outflow was $138.5 million, including net debt repayments, $20.0 million of share repurchases and $17.4 million of preferred dividends.
Changes, outlook and notable items
- Quarterly sales rose 1.4%, while operating income increased 9.4%. Management attributed Process & Motion Control’s flat core sales to aerospace and consumer-facing growth offset by softer industrial-process demand and product-line simplification. Water Management’s 3% quarterly core-sales growth reflected North American building-construction demand, partly offset by product simplification. Core sales exclude acquisitions, divestitures and foreign-exchange effects.
- Operating margins improved in both segments. Management cited productivity and footprint actions in Process & Motion Control, and sales growth, cost initiatives and a lower LIFO inventory adjustment in Water Management. Quarterly continuing-operations net income declined year over year, with higher income-tax expense among the factors described.
- Backlog was $389.5 million at December 31; management expected about 61% to convert to revenue in fiscal 2020 and the balance in fiscal 2021 and later. The filing does not provide specific full-year earnings or sales guidance.
- Restructuring charges were $3.6 million for the quarter and $8.9 million for nine months. Management expects further restructuring and footprint/product rationalization costs, but said the overall plan and related expenses were not yet estimable.
- Unusual items include a $2.2 million quarterly debt-extinguishment loss from refinancing and prepayment; the nine-month period also included a $3.2 million noncash gain from forgiveness of remaining New Market Tax Credit debt. The 5.75% preferred shares mandatorily converted into about 16.0 million common shares during the quarter.
- After quarter-end, the company acquired Just Manufacturing for a preliminary cash price of approximately $60 million. The board also declared an initial common dividend of $0.08 per share and increased available share-repurchase authority to $300 million.
- Risks and contingencies include exposure to foreign-exchange and interest-rate movements, tax examinations and valuation-allowance judgments, and ongoing legal claims. The filing estimates asbestos-related liabilities of $40 million and expects insurers to pay approximately $30 million over the next ten years; it also records a $40 million insurance receivable considered probable of recovery and cautions that coverage may not ultimately be available in full. Management said unresolved legal matters were not expected to have a material adverse effect based on information then available.
Key facts for investors to verify
- Confirm the intended issuer and reporting period: the source document is Rexnord Corporation’s fiscal 2020 third-quarter 10-Q, not a Zurn Elkay Water Solutions Corp. filing.
- Assess how much of reported sales and margin growth was organic versus acquisition-related, foreign exchange, LIFO effects and restructuring/product-line actions.
- Track conversion of the $389.5 million backlog and progress, costs and savings from the continuing restructuring program.
- Review debt repayment, interest savings, covenant headroom and the funding implications of the post-quarter acquisition, dividend and expanded repurchase authorization.
- Monitor asbestos exposure and insurance recoverability, tax examinations, and whether subsequent operating results support the filing’s backlog expectations.