Business context and reporting period
Filing identity differs from the request: the supplied document is Rexnord Corporation’s Form 10-K, not a Zurn Elkay Water Solutions Corp filing. It reports fiscal 2019, the year ended March 31, 2019; fiscal Q4 ended that date. Rexnord operated Process & Motion Control and Water Management businesses, including Zurn-branded products.
The filing presents audited annual results and unaudited quarterly results. Unless noted, amounts are in millions of dollars.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $2,050.9 | $1,851.6 |
| Gross profit / margin | $784.8 / 38.3% | $706.5 / 38.2% |
| Operating income / margin | $305.6 / 14.9% | $266.4 / 14.4% |
| Continuing-operations net income | $189.0 | $206.6 |
| Net income attributable to common stockholders | $11.1 | $52.7 |
| Operating cash flow | $258.1 | $228.5 |
| Capital expenditures | $44.9 | $40.7 |
| Cash and cash equivalents at year-end | $292.5 | $193.2 |
| Total debt at year-end | $1,238.0 | $1,356.0 |
| Working capital at year-end | $585.9 | $543.5 |
Operating cash flow less capital expenditures was $213.2 in FY2019, versus $187.8 in FY2018 (derived from the reported figures). Interest expense was $69.9, down from $75.1. The FY2019 effective tax rate was 22.4%; FY2018 included a substantial tax benefit from U.S. tax reform.
FY2019 segment sales and operating margins: Process & Motion Control, $1,380.6 and 16.4%; Water Management, $670.3 and 20.8%. FY2019 Q4 sales were $537.5, gross profit $201.8, and continuing-operations income $47.7. Common-stockholder net income for the quarter was $41.4.
Material changes versus the prior comparable period
- Annual sales increased 10.8%; Process & Motion Control sales rose 11.2% and Water Management sales rose 9.8%. Management attributed growth to favorable demand, with acquisitions also contributing.
- Consolidated operating income increased 14.7%, and operating margin expanded 0.5 percentage point. Management cited core-sales growth, productivity and footprint actions, partly offset by investments and higher corporate costs.
- Continuing-operations income declined to $189.0 from $206.6, despite higher operating income. Common-stockholder net income fell to $11.1, principally reflecting a larger discontinued-operations loss and the year-over-year tax comparison.
- The VAG Water Management business was sold on November 26, 2018, and reported as discontinued operations. FY2019 discontinued-operations loss was $154.7, including $126.0 of non-cash impairment charges and a $22.5 loss on sale; FY2018 loss was $130.6, including a $111.2 goodwill impairment.
- Cash increased and debt declined; Rexnord made a $75.0 voluntary term-loan prepayment. FY2019 included a $5.0 non-cash debt-extinguishment gain related to New Markets Tax Credit financing.
Outlook, commentary, risks and unusual items
- No quantitative earnings or revenue guidance is provided. Management said it expected to continue restructuring and footprint optimization, with additional related costs possible; the full amount was not estimable.
- Backlog was $372.5 at March 31, 2019, versus $329.9 a year earlier. The company expected approximately 94% to be recognized as revenue in FY2020 and the balance in FY2021 and later.
- Liquidity included $292.5 cash and $351.3 of additional borrowing capacity under the revolving credit facility and receivables securitization program. The company stated resources were adequate for expected needs.
- Leverage was material: debt totaled $1,238.0, while the credit-agreement total net leverage ratio was 2.22x against a 6.75x maximum covenant. About 58% of debt was variable-rate; management estimated a 100-basis-point rate increase would add about $7.3 annual interest expense.
- Other key risks include cyclical industrial and construction demand, competition, raw-material costs and tariffs, distributor and customer concentration, international and foreign-exchange exposure, acquisition integration, cyber/ERP disruption, and environmental, asbestos and product-liability matters.
- For Zurn asbestos claims, the company estimated $40.0 of potential liability and recorded a matching $40.0 insurance receivable, while cautioning that coverage and ultimate claims remain uncertain. Rexnord also disclosed other proceedings, including environmental matters, but said their ultimate outcomes were not expected to materially affect results based on information then available.
- Preferred shares carried a 5.75% dividend and were scheduled for mandatory conversion on November 15, 2019, potentially diluting common shareholders. Common dividends were not paid in FY2019 or FY2018.
- The company adopted ASC 606 in FY2019; it said adoption did not materially affect results. It expected lease accounting adoption to add approximately $65–$75 of lease assets and liabilities from April 1, 2019, without material earnings or cash-flow impact.
Important facts for investors to verify
- Confirm that Rexnord Corporation, rather than Zurn Elkay Water Solutions Corp, is the intended issuer and that the relevant period is FY2019, not a standalone 2018 Q4 filing.
- Review the VAG sale’s final working-capital adjustments and any contingent earn-out proceeds; the company did not expect the FY2019 earn-out amount, and final determination remained pending.
- Assess recurring earnings and cash generation separately from VAG impairments, sale loss, tax effects, restructuring charges and debt-extinguishment items.
- Check debt terms, variable-rate exposure, covenant headroom, preferred-stock conversion and the resulting potential dilution.
- Monitor backlog conversion, segment margins, restructuring costs, pension funding and the collectability of insurance recoveries for asbestos exposure.