Filing summary
Registrant and period: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing by Zurn Elkay Water Solutions Corp. It covers the fiscal third quarter ended December 31, 2018 (fiscal 2019 Q3), and the nine months then ended. Amounts are in U.S. dollars and millions unless stated otherwise.
Business context and reporting period
Rexnord operated two platforms: Process & Motion Control (PMC) and Water Management. In fiscal 2019, the company classified its VAG water-infrastructure business as discontinued operations and completed its sale on November 26, 2018. Management said it intends to focus Water Management on Zurn specification-grade commercial plumbing products.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net sales | $485.0 | $436.7 | $1,513.4 | $1,333.7 |
| Gross profit / margin | $184.3 / 38.0% | $170.1 / 39.0% | $583.0 / 38.5% | $507.8 / 38.1% |
| Operating income / margin | $70.9 / 14.6% | $64.4 / 14.7% | $224.4 / 14.8% | $189.7 / 14.2% |
| Continuing-operations net income | $52.9 | $85.9 | $141.3 | $148.6 |
| Net income (loss) attributable to common stockholders | $19.6 | $75.8 | $(30.3) | $120.5 |
| Diluted EPS from continuing operations | $0.43 | $0.70 | $1.15 | $1.21 |
- Q3 sales increased 11.1%; PMC sales rose 11.7% and Water Management sales rose 9.8%. Management attributed PMC growth to 4% core growth, 10% contribution from the prior-year Centa acquisition, and a 2% adverse currency effect. Water Management’s Q3 increase reflected stronger North American building-construction demand.
- For the nine months, sales increased 13.5%. PMC grew 14.4% (4% core growth and 10% from Centa); Water Management grew 11.6% (10% core growth and 2% from World Dryer).
- Operating income improved year over year, although Q3 consolidated operating margin edged down 0.1 percentage point. Nine-month margin rose 0.6 point. Q3 PMC margin was 16.3% versus 16.4%; Water Management margin was 20.9% versus 19.8%. Management cited productivity and sales growth, partly offset by innovation and market-expansion spending, lower Centa margins, and higher corporate costs.
- Nine-month operating cash flow was $145.3 versus $121.9. Capital expenditures were $26.5, implying operating cash flow less capital expenditures of $118.8. Cash and cash equivalents were $297.1 at December 31, 2018, versus $193.2 at March 31, 2018.
- Total debt was $1,312.4, including $792.4 on the term loan and $494.8 of 4.875% senior notes due 2025. Cash less total debt implies net debt of approximately $1,015.3. The company reported a 2.4x total net leverage ratio, below its 6.75x maximum covenant threshold, and said it was covenant-compliant.
- Reported liquidity included $342.7 of additional borrowing capacity, net of letters of credit, alongside cash. Current assets were $966.5 and current liabilities $336.9 at December 31; comparison with March 31 is affected by the VAG sale and removal of held-for-sale balances.
Material changes and unusual items
- VAG generated a $154.3 nine-month discontinued-operations loss, including a $126.0 non-cash impairment and a $19.7 non-cash loss on sale. The Q3 discontinued-operations loss was $27.8. The VAG sale yielded $9.0 net proceeds from $21.5 gross proceeds, subject to customary adjustments; potential contingent consideration is up to $20.0 based on future earn-out performance.
- Comparisons of net income are significantly affected by prior-year tax benefits from U.S. tax reform. Q3 tax expense was $9.1 versus a $51.0 tax benefit in the prior-year quarter; nine-month tax expense was $40.8 versus a $26.5 benefit. The current nine-month effective tax rate was 22.8%.
- Q3 included a $5.0 gain on extinguishment of debt after forgiveness of certain subsidiary debt and related loans receivable. Prior-year Q3 included an $11.9 debt-extinguishment loss.
- Restructuring charges were $2.6 in Q3 and $9.4 for the nine months. Management expects further restructuring and footprint actions but said total future costs were not yet estimable.
- After quarter-end, Rexnord voluntarily prepaid $75.0 of term debt on January 9, 2019, and acquired an additional 47.5% interest in Centa China for $22.0 on January 23, taking control of the joint venture.
Outlook, risks, and contingencies
- Backlog at December 31 was $361.9; the company expected to recognize approximately 61% in fiscal 2019 and 39% in fiscal 2020 and later. This is an expectation, not a guarantee of conversion to sales.
- Management described favorable demand across many served end markets, including North American nonresidential construction, but the filing does not provide specific earnings or revenue guidance for the remainder of fiscal 2019.
- Risks include execution and costs of ongoing restructuring, demand and market conditions, foreign-exchange and interest-rate movements, tax exposures, and the uncertainty of converting backlog into revenue. Forward-looking statements are subject to risks described in the filing and prior SEC reports.
- The company reported approximately $38.0 of estimated asbestos-related liability and a corresponding $38.0 insurance receivable considered probable of recovery. It cautioned that insurance availability and ultimate liability are uncertain. Management said other unresolved legal matters were not expected to have a material adverse effect based on information then available.
- Series A mandatory convertible preferred stock carries a 5.75% dividend and was scheduled for mandatory conversion on November 15, 2019, subject to the stated conversion terms.
Most important facts for investors to verify
- Confirm the issuer: this source is Rexnord Corporation’s 10-Q, despite the request naming Zurn Elkay Water Solutions Corp.
- Separate continuing operations from discontinued VAG results; assess the $126.0 impairment and sale-related loss when comparing earnings.
- Check the final VAG working-capital and cash adjustments and whether any earn-out consideration is ultimately earned.
- Track backlog conversion, core demand, and segment margins, particularly against acquisition, currency, and restructuring effects.
- Review debt and liquidity after the $75.0 post-quarter term-loan prepayment, and monitor leverage and covenant headroom.
- Assess the collectability of the asbestos insurance receivable and the outcome of other legal, tax, and restructuring exposures.