Business context and reporting period
This filing is Rexnord Corporation’s unaudited Form 10-Q for the fiscal quarter ended December 31, 2016 (fiscal 2017 Q3), with year-to-date comparisons for the nine months ended December 31. Rexnord reported two platforms: Process & Motion Control and Water Management, which includes Zurn-branded products. The supplied filing is for Rexnord Corporation, not a filing under the name Zurn Elkay Water Solutions Corp.
Key financial metrics
| Metric | Fiscal 2017 Q3 | Prior-year Q3 | Nine months FY2017 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $451.8 million | $460.2 million | $1,414.6 million | $1,431.2 million |
| Gross profit / margin | $153.0 million / 33.9% | $158.3 million / 34.4% | $492.4 million / 34.8% | $497.4 million / 34.8% |
| Operating income / margin | $32.8 million / 7.3% | $48.5 million / 10.5% | $123.9 million / 8.8% | $157.2 million / 11.0% |
| Net income attributable to Rexnord common shareholders | $1.7 million | $24.4 million | $45.2 million | $68.3 million |
| Diluted EPS attributable to common shareholders | $0.02 | $0.24 | $0.43 | $0.66 |
For the nine months, operating cash flow was $122.1 million, versus $150.2 million a year earlier. Capital expenditures were $44.0 million, compared with $26.4 million; cash used in investing activities was $255.8 million, including $213.7 million net cash for the Cambridge acquisition. Cash and cash equivalents were $429.3 million at December 31, 2016, down from $484.6 million at March 31, 2016.
Total debt was $1,626.9 million, including $16.8 million current maturities; long-term debt was $1,610.1 million. Net debt using balance-sheet cash was approximately $1,197.6 million. The company reported $339.1 million of additional borrowing capacity across its revolving facility and receivables securitization program, after letters of credit. Its reported total net leverage ratio was 3.5x against a 6.75x maximum covenant threshold.
Material changes versus prior comparable periods
- Q3 net sales fell 1.8%; operating income declined 32.4%, and common-shareholder net income fell to $1.7 million from $24.4 million.
- Process & Motion Control Q3 sales rose 1.7%, including an 8% contribution from Cambridge, which more than offset a 6% decline in core sales. Water Management sales fell 6.6%; lower water-infrastructure project shipments were a key factor.
- Q3 operating margin contracted 3.2 percentage points. Management cited lower core sales, accelerated depreciation and restructuring-related footprint actions, less favorable project mix, expense timing, and investment in innovation and market expansion.
- Nine-month operating income declined 21.2% and common-shareholder diluted EPS decreased from $0.66 to $0.43. Nine-month operating cash flow also decreased.
- Debt was refinanced in December. The term-loan refinancing generated a $7.8 million loss on extinguishment, including $5.4 million of refinancing costs and a $2.4 million noncash write-off. Preferred-stock proceeds supported debt prepayment and general corporate purposes.
Outlook, commentary, risks and unusual items
- Management expects restructuring and footprint-optimization work to continue, potentially bringing additional workforce, facility, lease-termination, impairment and accelerated-depreciation costs; the overall plan and related expense were not yet estimable.
- Rexnord acquired Cambridge on June 1, 2016 for a reported cash purchase price of $213.4 million. Purchase-price allocation remained preliminary. The company also continued exiting its Rodney Hunt Fontaine flow-control gate product line; this line generated Q3 sales of $2.4 million and an operating loss of $6.1 million.
- The $390.2 million net preferred-stock issuance carries a 5.75% dividend and mandatory conversion in November 2019. It may dilute common shareholders; conversion terms provide for 39.7020 to 47.6420 common shares per preferred share, subject to stated terms.
- Tax benefits, including excess share-based-payment tax benefits following early adoption of ASU 2016-09, materially affected the reported tax rate. Management cautioned that the adoption may create effective-tax-rate volatility.
- Interest-rate and foreign-exchange exposure remain relevant. Approximately 87% of variable-rate term loans were hedged; management estimated a 100-basis-point rate increase would raise annual term-loan interest expense by about $9.1 million. Foreign-currency translation reduced equity by $33.4 million during the nine months.
- Asbestos claims and environmental matters are contingencies. The company estimated Water Management-related asbestos liability at $32.0 million and recorded a matching insurance receivable considered probable of recovery; management cautioned that actual liability and available insurance could differ. The company also disclosed pending litigation and other claims, while stating that the unresolved matters were not expected to have a material adverse effect based on current information.
- The filing provides no quantified full-year revenue or earnings guidance. Forward-looking statements are subject to the risks described in the company’s fiscal 2016 Form 10-K.
Important facts for investors to verify
- Confirm issuer and scope: this is Rexnord Corporation’s filing, with Water Management/Zurn operations, not a standalone Zurn Elkay Water Solutions Corp. filing.
- Assess whether the Q3 operating-margin decline and lower infrastructure shipments were temporary, and track core sales separately from Cambridge acquisition effects and the RHF exit.
- Review debt terms, covenant headroom, refinancing costs, preferred-stock dividends and potential common-share dilution.
- Monitor restructuring spending, footprint actions, Cambridge purchase-accounting adjustments and acquisition contribution to results.
- Reassess cash generation and capital spending against the company’s debt obligations, liquidity availability and disclosed asbestos-insurance assumptions.