Filing identity and reporting period
The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing under the name Zurn Elkay Water Solutions Corp. It covers the three months ended June 30, 2018 (Rexnord fiscal Q1 2019), compared with the three months ended June 30, 2017. Financial amounts below are in millions of dollars unless noted.
Business context and financial results
Rexnord reported two continuing platforms: Process & Motion Control and Water Management. The company approved a sale of its VAG business during the quarter and classified it as discontinued operations.
- Net sales rose 13.6% to $503.6, from $443.2. Process & Motion Control sales grew 15.5% to $332.4; Water Management sales grew 10.1% to $171.2.
- Gross profit was $195.5 versus $164.1; gross margin was approximately 38.8% versus 37.0%. Operating income increased 26.0% to $72.1; operating margin rose to 14.3% from 12.9%.
- Continuing-operations net income was $42.2, up from $29.4. Diluted continuing-operations EPS was $0.34 versus $0.22.
- A $42.8 after-tax discontinued-operations loss, including a $44.0 non-cash impairment, drove a $0.6 consolidated net loss and a $6.5 net loss attributable to common stockholders. Common diluted EPS was $(0.06), versus $0.20.
- Operating cash flow was $16.2, down from $37.0. Capital expenditures were $11.1; cash used in investing activities was $7.6. Cash and cash equivalents were $179.0 at June 30, compared with $193.2 at March 31.
- Total debt was $1,337.6, versus $1,356.0 at March 31. The company reported $350.2 of additional borrowing capacity, including revolver and receivables-securitization availability. Its total net leverage ratio was 2.9x against a 6.75x maximum covenant.
Changes versus prior period
- Sales growth included acquisition and currency effects: Process & Motion Control core sales rose 3%, with 11% contribution from Centa and a 2% favorable currency effect; Water Management core sales rose 7%, with 3% contribution from World Dryer.
- Both segments improved operating margins. Management cited stronger core sales, productivity and cost-reduction initiatives; Process & Motion Control results also benefited from footprint actions.
- Operating cash flow declined despite higher sales, reflecting higher cash taxes, cash interest and trade working capital. Inventory increased to $335.8 from $304.1.
- Foreign currency translation reduced other comprehensive income by $35.7 during the quarter.
Outlook, commentary and risks
- Management expected the VAG divestiture to be completed during fiscal 2019. The recorded impairment reflects estimated fair value less costs to sell; the final sale proceeds and any resulting adjustment could differ.
- Backlog/unsatisfied performance obligations were $349.9; the company expected approximately 91% to be recognized as revenue in fiscal 2019 and the balance in fiscal 2020 and beyond. This is not a full-year sales or earnings forecast.
- Restructuring and footprint optimization are continuing. Further workforce, facility and asset-related costs are possible, but the company said the plans were preliminary and the related expenses could not yet be estimated.
- Key exposures include variable interest rates, foreign-exchange movements, tax uncertainty under U.S. tax reform, and the execution and valuation of the VAG sale. The company reported compliance with debt covenants.
- Legal matters include asbestos claims and environmental proceedings. For Zurn-related asbestos claims, the company estimated $38.0 of potential liability and recorded a matching $38.0 insurance receivable, while warning that coverage could be disputed or unavailable.
Important facts for investors to verify
- Confirm the issuer and filing: the source is Rexnord Corporation, although the request names Zurn Elkay Water Solutions Corp.
- Review VAG sale progress, final consideration, and any further impairment or discontinued-operations effects.
- Assess whether cash conversion improves as working capital and inventory develop, and compare operating cash flow with reported earnings.
- Track debt, available borrowing capacity, leverage covenant headroom, and interest-rate exposure.
- Monitor restructuring costs, asbestos insurance recoverability, and unresolved tax estimates.