Rexnord Corporation — Form 10-Q Summary
Business context and period. The filing is for Rexnord Corporation, not an entity identified as Zurn Elkay Water Solutions Corp. It covers the second quarter and first six months of fiscal 2019, ended September 30, 2018, with comparisons to the corresponding 2017 periods. Rexnord operated Process & Motion Control and Water Management; VAG, formerly part of Water Management, was classified as discontinued operations.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales, continuing operations | $524.8 million | $453.8 million | $1,028.4 million | $897.0 million |
| Gross profit | $203.2 million | $173.6 million | $398.7 million | $337.7 million |
| Income from operations | $81.4 million | $68.1 million | $153.5 million | $125.3 million |
| Operating margin | 15.5% | 15.0% | 14.9% | 14.0% |
| Net income from continuing operations | $46.2 million | $33.3 million | $88.4 million | $62.7 million |
| Net income (loss) attributable to common stockholders | $(43.4) million | $24.0 million | $(49.9) million | $44.7 million |
| Diluted EPS from continuing operations | $0.37 | $0.26 | $0.71 | $0.48 |
| Diluted EPS, total | $(0.30) | $0.23 | $(0.46) | $0.42 |
- Sales and segments: Q2 sales rose 15.6%. Process & Motion Control sales increased 16.1% to $348.7 million; Water Management continuing-operations sales increased 14.8% to $176.1 million. Six-month sales increased 14.6%.
- Margins and earnings: Q2 gross margin was approximately 38.7%, versus 38.3% a year earlier. Management attributed improved Process & Motion Control margin to core growth, productivity and footprint actions. Water Management Q2 margin was 23.5%, down 0.2 percentage points; its six-month margin improved 0.5 points to 22.4%.
- Cash flow: Six-month operating cash flow was $75.1 million, compared with $60.5 million. Investing used $16.1 million, including $17.6 million of capital expenditures and a $2.0 million asset acquisition, partly offset by $3.5 million of disposition proceeds. Financing used $27.7 million. Cash and cash equivalents were $223.5 million at September 30, 2018.
- Debt and liquidity: Total debt was $1,338.0 million, including $792.1 million of term loans and $494.6 million of senior notes. Additional borrowing capacity was $350.2 million, net of letters of credit. The company reported a 2.7x total net leverage ratio against a 6.75x maximum covenant and said it was in compliance.
- Backlog: Unsatisfied performance obligations were $340.7 million; the company expected to recognize about 82% in fiscal 2019 and the balance in fiscal 2020 and beyond.
Material changes and unusual items
- Continuing-operations sales growth included acquisition contributions: Centa added 10% to Process & Motion Control Q2 sales, while World Dryer added 3% to Water Management Q2 sales. Core sales grew 7% and 12%, respectively. Aerospace shipment timing also benefited Process & Motion Control Q2.
- Rexnord recorded VAG impairment charges of $82.0 million in Q2 and $44.0 million in Q1, for $126.0 million in the first half. The resulting VAG discontinued-operations losses were $83.7 million in Q2 and $126.5 million for the first half. These charges drove the reported common-stockholder losses despite higher continuing-operations earnings.
- On October 5, 2018, the company signed an agreement to sell VAG, after the September 30 quarter-end. Expected cash proceeds were approximately $25 million, subject to customary adjustments, plus up to $20 million in contingent earn-out consideration. Closing was anticipated in fiscal Q3, subject to conditions including German and Austrian antitrust approval.
- Restructuring charges were $3.7 million in Q2 and $6.8 million in the first half. Management said further workforce, facility and product-line actions are expected, but the overall plan and related costs were not yet estimable.
- Other notable changes: interest expense declined to $18.7 million for Q2 from $20.1 million; corporate expense increased, partly due to facility termination and compensation costs. Foreign-currency translation reduced first-half comprehensive results.
Outlook, risks and contingencies
- No specific full-year earnings or revenue guidance is provided. Management cited favorable demand trends in many served markets and ongoing productivity, cost-reduction and footprint-optimization efforts. Results for interim periods are not necessarily indicative of full-year results.
- The VAG sale price, timing and completion remain uncertain; proceeds are subject to closing adjustments and the earn-out depends on future EBITDA. The estimated fair value and impairment could change.
- Key exposures include restructuring execution and costs, market demand, foreign exchange and interest rates, debt service and covenant restrictions, and tax estimates. The company noted ongoing evaluation of U.S. tax-reform effects and GILTI treatment.
- Legal matters include environmental and asbestos claims, among other ordinary-course proceedings. Management did not expect unresolved matters overall to materially adversely affect the company. For Zurn asbestos claims, the filing estimates $38.0 million of potential liability and a corresponding $38.0 million insurance receivable; recovery and coverage remain subject to uncertainty.
- Management concluded disclosure controls were effective as of September 30, 2018, with no reported material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and entity scope: this supplied filing is Rexnord Corporation’s 10-Q; Zurn is discussed as part of Water Management.
- Track completion and final proceeds of the VAG sale, including working-capital adjustments, approval conditions and earn-out terms.
- Assess continuing-operations growth and margins separately from VAG discontinued operations and impairment charges.
- Monitor cash conversion and working-capital needs, debt balances, borrowing availability, leverage and covenant headroom.
- Review expected restructuring costs, tax exposures, and the assumptions supporting asbestos insurance recovery and other contingencies.