Filing identity and reporting period
Important metadata mismatch: The supplied filing is Rexnord Corporation’s Form 10-K for the fiscal year ended March 31, 2017, not a filing by Zurn Elkay Water Solutions Corp. Zurn is identified as a Rexnord Water Management brand/business. The filing includes unaudited fourth-quarter results for the quarter ended March 31, 2017.
Rexnord operated two platforms: Process & Motion Control and Water Management, serving industrial, commercial construction, institutional, and water-infrastructure markets.
Financial results and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $1,918.2 million | $1,923.8 million |
| Gross profit / margin | $668.0 million / 34.8% | $665.2 million / 34.6% |
| Operating income / margin | $183.7 million / 9.6% | $174.3 million / 9.1% |
| Net income attributable to Rexnord common stockholders | $66.8 million | $67.9 million |
| Diluted EPS attributable to common stockholders | $0.64 | $0.66 |
| Cash from operating activities | $195.1 million | $219.0 million |
| Capital expenditures | $54.5 million | $52.1 million |
| Cash and cash equivalents | $490.1 million | $484.6 million |
| Total debt | $1,622.7 million | $1,920.1 million |
| Working capital | $777.8 million | $771.7 million |
Fourth-quarter FY2017 sales were $503.6 million, gross profit was $175.6 million, and net income attributable to common stockholders was $21.6 million. FY2017 operating cash flow less capital expenditures was $140.6 million.
At year-end, available additional borrowing capacity was $345.8 million, including revolving-credit and receivables-securitization availability. The company reported a 3.33x total net leverage ratio and compliance with applicable debt covenants. Credit-agreement Adjusted EBITDA was $346.5 million, a non-GAAP measure.
Changes versus the prior year
- Consolidated sales declined 0.3%. Process & Motion Control sales rose 3.1% to $1,134.7 million, including a 7% contribution from Cambridge; excluding acquisitions and currency effects, core sales declined 3%.
- Water Management sales fell 4.9% to $783.5 million; core sales declined 2%, mainly reflecting timing of water-infrastructure project shipments. Stable nonresidential construction demand partly offset the decline.
- Operating income increased 5.4%, and operating margin improved 0.5 percentage points. Water Management operating margin rose to 10.9%; Process & Motion Control margin fell to 11.9% from 13.3%.
- Common-stockholder net income and diluted EPS were lower year over year, partly reflecting $7.3 million of preferred dividends accrued in FY2017.
- Operating cash flow decreased $23.9 million, primarily due to higher cash restructuring payments and the nonrecurrence of an $8.4 million prior-year anti-dumping settlement receipt.
- Total debt declined by $297.4 million. The company issued mandatory convertible preferred stock for net proceeds of $389.7 million and used $195.0 million of proceeds to prepay term debt; earlier in the year it also prepaid $95.0 million.
Outlook, commentary, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided in the supplied filing. Management expected to continue footprint optimization, cost-reduction actions, and selected product-line rationalizations, with further related charges possible; the full extent of future costs was not yet estimable.
- Cambridge was acquired on June 1, 2016 for a stated cash purchase price of $213.4 million. The results include Cambridge from the acquisition date, affecting comparability.
- FY2017 included $31.6 million of restructuring and similar charges, a $7.8 million debt-extinguishment loss, and a $2.6 million non-cash pension/postretirement actuarial gain. FY2016 included an $8.4 million anti-dumping settlement benefit.
- Water Management’s Rodney Hunt Fontaine flow-control gate product line exit generated a FY2017 operating loss of $16.3 million, including restructuring charges.
- Key risks include substantial leverage and floating-rate exposure, cyclical industrial and construction markets, customer and distributor concentration, raw-material costs, foreign-exchange and international risks, weather-related construction disruptions, acquisition integration, cybersecurity/ERP implementation, and environmental, asbestos, and product-liability claims.
- For Water Management asbestos litigation, the company estimated $37.0 million of potential liability and recorded a corresponding $37.0 million insurance receivable deemed probable of recovery. It estimated available insurance of approximately $242.9 million, but disclosed coverage uncertainties and possible gaps. Other asbestos matters were described as subject to insurance or indemnification arrangements.
- The 5.75% Series A mandatory convertible preferred stock carries quarterly dividends and is scheduled to convert on November 15, 2019 unless converted earlier. Conversion may increase common shares outstanding. Common-stock dividends were not paid in FY2017 or FY2016.
- Management and Ernst & Young reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended issuer and period: this document is Rexnord Corporation FY2017, not a Zurn Elkay Water Solutions Corp 10-K or a standalone 2016 Q4 filing.
- Review debt maturities, the term-loan rate and hedges, covenant headroom, and the liquidity available under the credit and receivables facilities.
- Assess whether Cambridge integration and ongoing restructuring deliver the expected operating benefits, and distinguish recurring performance from acquisition effects and unusual charges.
- Track Water Management infrastructure shipment timing, the RHF exit, and segment margin trends.
- Examine the assumptions, insurance recoverability, and indemnification protections underlying asbestos and environmental exposures.
- Consider preferred-stock dividend obligations and potential dilution upon mandatory conversion.