Filing identity and reporting period
Important mismatch: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing identified as Zurn Elkay Water Solutions Corp. The summary below reflects Rexnord’s filing. It covers fiscal Q1 2013, the three months ended June 30, 2012, compared with the three months ended July 2, 2011. Rexnord describes two platforms: Process & Motion Control and Water Management.
Financial results and liquidity
| Metric | Q1 fiscal 2013 | Comparable period |
|---|---|---|
| Net sales | $497.0 million | $476.2 million |
| Gross profit / margin | $178.9 million / 36.0% | $166.9 million / 35.0% |
| Operating income / margin | $53.6 million / 10.8% | $63.0 million / 13.2% |
| Net income (loss) | $(2.2) million | $11.2 million |
| Diluted earnings (loss) per share | $(0.02) | $0.16 |
| Cash used by operations | $37.9 million | $37.6 million |
| Capital expenditures | $14.4 million | $8.1 million |
- Revenue increased 4%. Management reported core sales, excluding acquisitions, divestitures and currency effects, declined 1%.
- Cash and cash equivalents were $392.9 million at June 30, up from $298.0 million at March 31. Current assets were $1,089.9 million and current liabilities $391.2 million.
- Total debt was $2,121.0 million, down from $2,423.7 million at March 31. The company reported $319.6 million of additional borrowing capacity, including $219.6 million under its revolver and $100.0 million under its receivables program.
- Cash from financing activities was $146.3 million, principally reflecting $458.3 million of net IPO proceeds, offset in part by redemption of $300 million principal amount of notes and related costs.
- Adjusted EBITDA, a non-GAAP measure, was $97.1 million for the quarter; trailing-twelve-month pro forma Adjusted EBITDA was $395.5 million. The company reported a 1.46x senior secured bank leverage ratio and compliance with applicable debt covenants.
Material changes versus the prior period
- Water Management sales rose 24% to $179.7 million, substantially reflecting the VAG acquisition; its core sales declined 9%. Segment operating income fell to $16.5 million from $19.8 million, with lower North American municipal-water demand and acquisition mix cited as factors.
- Process & Motion Control sales declined 4% to $317.3 million, but core sales increased 2%. Segment operating income rose to $54.1 million from $50.3 million; the filing cites productivity gains and operating leverage.
- Operating income fell $9.4 million year over year. Results included a $10.1 million Zurn PEX brass-fittings contingency charge, $2.6 million of restructuring costs and a $0.2 million pension-curtailment loss. Management stated operating income excluding these items was $66.5 million, or 13.4% of sales.
- Net results also reflected a $21.1 million debt-extinguishment loss from redeeming 11.75% notes, a $15.0 million Apollo management-agreement termination charge, and a $16.6 million recovery under the Continued Dumping and Subsidy Offset Act (CDSOA). Interest expense declined to $38.3 million from $44.4 million following debt reduction.
- The April 2012 IPO materially increased shares outstanding; weighted-average basic shares were 94.1 million versus 66.7 million in the prior period.
Outlook, commentary, risks and unusual items
- Management anticipated a lower-growth environment for the balance of fiscal 2013 and revised its outlook to reflect weaker North American mining, slower European demand, and slower North American water-treatment and infrastructure demand, partly offset by growth initiatives. The filing provides no clear numeric revised guidance.
- The proposed national settlement of Zurn PEX brass-fittings claims remained subject to definitive terms, insurer agreement and court approval. Opt-outs may pursue claims independently; insurers had separately challenged coverage. The company warned that liability beyond recorded reserves could materially adversely affect results.
- Rexnord estimated Zurn asbestos liabilities at $42.0 million and recorded a matching insurance receivable, but noted uncertainty over insurance availability and potential liabilities beyond the estimate.
- The $16.6 million CDSOA recovery was subject to pending litigation; Rexnord could not estimate future payments or rule out repayment of prior distributions.
- Foreign currency remains a risk: approximately 27% of Q1 sales originated outside the United States, and currency translation reduced equity by $12.7 million during the quarter. The company estimated a 100-basis-point rate increase would add about $4.7 million to annual interest expense on senior secured facilities.
- Management reported disclosure controls and procedures were effective as of June 30, 2012, with no material changes in internal control over financial reporting identified during the quarter.
Most important facts for investors to verify
- Confirm the intended issuer: this source is Rexnord Corporation, despite the request naming Zurn Elkay Water Solutions Corp.
- Review the revised fiscal 2013 outlook and the demand assumptions underlying management’s lower-growth commentary.
- Track final court and insurer approval, funding and opt-outs for the Zurn PEX settlement, as well as any reserve changes.
- Assess recurring operating performance separately from the IPO-related debt redemption, Apollo termination charge, CDSOA recovery and other unusual items; review the company’s non-GAAP reconciliations.
- Monitor debt service, covenant headroom, variable-rate exposure, and the availability and terms of revolving and receivables-program capacity.