Zurn Elkay Water Solutions Corp quarterly report, Q1 FY2020

Filing identity and reporting period

Important identification mismatch: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing under the name Zurn Elkay Water Solutions Corp. It reports the quarter ended June 30, 2019, which Rexnord identifies as the first quarter of fiscal 2020—not fiscal 2019. The summary below reflects the filing provided.

Rexnord is a diversified industrial company with Process & Motion Control and Water Management platforms. Its Water Management products include Zurn-branded products.

Financial results and liquidity

Unless stated otherwise, amounts are in millions of dollars.

• Sales rose 0.9%. Process & Motion Control sales declined 0.7% to $330.1; Water Management sales increased 4.1% to $178.2.
• Process & Motion Control operating margin rose to 16.7% from 15.0%; Water Management margin increased to 22.4% from 21.3%.
• Cash used in investing activities was $29.4, including $24.8 for the StainlessDrains.com acquisition and $5.9 of capital expenditures. Cash used in financing activities was $10.6. Cash declined $20.7 to $271.8.
• At June 30, total debt was $1,264.9, including $718.7 of term loans and $495.2 of 4.875% senior notes due 2025. Cash was $271.8. Current assets were $969.4 and current liabilities were $354.3.
• Available additional borrowing capacity was $351.4: $258.5 under the revolving facility and $92.9 under the receivables securitization program. No amounts were drawn under either facility.
• Net leverage under the credit agreement was 2.3x, below the 6.75x maximum covenant. The company reported compliance with applicable covenants.

Material changes versus the prior-year quarter

• Operating income increased $8.1, with improvement in both segments; management attributed the gains principally to productivity, footprint actions, cost reductions and higher Water Management sales.
• Interest expense fell to $15.5 from $18.6, mainly reflecting lower borrowings following a $75.0 term-loan prepayment in fiscal 2019 and the absence of prior-year interest-rate-derivative loss amortization.
• Common-stockholder earnings improved from a loss to income. The comparison is substantially affected by the prior-year $42.8 after-tax discontinued-operations loss, including a $44.0 noncash impairment of the VAG business. The current quarter included a further $1.8 loss from VAG sale adjustments and related costs.
• Operating cash flow increased by $2.8, though inventory growth and the timing of accrued-expense payments partly offset increased profit.

Outlook, commentary, risks and unusual items

• The filing gives no specific full-year earnings or sales guidance. Management expects to continue restructuring and product-line rationalization; further costs may include workforce reductions, asset impairment or accelerated depreciation, lease termination and facility costs, but the plans and expenses were not yet estimable.
• Backlog was $390.4 at June 30. Rexnord expected approximately 90% to be recognized as revenue in fiscal 2020 and the remainder in fiscal 2021 and later; backlog conversion is not guaranteed.
• Management cited 1% core sales growth in Process & Motion Control, with foreign exchange reducing reported growth by 3% and acquisition contribution adding 1%. North American strength was partly offset by weaker European and Asian demand and product simplification. Water Management core growth was 4%, reflecting stronger North American building-construction demand, partly offset by product simplification.
• Rexnord acquired StainlessDrains.com for a preliminary $24.8 cash purchase price, adding products to Water Management. The purchase-price allocation remained preliminary.
• Series A preferred stock, paying 5.75%, was scheduled for mandatory conversion on November 15, 2019, subject to its conversion terms. Preferred dividends were $5.8 for the quarter.
• Adoption of the new lease standard on April 1, 2019 resulted in initial recognition of approximately $70.8 of right-of-use assets and $73.0 of lease liabilities. Management reported no significant effect on results or cash flows.
• Asbestos-related claims involve substantial estimation and insurance-coverage uncertainty. The company estimated $40.0 of potential liability for existing and expected claims over ten years and recorded a $40.0 insurance receivable it considered probable of recovery; it cautioned that coverage may not ultimately be available or sufficient. Other disclosed matters include environmental, product-liability and other legal claims, which management did not expect to materially adversely affect the company based on information then available.
• Management described forward-looking statements as subject to risks and uncertainties and gave no assurance that anticipated results would be achieved. Disclosure controls were concluded effective as of June 30, 2019.

Most important facts for investors to verify

1. Confirm the intended issuer and period: this is Rexnord Corporation’s 10-Q for Q1 fiscal 2020, not a filing identified as Zurn Elkay Water Solutions Corp. or fiscal 2019.
2. Assess whether reported operating-margin gains and sales trends are sustainable, particularly in light of weaker European and Asian demand and currency effects.
3. Monitor cash conversion, inventory and working-capital movements, acquisition spending, and the conversion of the $390.4 backlog.
4. Review debt, preferred-stock conversion and dividend obligations, covenant headroom, and the composition of reported leverage.
5. Track restructuring costs, preliminary StainlessDrains.com purchase accounting, VAG contingent consideration and sale adjustments, and asbestos liabilities and insurance recoveries.