SEC Filing Summary
Issuer identity alert: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing under the name Zurn Elkay Water Solutions Corp. It covers the quarter ended September 30, 2020. Confirm the issuer and filing are the intended ones before relying on this summary.
Business context and reporting period
Rexnord operates Process & Motion Control and Water Management platforms. After its fiscal year ended March 31, 2020, the company changed its year-end to December 31; April 1–December 31, 2020 is a nine-month transition period. The filing presents results for the three and six months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $493.6 million, down 5.3% from $521.3 million | $942.7 million, down 8.4% from $1,029.6 million |
| Gross profit / margin | $193.1 million / 39.1%; prior-year margin 39.9% | $370.0 million / 39.2%; prior-year margin 39.8% |
| Operating income / margin | $72.4 million / 14.7%, versus $88.5 million / 17.0% | $138.4 million / 14.7%, versus $168.7 million / 16.4% |
| Net income from continuing operations | $45.4 million, versus $56.7 million | $81.2 million, versus $105.2 million |
| Diluted EPS from continuing operations | $0.37, versus $0.46 | $0.66, versus $0.85 |
| Operating cash flow | $113.8 million for six months, versus $86.3 million |
Six-month capital expenditures were $15.3 million; operating cash flow less capital expenditures was $98.5 million. Financing activities used $362.2 million, including $331.8 million of debt repayments, $19.2 million of common dividends and $15.0 million of share repurchases.
At September 30, cash was $326.6 million, down from $573.4 million at March 31. Total debt was $1,195.8 million, versus $1,473.4 million, including no revolver or receivables-securitization borrowings. The company reported $355.1 million of additional borrowing capacity, net leverage of 2.2x, and compliance with its credit agreement covenants. Current assets were $1,015.5 million and current liabilities were $360.0 million.
Material changes versus prior comparable periods
- Process & Motion Control sales fell 12.8% in the quarter and 14.8% for six months; the company attributed the decline to weaker demand across most end markets and geographies amid COVID-19.
- Water Management sales rose 8.4% in the quarter, including a 3% contribution from Just Manufacturing; core sales increased 5%, driven partly by demand for touchless and hygienic products. Six-month sales rose 3.3%, while core sales were flat as higher demand for those products offset broader market weakness.
- Quarterly operating income declined 38.6% in Process & Motion Control, while Water Management operating income rose 11.4%. For six months, the respective changes were down 33.5% and up 6.1%.
- Interest expense declined to $11.5 million for the quarter and $24.9 million for six months, principally reflecting lower borrowings and interest rates. The prior-year periods included a $3.2 million debt-extinguishment gain.
- Restructuring charges increased to $6.6 million for the quarter and $8.3 million for six months, versus $2.1 million and $5.3 million, respectively.
Outlook, risks and unusual items
- Backlog was $353.3 million at September 30. Management expected approximately 62% to be recognized as revenue during the remaining three months of the transition period and approximately 38% in 2021 and beyond. The filing gives no clear quantified full-period earnings or sales guidance.
- COVID-19 had disrupted operations and supply chains earlier in the pandemic; by September 30, essentially all global facilities were operating with only intermittent interruptions. Management warned that further pandemic effects could adversely affect demand, operations, cash flows and financial condition, and said additional restructuring was possible.
- Management continued cost reductions, workforce actions and footprint optimization. It cited lower sales volume, restructuring and higher stock-based compensation as pressures on margins, partly offset by productivity and cost-reduction measures.
- The company completed the sale of its China gearbox product line on October 1 for $5.8 million; the expected gain or loss was immaterial. The board declared a $0.08-per-share dividend payable December 7, 2020.
- Asbestos-related claims were estimated at $50.0 million, with a corresponding $50.0 million insurance receivable recorded; management noted uncertainty around coverage availability and potential future exposure. Other legal matters were described as not expected to have a material adverse effect based on current information. Ongoing tax examinations could change unrecognized tax benefits, but potential payments were not expected to be significant.
- The company adopted the expected-credit-loss accounting standard on April 1, 2020, with no financial-statement impact.
Important facts for investors to verify
- Confirm that Rexnord Corporation—not Zurn Elkay Water Solutions Corp.—is the intended issuer and that this transition-period reporting basis matches the requested comparison.
- Review segment sales and margins, particularly the continued weakness in Process & Motion Control and the sources and durability of Water Management growth.
- Reconcile the substantial cash decline with debt repayments, and assess remaining liquidity, debt maturities, leverage and covenant headroom.
- Assess how much backlog converts as expected and how COVID-19, restructuring, and supply-chain or demand conditions affect subsequent results.
- Review the asbestos liability and insurance recovery assumptions, tax exposures, and other contingencies for changes in estimates or coverage.