Filing summary
Entity and period: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing identified as Zurn Elkay Water Solutions Corp. It covers the fiscal quarter ended September 30, 2019 (Rexnord fiscal 2020 second quarter), with six-month comparisons to September 30, 2018. Figures are in U.S. dollars.
Business context and results
Rexnord reports Process & Motion Control and Water Management segments. The filing describes engineered mechanical components and water-quality, safety, flow-control and conservation products.
| Metric | Quarter ended Sep. 30, 2019 | Prior-year quarter | Six months ended Sep. 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $521.3 million | $524.8 million | $1,029.6 million | $1,028.4 million |
| Gross profit / margin | $208.2 million / 39.9% | $203.2 million / 38.7% | $409.8 million / 39.8% | $398.7 million / 38.8% |
| Operating income / margin | $88.5 million / 17.0% | $81.4 million / 15.5% | $168.7 million / 16.4% | $153.5 million / 14.9% |
| Continuing-operations net income | $56.7 million | $46.2 million | $105.2 million | $88.4 million |
| Net income (loss) attributable to common stockholders | $50.8 million | $(43.4) million | $91.5 million | $(49.9) million |
| Diluted EPS from continuing operations | $0.46 | $0.37 | $0.85 | $0.71 |
Cash flow, debt and liquidity
- Six-month operating cash flow was $86.3 million, versus $75.1 million a year earlier. Investing activities used $37.6 million, including $25.1 million for acquisitions and $13.2 million of capital expenditures; financing activities used $15.8 million.
- Cash and cash equivalents were $319.8 million at September 30, 2019, up from $292.5 million at March 31, 2019.
- Total debt was $1,250.8 million, including a $719.0 million term loan and $495.4 million of 4.875% senior notes due 2025. The term loan’s effective rate was 4.02%; reported long-term debt was $1,249.3 million.
- Management reported $351.7 million of additional borrowing capacity, with $258.6 million available on the revolver and $93.1 million under the receivables securitization facility. Neither facility had borrowings outstanding; letters of credit reduced availability.
- The company reported a 2.2-to-1.0 total net leverage ratio, below the 6.75-to-1.0 covenant maximum, and compliance with applicable covenants.
Material changes and management commentary
- Quarterly sales declined 0.7% overall. Process & Motion Control sales fell 3.4% to $337.0 million: core sales declined 2%, with currency translation reducing sales 2% and Centa China adding 1%. Management cited softer industrial-process demand and product-line simplification, partly offset by aerospace growth.
- Water Management sales rose 4.7% to $184.3 million. Core sales increased 4%, with North American building-construction demand supporting growth; the StainlessDrains.com acquisition contributed 1%.
- Operating income and margins improved in both segments. Management attributed the improvement principally to productivity, cost-reduction and footprint-repositioning benefits; lower corporate expense also reflected prior-year facility termination costs.
- Net interest expense fell to $15.3 million for the quarter from $18.7 million, primarily reflecting lower borrowings after a prior-year $75.0 million voluntary term-loan prepayment and the absence of prior-year derivative-loss amortization.
- Six-month sales were essentially flat. Process & Motion Control declined 2.1%, while Water Management grew 4.4%. Six-month operating income increased 9.9% to $168.7 million.
Outlook, unusual items and risks
- No specific earnings or sales guidance is provided. Backlog was $392.1 million at September 30, 2019; Rexnord expected to recognize approximately 80% in fiscal 2020 and the remainder in fiscal 2021 and beyond.
- Restructuring continued, with charges of $2.1 million for the quarter and $5.3 million for six months. Management expects further actions, but said the broader plan and related expenses were not yet estimable.
- A $3.2 million noncash gain resulted from forgiveness of remaining New Market Tax Credit-related net debt. The six-month period also included a $1.8 million loss from final VAG sale adjustments. The prior-year comparison included substantial VAG discontinued-operations impairment losses ($82.0 million for the quarter and $126.0 million for six months), which materially affect reported net-income comparisons.
- Mandatory convertible preferred stock totaled 402,500 shares and was scheduled to convert automatically on November 15, 2019, into a variable number of common shares. The filing states a range of 39.7020 to 47.6420 common shares per preferred share, subject to adjustments.
- Asbestos-related claims involve estimation and insurance-recovery uncertainty. The company estimated approximately $40.0 million of potential liability for specified Water Management claims and recorded a $40.0 million insurance receivable it considered probable of recovery; it cautioned that coverage could be disputed, unavailable or insufficient. Management said other unresolved legal matters were not expected to have a material adverse effect, based on information then available.
- The company was undergoing an IRS examination of fiscal 2016 and 2017 federal returns and reported planned German tax examinations relating to VAG. Potential tax payments were not expected to be significant, according to management.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Rexnord Corporation, whereas the request names Zurn Elkay Water Solutions Corp.
- Review segment demand trends, especially weaker industrial-process markets and the dependence of Water Management growth on North American construction.
- Assess cash conversion and working-capital movements; management cited inventory growth and payment timing as offsets to incremental profit.
- Check the preferred-stock conversion and resulting common-share dilution, along with the company’s debt and covenant position.
- Monitor restructuring costs, backlog realization, asbestos insurance recoveries and the outcomes of tax examinations.