Filing overview
Issuer and period: The supplied filing is Rexnord Corporation’s Form 10-K for the fiscal year ended March 31, 2018, not a filing by Zurn Elkay Water Solutions Corp. Rexnord’s Water Management platform includes Zurn-branded products. Fiscal fourth-quarter data are included, but the filing does not represent calendar Q4 2017.
Rexnord operated through Process & Motion Control and Water Management, selling engineered industrial components and water-management products. Its strategy emphasizes the Rexnord Business System, organic improvement, and acquisitions.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $2,066.0 million | $1,918.2 million |
| Gross profit | $756.9 million; 36.6% margin | $668.0 million; 34.8% margin |
| Operating income | $147.1 million; 7.1% margin | $183.7 million; 9.6% margin |
| Net income attributable to Rexnord | $75.9 million | $74.1 million |
| Net income attributable to common stockholders | $52.7 million; diluted EPS $0.50 | $66.8 million; diluted EPS $0.64 |
| Cash from operating activities | $228.5 million | $195.1 million |
| Capital expenditures | $40.7 million | $54.5 million |
| Cash and cash equivalents at year-end | $217.6 million | $490.1 million |
| Total debt at year-end | $1,356.0 million | $1,622.7 million |
Working capital was $543.5 million. The company reported $329.0 million of additional borrowing capacity, comprising availability under its revolver and receivables securitization facility. Its total net leverage ratio was approximately 3.0x, against a 6.75x maximum covenant threshold; the company stated it was compliant with applicable covenants.
FY 2018 fourth-quarter sales were $575.2 million and gross profit was $209.7 million. Rexnord reported a $62.0 million net loss attributable to Rexnord and a $67.8 million loss attributable to common stockholders for the quarter, including the VAG goodwill impairment.
Changes versus the prior period
- Consolidated sales rose 7.7%. Process & Motion Control sales increased 9.4%; Water Management sales increased 5.3%.
- Management reported 5% core sales growth in each segment, excluding specified acquisition, foreign-exchange, and divestiture effects.
- Process & Motion Control operating income increased to $193.8 million from $134.9 million, with segment margin rising to 15.6% from 11.9%, attributed principally to sales growth, productivity, and lower restructuring costs.
- Water Management recorded an operating loss of $3.0 million versus operating income of $85.1 million, primarily because of a $111.2 million non-cash goodwill impairment tied to the planned VAG divestiture.
- Cash from operations increased, while year-end cash fell substantially, reflecting acquisitions and debt-related financing outflows. Total debt declined year over year.
- Common-stockholder earnings and diluted EPS declined despite higher consolidated net income, partly reflecting increased preferred-stock dividends.
Outlook, commentary, and risks
- Following board review, management said it planned to focus Water Management on Zurn specification-grade commercial plumbing products and anticipated divesting VAG. The transaction was not completed in the filing; additional impairment charges could arise as plans develop.
- Management expected further restructuring and footprint-optimization costs, but did not provide quantified forward guidance for sales or earnings.
- FY 2018 acquisitions included World Dryer for $50.0 million and Centa for a preliminary purchase price of $129.7 million plus assumed debt. Integration and realization of expected benefits remain execution risks.
- The $66.5 million tax benefit associated with U.S. tax reform was a provisional estimate; the company expected further guidance could change recorded amounts.
- Key disclosed risks include substantial indebtedness and floating-rate exposure, cyclical industrial and construction demand, raw-material costs and tariffs, currency movements, reliance on distributors and major customers, cyber and ERP-system risks, and uncertainty around the VAG divestiture.
- Contingencies include asbestos claims, environmental matters, product-liability claims, and tax examinations. For Zurn-related asbestos claims, the company estimated a $38.0 million liability and recorded a corresponding $38.0 million insurance receivable, while noting uncertainty about coverage and possible coverage gaps.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Confirm the issuer and reporting period: this is Rexnord Corporation FY 2018, not a Zurn Elkay 10-K or calendar-year 2017 Q4 filing.
- Track the timing, terms, and proceeds of any VAG sale, and whether further impairment or separation costs are recorded.
- Assess recurring operating performance apart from the $111.2 million impairment, acquisition effects, restructuring charges, and provisional tax benefit.
- Review cash conversion, debt service and refinancing needs, covenant headroom, and the effect of interest-rate changes.
- Monitor integration of Centa and World Dryer, restructuring charges, and whether segment margin improvements persist.
- Check actual asbestos insurance recoveries, coverage limits and gaps, and developments in environmental, product-liability, and tax matters.