Business context and reporting period
This is Rexnord Corporation’s Form 10-Q for the fiscal quarter ended June 30, 2016 (fiscal 2017 first quarter; April 1–June 30, 2016). Rexnord operates Process & Motion Control and Water Management businesses; Zurn is among the Water Management brands. The filing identifies Rexnord—not Zurn Elkay Water Solutions Corp—as the registrant, so the company identity in the request does not match the filing.
Financial results and liquidity
| Metric | Quarter ended June 30, 2016 | Comparable 2015 quarter |
|---|---|---|
| Net sales | $471.8 million | $485.1 million |
| Gross profit / margin | $165.4 million / 35.1% | $169.8 million / 35.0% |
| Operating income / margin | $38.6 million / 8.2% | $53.2 million / 11.0% |
| Net income attributable to Rexnord | $18.9 million | $21.3 million |
| Diluted EPS | $0.18 | $0.20 |
| Operating cash flow | $19.6 million | $7.9 million |
| Capital expenditures | $12.0 million | $7.7 million |
Cash and equivalents were $183.2 million at June 30, down from $484.6 million at March 31, 2016. Investing used $225.5 million, principally including $214.4 million for the Cambridge acquisition; financing used $94.1 million, including debt repayments and a $95.0 million voluntary term-loan prepayment. Total debt was $1.822 billion, or approximately $1.639 billion net of reported cash. The company reported $345.3 million of additional borrowing capacity, including $245.3 million under its revolver and $100.0 million under its receivables facility.
Adjusted EBITDA, a non-GAAP measure, was $79.0 million for the quarter. The company reported a 4.3-to-1.0 net first-lien leverage ratio against a maximum permitted ratio of 7.75-to-1.0; it stated it was in compliance with applicable covenants.
Material changes versus the comparable period
- Sales declined 2.7% year over year. Process & Motion Control sales fell 2.9%; Cambridge contributed 2%, partly offsetting a 5% decline in core sales. Water Management sales fell 2.5%, although core sales rose 3% excluding the RHF product-line exit and currency effects.
- Operating income declined 27.4%, and operating margin fell 2.8 percentage points. Process & Motion Control margin was pressured by lower sales, investment spending, and Cambridge purchase-accounting adjustments; Water Management faced restructuring costs, the RHF exit, and project-shipment timing.
- Interest expense rose to $23.7 million from $21.6 million. The income-tax line shifted from a $10.0 million provision to a $5.9 million benefit, including a $4.6 million excess share-based-payment tax benefit following early adoption of ASU 2016-09.
- Cambridge was acquired June 1 for preliminary cash consideration including $210.0 million enterprise value, plus $4.1 million of additional preliminary consideration. Its results are included only after closing; the preliminary allocation included $126.3 million goodwill and $81.2 million intangible assets.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management said it expects to continue restructuring and footprint/product-line optimization, but related future expenses were not yet estimable.
- Management cited uneven end-market demand, including weaker OEM and end-user demand in several industrial markets. Favorable nonresidential construction demand and infrastructure project timing supported Water Management.
- Debt is predominantly variable rate. Interest-rate swaps and caps hedge approximately 78% of variable-rate term loans; management estimated a 100-basis-point rate increase would add about $6.8 million in annual term-loan interest expense, with a further 100-basis-point increase adding about $11.5 million.
- About 32% of quarterly sales originated outside the U.S. The filing noted the June 2016 Brexit vote and pound decline; the company said effects beyond currency movements to date were not yet determined.
- Asbestos liabilities are estimated at $32.0 million, with a corresponding $32.0 million insurance receivable recorded. Management cited uncertainties around future claims, insurer coverage, and potential coverage gaps. Other legal matters were not expected by management to have a material adverse effect based on information then available.
- The RHF flow-control gate product line was being exited; its quarterly sales were $6.5 million versus $16.9 million, and its pretax operating loss was $4.5 million versus $2.4 million. Restructuring charges increased to $5.6 million from $1.9 million.
Most important facts to verify
- Confirm the intended issuer: this filing is for Rexnord Corporation, not a registrant named Zurn Elkay Water Solutions Corp.
- Confirm the intended reporting period: this is fiscal Q1 2017, ended June 30, 2016.
- Assess whether operating-margin pressure, industrial demand, RHF exit costs, and Cambridge integration affect subsequent results.
- Review debt-service exposure, covenant headroom, available liquidity, and the effect of interest-rate changes.
- Monitor asbestos insurance recoverability and the final Cambridge purchase-price allocation.
- Separate the reported tax benefit and non-GAAP Adjusted EBITDA from recurring operating performance and cash generation.