Filing summary
Registrant and period: The supplied filing is Rexnord Corporation’s Form 10-Q for the quarter ended June 30, 2017 (the first quarter of fiscal 2018, which began April 1, 2017). It is not a filing by Zurn Elkay Water Solutions Corp.; Zurn is identified as a Rexnord Water Management brand/business. Figures below are in U.S. dollars.
Business context and results
Rexnord operated two platforms: Process & Motion Control, serving industrial and other end markets, and Water Management, serving building and water-infrastructure markets. Net sales rose 3.4% to $487.7 million from $471.8 million. Management attributed growth to stronger core sales in Process & Motion Control; Water Management core sales were flat.
| Metric | Quarter ended June 30, 2017 | Prior-year quarter |
|---|---|---|
| Net sales | $487.7 million | $471.8 million |
| Gross profit / gross margin | $176.0 million / 36.1% | $165.4 million / 35.1% |
| Operating income / operating margin | $55.2 million / 11.3% | $38.6 million / 8.2% |
| Net income | $26.5 million | $18.9 million |
| Net income attributable to common stockholders | $20.7 million | $18.9 million |
| Diluted EPS attributable to common stockholders | $0.20 | $0.18 |
| Cash provided by operating activities | $37.0 million | $19.6 million |
| Capital expenditures | $6.9 million | $12.0 million |
Approximate operating cash flow less capital expenditures was $30.1 million, versus $7.6 million in the prior-year quarter. This is a simple calculation, not a company-reported non-GAAP measure.
Segments and material year-over-year changes
- Process & Motion Control: Sales increased 9.1% to $287.7 million; operating income rose to $39.7 million from $25.7 million, and operating margin improved to 13.8% from 9.7%. Management cited 5% core-sales growth, favorable demand across most served markets, lower amortization, and productivity improvements. The Cambridge acquisition contributed a 5% sales benefit, while currency was a 1% headwind.
- Water Management: Sales declined 3.9% to $200.0 million; operating income increased to $27.6 million from $22.7 million, and operating margin improved to 13.8% from 10.9%. Core sales were flat. Improved nonresidential construction demand was offset by weaker/timing-related water and wastewater infrastructure shipments. The prior-year comparison included the RHF product line, exited in fiscal 2017, and foreign currency was a headwind.
- Consolidated operating income increased 43.0%. Restructuring charges fell to $2.7 million from $5.6 million; intangible amortization fell to $8.2 million from $14.6 million.
- Interest expense declined to $20.0 million from $23.7 million, reflecting lower borrowings following term-loan prepayments. The tax comparison was unusual: the quarter recorded an $8.2 million tax provision versus a $5.9 million tax benefit a year earlier. The effective tax rate was 23.6% versus (45.4)%, with both periods affected by tax items described in the filing.
Cash, debt, and liquidity
Cash and cash equivalents were $516.2 million at June 30, 2017, up from $490.1 million at March 31, 2017. Total debt was $1.619 billion, including $1.603 billion of long-term debt; cash therefore partially offset, but did not eliminate, substantial leverage. The filing reports a 3.2x total net leverage ratio under the credit agreement and compliance with applicable covenants.
Available additional borrowing capacity was reported as $346.1 million: $250.7 million under the revolving facility and $95.4 million under the receivables securitization program. No amounts were borrowed under either facility; letters of credit reduced availability. Operating cash flow improved, while investing cash use was $6.7 million versus $225.5 million a year earlier, when the Cambridge acquisition accounted for most investing outflow. Financing cash use was $9.0 million, including $5.8 million of preferred dividends and $4.2 million of debt repayments.
The term loan’s weighted-average effective interest rate was 4.05%. Swaps and caps hedged approximately 88% of variable-rate term loans. Management estimated that a 100-basis-point interest-rate increase would add about $9.5 million of annual term-loan interest expense, with a further 100-basis-point increase adding about $7.2 million annually.
Outlook, risks, and unusual items
- The filing provides no specific numerical sales or earnings guidance. Management said restructuring and footprint/product-portfolio actions would continue; potential costs include workforce reductions, asset impairment or accelerated depreciation, lease termination, and facility rationalization. The full plan and related expenses were not yet estimable.
- Management described favorable demand across most Process & Motion Control end markets. Water Management demand in nonresidential construction was offset by shipment timing in water and wastewater infrastructure. Results for interim periods are not necessarily indicative of the full fiscal year.
- Rexnord had $402.5 million of 5.75% Series A mandatory convertible preferred stock outstanding. Preferred dividends of $5.8 million reduced income attributable to common stockholders; mandatory conversion is scheduled for November 15, 2019, subject to the instrument’s terms.
- Legal matters include asbestos claims and environmental proceedings. For Zurn-related asbestos claims, the company estimated approximately $37.0 million of potential liability and recorded a matching insurance receivable deemed probable of recovery. It estimated available insurance at approximately $241.9 million but warned that coverage is not assured and actual liability may differ materially. Management believed the broader unresolved legal matters would not materially adversely affect the company, while noting inherent uncertainties.
- About 30% of quarterly sales originated outside the United States. A hypothetical 10% strengthening of the U.S. dollar was estimated to reduce stockholders’ equity by approximately $54.5 million. The filing also notes valuation allowances on certain tax loss carryforwards and ongoing tax examinations; potential payments from current examinations were not expected to be significant.
Important facts for investors to verify
- Confirm the entity: this source is Rexnord Corporation’s 2017 10-Q, not a Zurn Elkay Water Solutions Corp. filing.
- Assess whether Process & Motion Control growth and the improved operating margins persisted, and distinguish organic/core growth from acquisition and currency effects.
- Monitor cash conversion and working-capital needs, particularly the quarter’s inventory increase, alongside capital spending and debt service.
- Review debt, interest-rate exposure, covenant headroom, and the potential common-share dilution from mandatory convertible preferred stock.
- Track the scope and costs of ongoing restructuring, and developments in asbestos insurance recoveries, environmental matters, and tax examinations.