Filing summary
Issuer and period: The supplied filing is Rexnord Corporation’s Form 10-Q, filed August 6, 2014, for the fiscal quarter ended June 30, 2014 (the first quarter of fiscal 2015). This does not match the request metadata naming Zurn Elkay Water Solutions Corp. Zurn is discussed as part of Rexnord’s Water Management business.
Business context and results
Rexnord operates Process & Motion Control and Water Management platforms. It reported net sales of $509.8 million, up 0.2% from $508.7 million a year earlier. Process & Motion Control sales declined 3.2% to $304.6 million; Water Management sales rose 5.7% to $205.2 million.
- Gross profit was $179.3 million, down from $181.9 million; gross margin was approximately 35.2%, versus 35.8%.
- Operating income was $57.6 million, down 5.6% from $61.0 million. Operating margin was 11.3%, versus 12.0%.
- Net income was $12.0 million, versus $13.6 million; net income attributable to Rexnord was $12.1 million, versus $13.8 million. Diluted EPS was $0.11, versus $0.14.
- Interest expense fell to $22.5 million from $35.0 million, principally following retirement of 8.50% senior notes in fiscal 2014. No debt-extinguishment loss was recorded this quarter, compared with $4.0 million a year earlier.
- The income tax provision increased to $21.8 million from $2.2 million; the effective rate was 64.5% versus 13.9%. Management attributed the current-period rate largely to $10.1 million of one-time costs tied to a change in a foreign subsidiary’s U.S. tax classification; excluding those costs, it said the rate would have been 34.6%.
Cash flow, liquidity, and debt
- Operating cash flow was $6.4 million, compared with cash use of $27.3 million. Investing used $36.4 million, including $27.7 million for the Green Turtle acquisition and $8.7 million of capital expenditures. Financing provided $1.6 million. Cash declined $27.7 million to $311.3 million.
- At June 30, cash was $311.3 million and additional borrowing capacity was $335.1 million: $235.1 million under the revolving facility and $100.0 million under the receivables program.
- Total debt was $1,972.3 million, including $1,917.8 million of term loans. The term loan’s effective average rate was 4.00%. No revolver or receivables-program borrowings were outstanding, though $29.9 million of revolver capacity was used for letters of credit.
- The company reported a 3.86x net first-lien leverage ratio and compliance with applicable credit-agreement covenants, including the 7.75x revolver maintenance limit.
Material changes and management commentary
- Process & Motion Control core sales declined 4%, partly offset by 3% acquisition contribution; management cited expected weakness in bulk-material-handling markets and a lower starting backlog. Excluding Mill Products’ $8.5 million year-over-year sales decline, segment sales fell 1%.
- Water Management core sales increased 4%, which management linked to market-share gains and stronger conditions in most end markets. Segment operating margin declined to 9.0% from 9.6%, affected by restructuring, Green Turtle inventory fair-value adjustments, and less favorable water-infrastructure mix; it improved 310 basis points sequentially.
- Rexnord acquired Green Turtle, a manufacturer of fiberglass oil and grease separators and traps, for $27.7 million to expand Water Management. The acquisition was described as not material to the quarter’s financial statements.
- The board began evaluating strategic alternatives for non-core Mill Products, including a possible sale; the process was expected to conclude by fiscal year-end, but outcomes were not yet determinable.
- Management said it expects further restructuring charges as it optimizes costs, manufacturing footprint, and product lines; the plans and related expenses were not yet estimable. The filing provides no specific financial guidance for future periods.
Unusual items, risks, and contingencies
- A customer-rebate accrual out-of-period adjustment reduced first-quarter fiscal 2015 net income by $5.3 million after tax, with no operating-cash-flow impact. Management considered it immaterial to previously issued statements and not expected to be material for fiscal 2015.
- Asbestos claims remain a significant estimation and insurance risk. The company recorded a $36.0 million liability and corresponding insurance receivable; it estimated approximately $250.5 million of available coverage but cautioned coverage may not ultimately be available in full and actual liabilities could differ or continue beyond the modeled period.
- Approximately 7,000 asbestos lawsuits representing about 26,000 claims named Zurn and other companies. The company said current claims are handled through an insurer-funded defense strategy.
- Other legal proceedings include environmental claims at the Ellsworth Industrial Park and asbestos matters, for which management cited indemnification or insurance protections, and the PEX brass-fittings settlement, funded through a capped seven-year claims fund. A Sloan patent dispute was resolved by consent judgment in June 2014 without material adverse impact.
- Foreign operations generated about 33% of sales. Management estimated a 10% stronger U.S. dollar would reduce stockholders’ equity by approximately $45.5 million. A 100-basis-point rate increase was estimated to add about $2.9 million of annual interest expense; approximately 97% of debt was variable-rate, partly hedged by swaps beginning in September 2015.
- Management stated disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer and period: this filing is Rexnord Corporation, fiscal Q1 2015, not a filing under the stated Zurn Elkay company name.
- Assess how the $5.3 million after-tax rebate adjustment and $10.1 million one-time tax-classification costs affect the interpretation of reported earnings and the effective tax rate.
- Monitor Mill Products’ strategic review and the trend in Process & Motion Control backlog and bulk-material-handling demand.
- Review debt, covenant headroom, variable-rate exposure, and the timing and effectiveness of the planned interest-rate hedges.
- Evaluate the assumptions behind asbestos liabilities and the collectability and sufficiency of insurance and indemnification coverage.