Business context and reporting period
This filing is Rexnord Corporation’s unaudited Form 10-Q for the fiscal quarter ended December 28, 2013 (fiscal 2014 third quarter), with comparative results for the quarter ended December 29, 2012. The filing identifies Rexnord—not Zurn Elkay Water Solutions Corp—as the registrant; investors should verify the requested company and filing identity.
Rexnord operated Process & Motion Control and Water Management platforms, serving industrial, aerospace, energy, construction, and water-treatment markets. Fiscal year ends March 31.
Financial results and liquidity
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $489.1 million | $471.7 million | $1,512.3 million | $1,464.8 million |
| Gross profit | $181.2 million | $167.9 million | $554.9 million | $533.2 million |
| Operating income | $67.5 million | $59.5 million | $201.1 million | $180.6 million |
| Net income (loss) attributable to Rexnord | $28.7 million | $9.2 million | $(9.8) million | $26.2 million |
| Diluted EPS attributable to Rexnord | $0.28 | $0.09 | $(0.10) | $0.26 |
| Cash from operations | Not separately presented | Not separately presented | $93.4 million | $49.1 million |
Q3 gross margin was approximately 37.0% versus 35.6%; operating margin was 13.8% versus 12.6%. Nine-month operating margin was 13.3% versus 12.3%. Nine-month net loss includes a $133.2 million debt-extinguishment charge; management reported adjusted EBITDA of $293.5 million for the nine months, a non-GAAP measure.
At December 28, 2013, cash was $192.7 million, total debt was $1,978.2 million, and reported total stockholders’ equity was $434.1 million. Cash declined from $524.1 million at March 31, 2013. The company reported $336.7 million of additional borrowing capacity, including $236.7 million under its revolver and $100.0 million under its receivables program. Nine-month investing cash use was $143.6 million, including $112.0 million for acquisitions and $31.6 million in capital expenditures; financing cash use was $279.5 million.
Material changes versus comparable periods
- Q3 sales rose 3.7% year over year; management said core sales increased 4%, with negligible acquisition and currency effects. Nine-month sales increased 3.2%, with core sales up 3%.
- Water Management drove growth: Q3 sales increased 11.6% and operating income rose 50.8%; nine-month sales increased 8.6% and operating income rose 25.4%. Process & Motion Control sales were nearly flat in the nine-month comparison, with bulk material handling weakness offsetting growth in other markets.
- Q3 net income attributable to Rexnord improved to $28.7 million from $9.2 million. Nine-month results turned to a $9.8 million attributable loss from $26.2 million income, primarily reflecting the debt-extinguishment charge.
- Interest expense declined to $22.2 million in Q3 from $39.1 million, and to $86.4 million for nine months from $114.6 million, following refinancing and retirement of the 8.50% notes.
- Operating cash flow increased by $44.3 million year over year, which management attributed mainly to working-capital management, lower cash interest, and higher sales. Acquisition spending increased substantially from the prior-year period.
Outlook, commentary, risks, and unusual items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management cited market-share gains and alternative-market growth in Water Management, productivity gains, and continued strategic investment; it noted weakness in bulk material handling.
- In August 2013, Rexnord refinanced its debt, replacing the prior term loans and redeeming $1.145 billion of 8.50% senior notes. The company recorded a $133.2 million nine-month extinguishment loss, including a $109.9 million cash tender premium. The new term loan’s reported effective average rate was 4.00%; $650 million of variable-rate debt was hedged with swaps scheduled to take effect in 2015.
- Total debt was approximately $1.98 billion. The reported net first-lien leverage ratio was 4.16x, below the 7.75x maximum maintenance covenant; covenant compliance was reported at quarter-end. Debt agreements include restrictive covenants and acceleration provisions upon specified defaults.
- Four fiscal-2014 acquisitions—Precision Gear Holdings, L.W. Gemmell, Micro Precision, and Klamflex—were described as not material individually or in aggregate. Purchase-price allocations remained preliminary.
- Asbestos exposures include claims involving Zurn, with an estimated $35.0 million liability and $35.0 million insurance receivable recorded. Management estimated $252.6 million of available insurance but warned coverage may be unavailable or insufficient; actual liabilities could differ and extend beyond the estimated period. Other asbestos matters are described as covered to date by indemnities or insurance.
- A Sloan patent-infringement case involving a Zurn dual-flush valve was scheduled for trial in September 2014; the company said liability could exceed reserves. Management stated that unresolved legal matters overall were not expected to have a material adverse effect, based on information then available.
- Potential future risks include currency exposure (about 34% of nine-month sales originated outside the U.S.), variable-rate debt, asbestos insurance coverage gaps, routine tax examinations, and a possible fourth-quarter pension mark-to-market adjustment. A 100-basis-point rate increase was estimated to increase annual interest expense by about $3.3 million.
Important facts for investors to verify
- Confirm the issuer: this text is Rexnord Corporation’s 2013 10-Q, despite the request metadata naming Zurn Elkay Water Solutions Corp.
- Review the refinancing terms, cash tender premium, current and long-term debt, variable-rate exposure, leverage calculation, and covenant headroom.
- Assess whether the $133.2 million debt-extinguishment charge should be distinguished from recurring operating performance; review the limitations and reconciliation of adjusted EBITDA.
- Track cash conversion, working capital, acquisition integration and returns, and the sustainability of Water Management growth versus flat Process & Motion Control performance.
- Monitor asbestos insurance recoverability, the Sloan patent litigation, tax contingencies, and any subsequent developments or revised reserves.