Zurn Elkay Water Solutions Corp annual report, FY2013

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Business context and reporting period

Entity and period mismatch: The supplied filing is Rexnord Corporation’s Form 10-K for the fiscal year ended March 31, 2013, not a filing for Zurn Elkay Water Solutions Corp. or calendar 2012 Q4. Rexnord operated Process & Motion Control and Water Management platforms; figures below are in U.S. dollars.

Financial performance and position

  • Revenue: Fiscal 2013 net sales were $2,005.1 million, up 3.1% from $1,944.2 million. Process & Motion Control sales declined 3.4% to $1,266.1 million; Water Management sales rose 16.7% to $739.0 million, primarily reflecting the VAG acquisition.
  • Profit and margins: Gross profit was $731.4 million (36.5% gross margin), versus $690.1 million (35.5%) in fiscal 2012. Operating income was $255.4 million (12.7% margin), versus $245.3 million (12.6%). Net income was $50.1 million, compared with $29.9 million; diluted EPS was $0.50 versus $0.42. Continuing-operations net income was $54.9 million.
  • Cash flow and investment: Operating cash flow was $144.5 million, compared with $139.3 million. Capital expenditures were $60.1 million. Investing activities used $81.8 million; financing activities provided $165.7 million, including $458.3 million of net IPO proceeds.
  • Debt and liquidity: Total debt at March 31, 2013 was $2,131.6 million, down from $2,423.7 million; cash was $524.1 million, up from $298.0 million. Working capital was $638.9 million. Additional borrowing capacity was $324.9 million. The filing reports a 1.09x senior secured bank leverage ratio and a 2.73x adjusted EBITDA-to-fixed-charges ratio.
  • Other metrics: Adjusted EBITDA, a non-GAAP measure, was $405.0 million. Backlog was $468 million versus $490 million a year earlier. Approximately 33% of sales originated outside the United States.

Material changes versus the prior comparable period

  • Core Process & Motion Control sales declined 1%, as mining, energy and aerospace growth was offset by weaker global industrial demand. Water Management core sales increased 1%; reported growth was mainly acquisition-related.
  • Operating margin improved modestly overall. Process & Motion Control’s reported operating margin increased to 18.3%; excluding restructuring costs, management said it improved 90 basis points to 18.8%. Water Management’s reported margin rose to 9.2%; management cited 9.5% excluding specified restructuring and prior-year inventory adjustments.
  • Net interest expense fell to $153.3 million from $176.2 million, principally following redemption of $300 million of 11.75% notes. Fiscal 2013 also included a $24.0 million debt-extinguishment loss.
  • Fiscal 2013 included a $10.1 million charge for the Zurn PEX brass-fittings litigation settlement and a $16.6 million CDSOA recovery. The IPO increased weighted-average shares, affecting EPS comparability.

Outlook, commentary, risks and unusual items

  • The filing gives no specific revenue, earnings or cash-flow guidance. Management described growth opportunities through innovation, market-share gains, restructuring savings and acquisitions, but reported softer industrial demand and lower North American municipal water shipments.
  • The board was evaluating strategic alternatives, including a possible sale of the company or one or both platforms, or continuing the existing strategy. The outcome and timing were uncertain.
  • After year-end, Rexnord prepaid $150 million of term loans and reduced the applicable term-loan rate by 75 basis points; the reported March 31 debt balance predates that transaction.
  • Key risks include substantial leverage and floating-rate exposure, cyclical industrial and construction markets, raw-material costs, dependence on distributors and significant customers, foreign-exchange exposure, and acquisition and integration execution. A 100-basis-point rate increase was estimated to add about $1.9 million of annual interest expense on senior secured facilities.
  • Contingencies include asbestos claims, environmental matters, and the PEX brass-fittings settlement: a seven-year claims fund capped at $20 million, with attorneys’ fees and expenses capped at $8.5 million. Rexnord recorded a $35.0 million asbestos liability and corresponding insurance receivable, while noting insurance coverage and recovery uncertainties.
  • Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued an unqualified opinion.

Important facts for investors to verify

  1. Confirm the intended issuer and reporting period: the supplied document is Rexnord’s fiscal 2013 10-K, not a Zurn Elkay filing or a 2012 Q4 filing.
  2. Review the post-year-end $150 million term-loan prepayment, revised borrowing rate, and resulting debt and interest burden.
  3. Separate acquisition-driven Water Management growth from underlying performance, and assess ongoing industrial demand and municipal-water shipments.
  4. Examine the assumptions and potential cash exposure in the PEX settlement, asbestos claims, and related insurance recoveries.
  5. Assess the strategic-alternatives process, Apollo’s control position, debt covenants, and the quality of liquidity after the IPO and debt repayment.