Filing summary
Important identity and period note: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing identified as Zurn Elkay Water Solutions Corp. It covers Rexnord’s fiscal first quarter ended June 29, 2013 (April 1–June 29, 2013), compared with the quarter ended June 30, 2012. The filing describes Rexnord’s Water Management platform, which includes Zurn products.
Business context and reporting period
Rexnord operated two platforms: Process & Motion Control, serving industrial markets with engineered mechanical components, and Water Management, serving water quality, flow-control, conservation, and construction markets. The Board concluded its strategic-alternatives review during the quarter and chose to pursue the company’s plan as a standalone public company.
Financial performance and liquidity
| Metric | Fiscal Q1 2014 | Fiscal Q1 2013 |
|---|---|---|
| Net sales | $508.7 million | $493.6 million |
| Gross profit | $181.9 million; 35.8% margin | $178.7 million; 36.2% margin |
| Operating income | $61.0 million; 12.0% margin | $55.0 million; 11.1% margin |
| Net income (loss) attributable to Rexnord | $13.8 million; $0.14 diluted EPS | $(2.2) million; $(0.02) diluted EPS |
| Cash used for operating activities | $(27.3) million | $(37.9) million |
| Capital expenditures | $7.8 million | $14.4 million |
Water Management sales rose 8.0% to $194.1 million, with operating income up 13.3% to $18.7 million and margin improving to 9.6% from 9.2%. Process & Motion Control sales were nearly flat at $314.6 million; operating income fell 7.6% to $51.3 million and margin declined to 16.3% from 17.7%.
Cash and cash equivalents were $334.9 million at June 29, down from $524.1 million at March 31. Total debt was $1,985.4 million, including $24.0 million current maturities; long-term debt was $1,961.4 million. The company reported $321.8 million of additional borrowing capacity, comprising $221.8 million available under its revolving facility and $100.0 million under its receivables program. No borrowings were outstanding under the receivables program. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable quarter
- Sales increased 3.1%; management reported core sales growth of 3.0%, with negligible effects from acquisitions and currency translation.
- Operating income rose 10.9%, despite lower Process & Motion Control operating profit; improved Water Management results and lower corporate expense contributed to the increase.
- Interest expense fell to $35.0 million from $38.3 million, reflecting lower debt and borrowing rates.
- The prior-year quarter included a $16.6 million recovery under the Continued Dumping and Subsidy Offset Act, a $10.1 million Zurn PEX loss-contingency charge, a $21.1 million debt-extinguishment loss, and a $1.5 million discontinued-operations loss. The current quarter had no CDSOA recovery or Zurn PEX contingency charge, but included a $4.0 million debt-modification loss.
- Fiscal Q1 2014 included a $150.0 million term-loan prepayment, following a 75-basis-point reduction in the term-loan margin. Cash used in financing was $147.1 million, compared with $146.3 million provided in the year-earlier quarter, which had included IPO proceeds.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said Process & Motion Control demand was soft across most end markets, partly offset by growth in food and beverage and non-U.S. mining. Water Management benefited from market-share gains and increased alternative-market sales in non-residential construction.
- Management expected announced restructuring programs to conclude by the end of fiscal 2014. Current-quarter restructuring charges were $1.8 million.
- Operating cash use reflected the timing of semiannual senior-note interest and annual incentive payments. It also included $12.2 million related to plaintiff attorneys’ fees and required funding of the Zurn brass-fittings settlement fund.
- The Zurn brass-fittings settlement received final court approval in February 2013. Its seven-year claims fund is capped at $20 million; attorneys’ fees and expenses of $8.5 million were paid in the current quarter. The company recorded a reserve after considering insurer contributions, claims, opt-outs, and loss of future insurance coverage.
- For Zurn asbestos claims, the company estimated $35.0 million of liability for claims pending and expected over the next ten years, matched by a $35.0 million insurance receivable considered probable of recovery. Management cited uncertainty over future claims and insurance availability; it estimated available insurance at $253.9 million and noted potential coverage gaps.
- Other risks include foreign-currency exposure (about 34% of quarterly sales originated outside the United States), variable-rate debt, pending legal and tax matters, and the possibility that actual asbestos liabilities or recoveries differ from estimates. A 100-basis-point rate increase was estimated to increase annual interest expense by about $1.5 million. Management said unresolved legal matters were not expected to have a material adverse effect, based on information then available.
- Adjusted EBITDA was $93.0 million for the quarter, a non-GAAP measure; management cautioned that it excludes items such as capital expenditures, working-capital needs, interest, and taxes and should not be viewed as a substitute for GAAP results.
Most important facts for investors to verify
- Confirm the intended issuer: the source document is Rexnord Corporation’s 10-Q, despite the request metadata naming Zurn Elkay Water Solutions Corp.
- Assess whether Water Management’s sales and margin improvement can continue, and whether Process & Motion Control weakness persists.
- Review the company’s substantial debt burden, cash decline after debt repayment, interest-rate sensitivity, covenant headroom, and access to committed borrowing capacity.
- Track cash conversion and working-capital movements, including the timing of interest, incentive payments, and settlement funding.
- Monitor the Zurn brass-fittings settlement reserve and asbestos liability, insurance recoverability, and potential coverage gaps.
- Separate recurring operating performance from prior-period CDSOA recoveries and other debt, legal, restructuring, and strategic-review items.