Filing summary
Entity and period: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing identifying Zurn Elkay Water Solutions Corp. It covers the third quarter and nine months of fiscal 2016, ended December 31, 2015; comparisons are with the corresponding fiscal 2015 periods. Rexnord reported two platforms: Process & Motion Control and Water Management.
Financial performance
| Metric | Third quarter | Nine months |
|---|---|---|
| Net sales | $460.2 million, down 7.4% year over year | $1,431.2 million, down 6.6% |
| Gross profit / margin | $158.3 million / 34.4%; prior-year margin 36.5% | $497.4 million / 34.8%; prior-year margin 36.3% |
| Operating income / margin | $48.5 million / 10.5%, versus $35.7 million / 7.2% | $157.2 million / 11.0%, versus $171.3 million / 11.2% |
| Net income attributable to Rexnord | $24.4 million; diluted EPS $0.24 | $68.3 million; diluted EPS $0.66 |
| Cash from operations | Not separately reported for the quarter | $150.2 million, versus $167.0 million |
- Quarterly operating income improved despite lower sales, largely because prior-year corporate expense included a $31.4 million non-cash pension actuarial loss. Interest expense rose to $24.5 million from $21.9 million.
- Process & Motion Control quarterly sales fell 11.1%; segment operating income fell 33.8% and margin declined to 13.4% from 18.0%. Management cited weak industrial-process demand, lower absorption and market-expansion and footprint investments.
- Water Management quarterly sales fell 1.9% as reported, but core sales rose 2% excluding a 4% foreign-currency headwind. Operating income increased 6.3% and margin expanded to 11.4% from 10.5%, with productivity and cost actions offsetting restructuring expense.
- For the nine months, Process & Motion Control core sales declined 9% after currency and acquisition effects; Water Management core sales increased 4%. Consolidated operating income was down 8.2%.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $436.4 million at December 31, 2015, up from $370.3 million at March 31, 2015. Total assets were $3.320 billion and stockholders’ equity was $566.3 million.
- Total debt was $1.925 billion, including $1.885 billion of term loans; long-term debt was $1.904 billion. The term loan’s effective average interest rate was 4.00%. The company reported $333.6 million of additional borrowing capacity, comprising $242.6 million under its revolver and $91.0 million under its receivables securitization facility.
- Nine-month investing cash use was $20.5 million, including $26.4 million of capital expenditures. Financing cash use was $58.4 million, including $40.0 million of share repurchases and debt payments. Cash increased $66.1 million over the period.
- The company reported compliance with credit-agreement covenants. Its first-lien leverage ratio was 4.1x against a maximum permitted 7.75x. Adjusted EBITDA, a non-GAAP credit-agreement measure, was $261.2 million for the nine months.
Outlook, risks and unusual items
- No numerical full-year sales, earnings or cash-flow guidance is provided in the supplied filing text. Management said restructuring and footprint-optimization actions would continue; the full plan and related future costs were not yet estimable.
- Restructuring charges were $6.1 million for the quarter and $10.7 million for nine months, including a $2.9 million impairment tied to consolidating two North American water-infrastructure facilities.
- The former Mill Products business had ceased operations and was presented as discontinued operations. Remaining held-for-sale assets were $1.2 million; timing of their sale was indeterminable.
- Interest-rate exposure remains relevant: about 98% of debt was variable-rate, while swaps and caps hedged approximately 73% of variable-rate term loans. Management estimated a 100-basis-point rate increase would add about $6.8 million of annual term-loan interest expense under the stated scenario.
- Foreign-currency translation reduced equity by $18.3 million over nine months. The filing estimates an additional 10% strengthening of the U.S. dollar would reduce equity by approximately $50.9 million.
- Asbestos and other legal matters remain contingencies. The company estimated $35.0 million of potential asbestos liability for claims filed over the next ten years and recorded a matching insurance receivable as probable of recovery. It cautioned that insurance availability and ultimate claims remain uncertain; coverage gaps may arise. Management said unresolved legal matters were not expected to have a material adverse effect based on information then available.
- Quarterly and nine-month tax benefits reflect, in part, lapsed statutes of limitations and other tax items; the nine-month effective tax rate was 21.5%, versus 41.5% a year earlier. These factors make period comparisons less representative of recurring tax expense.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Rexnord Corporation, although the request names Zurn Elkay Water Solutions Corp.
- Assess whether Process & Motion Control demand and margins stabilize, and whether Water Management growth and margin gains persist.
- Review debt-service capacity, floating-rate sensitivity, covenant headroom and the availability of revolver and receivables-facility capacity.
- Track restructuring spending and benefits, remaining Mill Products asset-sale proceeds, and the effect of tax benefits that may not recur.
- Monitor asbestos claims, insurance recoverability and potential coverage gaps, along with foreign-exchange exposure.