Business context and reporting period
Important issuer mismatch: The supplied filing is Rexnord Corporation’s Form 10-Q, not a filing by Zurn Elkay Water Solutions Corp. It covers the fiscal quarter ended September 30, 2014 (Rexnord fiscal Q2 2015) and the six months ended that date. Rexnord operated Process & Motion Control and Water Management platforms.
Financial performance and position
| Metric | Q2 FY2015 | Prior-year Q2 | Six months FY2015 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $537.9 million | $514.5 million | $1,047.7 million | $1,023.2 million |
| Gross profit | $196.3 million | $191.8 million | $375.6 million | $373.7 million |
| Operating income | $77.6 million | $72.6 million | $135.2 million | $133.6 million |
| Net income (loss) | $37.1 million | $(52.5) million | $49.1 million | $(38.9) million |
| Diluted EPS | $0.35 | $(0.54) | $0.47 | $(0.40) |
- Q2 sales increased 4.5%; operating margin rose to 14.4% from 14.1%. Gross margin was approximately 36.5%, versus 37.3% a year earlier.
- Six-month operating margin was 12.9%, versus 13.1%. Interest expense declined to $44.5 million from $64.2 million for the six months.
- Operating cash flow for the six months was $78.5 million, compared with $9.1 million. Investing used $48.9 million, including $21.2 million of capital expenditures and $27.7 million for the Green Turtle acquisition. Financing used $3.4 million. Cash increased $22.3 million to $361.3 million.
- At September 30, cash was $361.3 million; current assets were $1,130.1 million and current liabilities $395.1 million. Total debt was $1,964.1 million, including $1,934.6 million long-term debt; debt less cash was approximately $1,602.8 million.
- Available additional borrowing capacity was $337.8 million: $237.8 million under the revolving facility and $100.0 million under the receivables program. No borrowings were outstanding under either facility; letters of credit used $27.2 million of revolver capacity.
Material changes versus the prior comparable period
- Water Management drove growth: Q2 sales increased 11.6% to $226.2 million and operating income rose 35.8% to $29.6 million. Management cited core growth, market share gains, volume, cost reductions and productivity.
- Process & Motion Control Q2 sales were essentially flat at $311.7 million; operating income fell 6.2% to $55.7 million. Mill Products sales declines and acquisition-related impacts weighed on results. Excluding Mill Products, management reported 2% segment sales growth, with acquisition growth offset partly by lower core sales.
- Prior-year comparisons were affected by a $129.2 million Q2 and $133.2 million six-month debt-extinguishment loss associated with the 2013 refinancing; there was no comparable charge in FY2015. The refinancing also reduced interest expense.
- Six-month sales rose 2.4%; Water Management sales grew 8.7%, while Process & Motion Control sales declined 1.6% as reported. Excluding Mill Products, management said Process & Motion Control sales increased 1%.
Outlook, risks, contingencies and unusual items
- No quantified company-wide revenue or earnings guidance is provided. Management expects additional restructuring and footprint optimization costs; amounts were not yet estimable. The company was assessing strategic alternatives for Mill Products, with the process expected to conclude by fiscal year-end.
- Management estimated a $4–$8 million non-cash actuarial pension loss in fiscal Q3 FY2015 following a voluntary lump-sum settlement offer. Revised mortality assumptions were under evaluation and could materially affect pension obligations, costs or contributions.
- Variable-rate debt creates interest-rate exposure. At September 30, approximately 97% of total debt was variable-rate; management estimated that, once LIBOR exceeds its 1% floor, each 100-basis-point increase would add about $12.8 million in annual term-loan interest expense. Subsequent to quarter-end, interest-rate caps were purchased, alongside existing swaps; management said approximately 73% of variable-rate term loans were effectively hedged.
- The company reported compliance with credit covenants; its first-lien leverage ratio was 3.74x against a 7.75x maximum maintenance covenant. Adjusted EBITDA for the six months was $201.7 million, a non-GAAP measure.
- Asbestos liabilities and insurance recoveries remain uncertain. The recorded estimated liability was $36.0 million, matched by a $36.0 million insurance receivable; the company cautioned that actual claims, coverage availability and recoveries could differ. Other disclosed matters include environmental claims and product-related litigation. Management did not expect unresolved matters, based on current information, to materially adversely affect the company.
- After quarter-end, Rexnord acquired Tollok for $38.3 million plus possible contingent payments up to $3.8 million and agreed to acquire Euroflex for approximately $77 million, subject to closing. These transactions may affect future debt, cash and operating results.
Most important facts for investors to verify
- Confirm the intended issuer: this filing is for Rexnord Corporation, despite the request naming Zurn Elkay Water Solutions Corp.
- Assess whether Water Management growth and margin improvement can offset weaker Process & Motion Control performance and Mill Products exposure.
- Review debt service capacity, variable-rate exposure, hedging coverage and covenant headroom, including the impact of subsequent acquisitions.
- Track restructuring costs, the Mill Products strategic review, and the pension remeasurement and updated mortality assumptions.
- Evaluate asbestos claim estimates and insurance collectability, given disclosed coverage gaps and uncertainty over future claims.