Zurn Water Solutions Corporation (formerly Rexnord Corporation) — Q3 2021 Form 10-Q
Business context and reporting period
The quarter ended September 30, 2021. Results include both Process & Motion Control (PMC) and Water Management; the transaction separating PMC and combining it with Regal closed October 4, 2021, after quarter-end. Zurn is now focused on water solutions, and PMC is to be reported as discontinued operations beginning in Q4. The company had transitioned to a December 31 fiscal year-end, so nine-month comparisons are for January–September.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $557.2 million | $493.6 million | $1,651.6 million | $1,489.7 million |
| Gross profit / margin | $218.8 million / 39.3% | $193.1 million / 39.1% | $662.5 million / 40.1% | $586.5 million / 39.4% |
| Operating income / margin | $89.9 million / 16.1% | $72.4 million / 14.7% | $272.1 million / 16.5% | $226.4 million / 15.2% |
| Net income attributable to Zurn | $64.1 million | $45.4 million | $187.3 million | $109.5 million |
| Diluted EPS | $0.51 | $0.37 | $1.50 | $0.89 |
| Cash from operating activities | — | $245.8 million | $237.7 million |
At September 30, cash was $477.6 million, total debt $1,191.8 million, and working capital $842.0 million (current assets $1,262.7 million less current liabilities $420.7 million). Debt was largely unchanged from December 2020. The company reported $255.8 million of additional revolving borrowing capacity and a 1.7x total net leverage ratio, against a 6.75x maximum covenant. Nine-month capital expenditures were $21.6 million; dividends paid were $32.6 million.
Changes versus prior comparable periods
- Q3 sales rose 12.9%; nine-month sales rose 10.9%. Water Management sales increased 15% in Q3 and 21.7% year to date, aided by acquisitions and underlying demand. Its core sales rose 5% in Q3 and 12% year to date.
- Q3 operating income increased 24.2%, with consolidated operating margin up 1.4 percentage points. PMC margin improved, while Water Management margin fell 3.2 percentage points to 21.2%, reflecting acquisition mix, LIFO inventory effects, higher stock compensation, and comparison with prior-year cost reductions.
- Nine-month operating income increased 20.2%. Interest expense declined to $33.7 million from $38.3 million. The prior-year period included a $35.8 million non-cash pension actuarial loss; none was recorded in 2021 through September.
- Operating cash flow increased modestly despite higher trade working capital use. Investing cash outflow narrowed to $6.5 million, partly because proceeds from asset disposals offset spending.
Outlook, commentary, risks and unusual items
- No formal full-year revenue or earnings guidance is provided in the filing. Backlog was $470.8 million at September 30; management expected about 69% to convert to revenue in the remaining three months of 2021 and the balance in 2022 and later.
- Management expected further restructuring and footprint-optimization costs; $3.7 million was recorded in the first nine months. The company also expected approximately $65 million of transaction and refinancing fees in Q4 and approximately $7 million of non-cash pension actuarial losses related to the PMC transfer.
- Management reported global facilities operating with intermittent interruptions and no significant distribution or supply-chain issues at September 30, but cited COVID-19 uncertainty and temporary transportation constraints affecting Water Management.
- The October 4 separation materially changed the company’s business and capital structure. Post-close, a new $550 million term loan and $200 million revolver were put in place; proceeds and the separation cash payment were used to repay the prior term loan and redeem the $500 million 2025 notes at a premium, as well as pay fees.
- Unusual items include a $4.2 million VAG earn-out recorded in discontinued operations and $10.1 million of nine-month gains on PMC asset disposals. Asbestos-related estimated liability and matching probable insurance receivable were each $59 million; recovery depends on insurance coverage and remains uncertain. The filing also describes tax risks if the separation fails to qualify for intended tax treatment.
Important facts for investors to verify
- How post-spin Water Management revenue, margins, cash conversion and backlog develop, excluding PMC and acquisition effects.
- Final transaction-related costs, the post-close debt balance and terms, and the effect of the separation cash payment and note redemption on liquidity and leverage.
- Whether backlog converts on the expected schedule, particularly given transportation and broader supply-chain risks.
- Actual restructuring and pension remeasurement charges, and the status of asbestos insurance recoveries and tax-related separation exposures.